Ford’s tax pledge will help Ontario’s economy recovery

No matter how you measure it, Ontario’s budget deficit is on track to be the largest in provincial history. And while this year’s massive deficit is primarily due to forces outside the government’s control—mainly the COVID 19 recession—Premier Ford must develop a strategy to deal with the problem.

The big question is how to go about it—to either raise taxes or reduce spending to shrink the gap between government revenues and government expenditures.

Premier Ford recently ruled out one of these two options, saying “I don’t believe in raising taxes.” If he keeps his promise not to raise taxes, he can help give Ontario’s economy a better chance to have a strong economic recovery.

There’s strong evidence that tax increases in Ontario would slow the province’s recovery. Indeed, recent research on deficit-reduction efforts in high-income countries shows that tax increases designed to eliminate deficits hurt the economy much more than spending reductions. And Canada’s own recent fiscal history provides many examples of successful deficit-reduction efforts based on spending reductions.

For example, in the early 1990s the federal government and nearly every province faced daunting deficits. These deficits were eliminated primarily by reducing government spending (relative to the size of the economy), not by raising taxes. And it wasn’t just Progressive Conservative premiers such as Mike Harris and Ralph Klein who took this approach. Roy Romanow’s NDP government in Saskatchewan and Jean Chretien’s Liberal government in Ottawa also relied primarily on spending reductions to slay large deficits.

In short, Canada’s fiscal history shows that governments of all political stripes have successfully eliminated large deficits through spending reductions. Meanwhile, the international evidence suggests that this approach is better for economic growth than trying to eliminate deficits through tax increases.

Moreover, if the Ford government tries to raise more revenue by raising the most economically harmful taxes, these efforts may be largely futile. Recent research, spotlighting Ontario’s efforts to reduce the deficit through income tax increases during the 2010s, shows that these tax hikes likely generated very little revenue. Sky high tax rates (such as Ontario’s 53.53 per cent top combined income tax rate) weaken incentives for additional work at the expense of leisure time. High income taxes also make Ontario less attractive for businesses and mobile workers. So again, increases to personal income taxes in Ontario would likely not produce much extra revenue.

Ontario is in a deep fiscal hole. If Premier Ford works to rein in spending in the years ahead while standing by his assertion that he “does not believe in raising taxes,” he will help provide a tax and policy environment conducive to economic growth and recovery.