Ontario Budget

Today’s provincial budget continues previously announced stimulus in the short term and projects severe, but largely unspecified, spending restraint in the long term. The most surprising new measure, a lower electricity rate for northern Ontario industry, is of little fiscal significance (costing just 0.1% of the budget).

A less surprising measure of potentially greater fiscal significance is the attempt to freeze public-sector compensation. The government is actually legislating a two-year freeze for the minority of public-sector workers who do not bargain collectively.

The government has declared its intention to negotiate two-year freezes with its unions as their existing collective agreements expire. Also, it will limit transfers to hospitals, universities, etc. on the assumption that these provincially-funded institutions will negotiate two-year freezes as their collective agreements expire.

Here is the United Steelworkers’ press release, which emphasizes the lower electricity rate and compensation freeze:

Ontario Budget: Austerity for Workers, Tax Cuts for Bay Street

TORONTO, March 25 – Today’s provincial budget does little to address the jobs crisis in Ontario, say the United Steelworkers (USW). Indeed, the budget itself projects an even higher unemployment rate this year than last year.

“The only positive surprise is the lower electricity rate for industrial facilities in northern Ontario,” observed Wayne Fraser, USW’s Ontario Director. “Our union has long advocated using abundant hydro power to support industrial jobs in Canada.”

The Northern Ontario Electricity Rate Program will be worth $150 million annually. One of the largest potential beneficiaries is Vale Inco, which has refused to negotiate with its Steelworker employees for eight months.

“Vale can now save more on hydro rates than it could conceivably save through the concessions that it has been trying to impose on our members,” said Fraser. “Today’s budget should prompt Vale to drop its demands for concessions. In fact, we call on the Ontario government to not approve the reduced electricity rate for Vale unless and until it returns to the bargaining table and negotiates a fair deal.”

Despite projecting ongoing inflation, the Ontario government is planning to introduce a two-year pay freeze for public employees. While it will respect existing collective agreements, “the fiscal plan provides no funding for incremental compensation increases for any future collective agreements.”

The budget speech pays lip service to post-secondary education as “our great competitive advantage,” but the budget restrains transfers to universities to pressure administrators to impose the two-year freeze on university staff when their collective agreements expire.

The United Steelworkers union represents staff at the Universities of Toronto and Guelph. “When our collective agreements expire next year, the employer’s opening offer may be a compensation freeze,” noted Fraser. “However, our union will seek to negotiate improvements on both campuses.”

Although the government claims that restraint is needed to balance the budget, it is pressing ahead with costly, no-strings-attached tax breaks for business. The province is giving up annual revenues of $4.5 billion by indiscriminately removing sales tax from all business inputs, $2.4 billion by slashing the corporate income tax rate and $1.6 billion by eliminating the corporate capital tax.

“By attempting a pay freeze for 1.2 million Ontario workers, the government risks putting downward pressure on wages throughout the provincial economy,” said USW economist Erin Weir. “To facilitate the consumer spending needed to sustain an economic recovery, the government should instead be looking for ways to support wages.”

There were a couple of other interesting points:

Setting the Table for Asset Sales?

Like the recent provincial throne speech, the budget promises a “review” of government business enterprises (page 26). I have noted elsewhere that the ongoing profits of Ontario’s Crown corporations are worth more than the anticipated proceeds of selling them.

The budget seems to attenuate this argument by reducing projected Crown-corporation profits (page 101). This reduction is notable because the budget generally foresees a slightly improved economic outlook, relative to the fall fiscal update.

Based on the fiscal update, my op-ed had assumed combined profits of $4.3 billion for the current fiscal year. Today’s budget projects only $4.1 billion.

A couple of weeks ago, I noted that Crown-corporation profits were projected to rise to $4.8 billion by 2011-12. The budget dials that back to $4.4 billion. It tosses out some vaguely plausible reasons, without any details, for this appreciable reduction (page 109).

One wonders whether the government is just lowering the bar for future Crown-corporation policy. If the government restructures its assets in some way and profits simply return to previous projections, the government could attribute this “increase” to the restructuring.

Checking the Footnotes

In support of “Ontario’s Tax Plan for Jobs and Growth,” the budget cites a 2004 Finance Canada report that I cited on this very blog last weekend. The budget claims that this report concluded that removing sales tax from business inputs “has a stronger beneficial impact on economic growth than any other kind of tax measure” (page 152).

