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The Progressive Economics Forum

Ontario’s Stimulating Election Platforms

A common refrain among political pundits has been that all of Ontario’s election platforms are unrealistic given a deteriorating economic outlook. Rather than bemoaning this alleged lack of realism, we should evaluate how each party’s platform would fare in a downturn.

The NDP platform is built on the fiscal framework set out in the 2011 provincial budget. The Liberal and Conservative platforms are based on slightly more optimistic private-sector forecasts. However, such forecasts have been revised down since the platforms were formulated.

Elections should be about policy choices. If each party tried to develop its own fiscal framework from the ground up, voters would instead have to disentangle a convoluted debate about differing economic assumptions and forecasting methodologies. It is reasonable to construct platforms on the last budget so that voters can evaluate them against a common baseline.

Which policy choices are appropriate given the risk of an economic downtown? Fiscal conservatives argue that the government should budget prudently to avoid plunging the province too deep into debt. Many economists contend that the government should deploy fiscal stimulus to bolster the economy when private demand lags.

Budgetary commitments in 2012-13, the first fiscal year of each party’s platform costing, total almost $2 billion for New Democrats, $2.3 billion for Liberals and $2.5 billion for Conservatives. The NDP platform is the most prudent in limiting new outlays to avoid excessive borrowing.

Of course, different budget measures have different economic effects. The NDP would provide $955 million of new provincial spending, $475 million of personal tax reductions (taking the HST off home heating and partially off gasoline), $90 million to lower the small-business tax rate, and $450 million of corporate tax credits for investment, employment and training.

The Liberals promise $838 million of new spending, $54 million of personal tax credits, $1,365 million to cut the general corporate tax rate and the $12-million corporate tax credit for hiring recent immigrants. The Conservatives offer $200 million of new spending, $900 million of personal tax cuts and the same $1,365-million corporate tax break.

Public spending is the strongest form of stimulus because it adds directly to demand for goods and services in the economy. Tax reductions provide less stimulus because much of the money is saved rather than spent. Corporate tax cuts are particularly ineffective because increased after-tax profits largely flow to corporate headquarters and shareholders outside Ontario.

Refundable tax credits are essentially expenditure delivered through the tax system. The NDP’s proposed tax credits are designed to leverage larger amounts of private investment and are contingent upon such investment.

A multiplier is the amount by which a dollar of budgetary outlay increases Gross Domestic Product (GDP). The federal Department of Finance estimates multipliers of 1.3 for public expenditure, 0.9 for personal tax cuts and 0.2 for corporate tax cuts in the year after their enactment.

Applying these multipliers to Ontario’s election platforms suggests a GDP boost of $1.3 billion from the Conservatives, $1.4 billion from the Liberals and $1.8 billion from the NDP if corporate tax credits are treated as corporate tax cuts. Counting these credits as public spending brings the NDP’s stimulus to $2.3 billion.

Of course, all of the above multipliers would be lower in Ontario because it is smaller than the national economy. Proportionally more spending would flow outside the province than outside the country as a whole. The NDP’s Buy Ontario policy would limit this outflow by keeping a larger share of procurement spending inside the province.

Given higher outflows and lower multipliers at the provincial level, the federal government should take primary responsibility for using fiscal policy to manage economic demand. However, to the extent that Ontario provincial platforms can be evaluated as stimulus packages, the NDP proposal is strongest.

New Democrats would deliver the most stimulus and job creation at the lowest fiscal cost by focussing on measures with the biggest bang per buck: direct public investment and targeted tax credits. By contrast, Liberals and Conservatives have prioritized slashing tax rates on corporate profits, the least effective way to stimulate the economy.

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Comments

Comment from gyor
Time: October 5, 2011, 9:50 am

If only the globe and mails and the stars election editorials had been a tenth as well thoughout as this.

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