Despite small businesses tax cut, uncompetitive policies still plague Ontario

Last week, Finance Minister Charles Sousa delivered Ontario’s fiscal update. The most high-profile measure was a one percentage point cut in the corporate tax rate for small businesses.

No doubt, some small business owners will welcome the tax relief. The move, however, does little to address the serious competitive challenges facing Ontario or the obstacles to business investment threatening our growth prospects. Far more must be done with regulation and fiscal policy to make Ontario an attractive place for investment.

First though, it’s important to recognize the severity of Ontario’s challenge when it comes to business investment. This year, firms are forecasted to invest approximately $51 billion in Ontario’s economy. That’s down from a pre-recession peak of $53.8 billion. In other words, business investment to the province still hasn’t recovered from the 2008/09 recession.

There are a number of reasons for this. Some are outside the government’s control, but others, having to do with public policy, are subject to government influence. And recent decisions threaten to make matters even worse.

Let’s start with the Wynne government’s planned rapid increase to the province’s minimum wage. The wage floor will hit $15 per hour in January 2019, bringing Ontario well out of line with most other Canadian provinces and nearby U.S. states with whom we compete.

In announcing its reduction to the small business tax rate, the government said it was trying to partially offset the cost of the minimum wage hikes for businesses. But in industries that rely on many less-skilled workers (restaurants, retail stores, hotels) the small tax reduction for smaller firms almost certainly won’t offset the higher costs for many firms. Our outlying minimum wage will make Ontario less competitive for attracting investment in such industries, and the small business rate reduction doesn’t change this reality.

And of course the higher minimum wage comes atop high costs that have plagued Ontario business for years due to the province’s high energy prices. Consider the words of Bank of Montreal chief economist Douglas Porter who said Ontario’s high cost of electricity “hurts small business, it hurts large business… and it reduces their willingness to invest here in the province if one of their core costs is higher than in other nearby regions.” In short, Ontario’s high electricity prices are a big obstacle to competitiveness and meaningful action on this file would do far more to help business than the small business rate reduction.

Of course, the Wynne government recently tried to lower hydro costs in the short-term through its “Fair Hydro Act,” which, to simplify somewhat, borrowed money to lower the cost of energy today. But of course this money must be paid back with interest by ratepayers and taxpayers in the future. Businesses know this, which is one reason why the province’s huge public debt is yet another obstacle to business investment since firms know that future taxes will be needed to service that debt. In short, the Wynne government’s Band-Aid solution to one competitiveness problem (high electricity prices) made another competitiveness problem (public indebtedness) even worse.

Ontario faces a number of policy challenges that can hurt investment attractiveness and threaten our long-term growth prospects. Some small businesses will doubtless welcome the little bit of tax relief announced last week. But the move won’t have a meaningful impact on the major competitiveness deficiencies plaguing Ontario.