In fact, Finance Canada’s report concluded that increasing capital cost allowances delivered the most benefit. Removing sales tax from business inputs came in third behind cutting personal income tax on capital gains.

The 2004 report also concluded that corporate income tax cuts are relatively ineffective. Finance Canada’s calculations indicated that a dollar of corporate income tax cuts provides less than one-third as much benefit as each dollar of sales tax removed from business inputs.

Therefore, a source that the Ontario government itself chose to cite actually casts doubt on the provincial tax plan, which devotes billions to slashing the corporate income tax.

For More Information

Fortuitously, the CCPA’s budget analysis mostly focuses on issues other than those that I have addressed. This document is concise and well worth reading.

3 comments

  • The 2010 Ontario Budget contains an example of faulty mathematical logic that wouldn’t fool a sixth grader. I know as I have lived with one (a sixth grader that is) last year.

    Here is the example:

    Just 20 years ago, 32 cents of every dollar spent on government programs were spent on health care.
    Today, it is 46 cents. In 12 years, if we don’t take action, it could be 70 cents.

    That is alarmist, to say the least. If health care spending expressed as cents per dollar of government program spending increased from 32 cents to 46 cents over 20 years; that is an increase of 14 cents over 20 years and an average annual increase of 0.7 cents per year (14/20).

    Therefore if that trend continued, in 12 years at 0.7 cents per year health care spending would be only at 54.5 cents (12 * 0.7 = 8.4 cents).

    That has much less impact than 70 cents so we need to ask where did the 70 cents projection come from?

    Check the facts on health care spending. In 2009 the Budget reported that health care spending represented 43 cents for every dollar of program spending and in 2008 the Budget reported that health care spending also represented 43 cents for every dollar. In 2007, the Budget reported that health care spending represented 46 cents for every dollar of program spending. So over the past 3 budgets, the annual average net increase in health care spending relative to program spending has been ZERO. If it is 46 cents currently, that is the level it was at in the 2007 Budget.

    Perhaps it is program spending that we should be looking at, rather than health care spending. Indeed, perhaps we should be studying the revenue side, including the growth of the provincial economy as well relative to health spending since it generally holds true that greater health service ‘consumption’ is strongly associated with greater wealth.

    In any event, to get to our mythical 70 cents of every dollar in program spending being directed to health care in 12 years (70 – 46 = 24), health care spending would need to increase by 2 cents of program spending in each and every year (2 * 12 = 24). There is no evidence that that has ever happen in the last 20 years.

    Ironically, the 2010 Budget at Chart 21 above indicates that health sector spending as a % of Program Expense will only be 40 cents – at $46.1 billion. A footnote reveals that it is only after controlling for time-limited investments and the method of presenting education sector expenses that health sector expenses account for 46 cents in 2009 – and actually are falling to 45 cents in 2010.

    Could this be more than simply ‘bad math’ at play.

  • This is one Conservative stance, you should never lower taxes while spending or running a deficit. period.

    Does not mean lowering taxes are bad, I just wonder what is the ammount percentage wise after local, province, and federal taxes should we get to keep?

    Comment from Brandon L
    Time: November 25, 2009, 7:12 pm

    Really the only thing I disagree with Harper and our Central bank committee is there willing to lower taxes and run a deficit.

    You cannot do both. Lowering taxes and running a deficit was George W Bush approach, lowering taxes is only works if government spending doesn’t outweigh the tax cuts benefits otherwise people spending decisions are unaltered as they save more to pay off the new debt. This will have people will save because of these deficits and leave spending unaltered.

    (Which by the way has happened since the end of olympics, many older canadians are saving more not ecause of their situation but in fear of escalating BC deficits. I also see in Canada that the generation, I, now am apart of is also doing it)

  • Good points, Corey.

    My sense is that healthcare spending has increased, and will increase, quite modestly as a share of the economy. It has jumped more as a proportion of the provincial budget because tax cuts have decreased the budget as a share of the economy.

    As the above USW press release notes, the Ontario government is pressing ahead with tax cuts for business. It is tax cuts, as opposed to healthcare spending, that are fiscally unsustainable.

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