Ontario needs a new foundation for success

Globe and Mail
September 29, 2008

DON DRUMMOND

The formula for Ontario’s economic success has toppled during the past five to 10 years.

The auto pact, which jump-started our auto-based industry, faded in importance and was finally struck a death blow by the World Trade Organization in 1999. Access to the U.S. market has experienced a major setback because of clogged infrastructure and the security measures implemented in the wake of the Sept. 11, 2001, terrorist attacks.

The Canadian dollar, which provided Canadian exporters with significant cost advantages, is not likely to hover around the sub-80-cent (U.S.) level again. And given the serious concerns about the province’s electricity supplies, the government has been weaning producers off cheap, subsidized power.

Even some of our remaining competitive advantages, such as our skilled work force and affordable health care system, will soon start to come under pressure from an aging population and soaring health care costs.

For these reasons, government must embrace a new vision for Ontario’s economy. To this end, a new foundation for economic prosperity is required.

It must include an innovative labour force. The province has moved swiftly and with great effect in this area, enacting many of the recommendations for Ontario’s post-secondary education system made by the 2004 review panel chaired by former premier Bob Rae.

Still, recent funding commitments have left Ontario’s post-secondary institutions with lower revenues per student – both public and private – than many of their competitors in the United States.

A greater focus on lowering the still-lofty high school dropout rate, providing the right incentives to help people move from welfare to the labour force and raising private-sector training budgets is also necessary. But above all, we must do a better job of integrating immigrants into the labour pool.

Virtually all of Ontario’s net labour force growth between now and 2020 will come from immigrants. Yet the difficulty of evaluating international work experience, the mismatch between that experience and present Canadian labour demand, language difficulties and a lack of foreign-credential recognition have been key impediments to immigrants’ ability to get good-paying jobs in their chosen fields.

Part of the challenge has been immigrant selection. And in that vein, the federal government has recently introduced changes in an attempt to lower the backlog of immigrants and to increase the flexibility of Citizenship and Immigration Canada to target certain skills depending on national needs.

The logical next step will be to consult with the provinces – and especially Ontario, given its large share of immigrants – in order to ensure that priorities are consistent.

Ontario’s new economic foundation must also be based on a competitive tax system. Most other jurisdictions are lowering their tax burdens, particularly on business capital. Ontario is falling behind despite some positive steps it has taken by phasing out the capital tax by 2010, reducing the education portion of business property tax rates and introducing a number of measures to lighten the burden on manufacturers.

Ontario must have a corporate tax system that provides a distinct advantage both in Canada and abroad. This would require a provincial statutory corporate tax of no more than 10 per cent, compared with the current rate of 14 per cent (12 per cent for manufacturers). This move, together with reductions at the federal level, would leave the combined federal-provincial rate at 25 per cent, positioning the province well to attract new investment.

Other areas of taxation also need to be addressed. Harmonizing the PST with the GST would spur business investment, and set the stage for household and government incomes to rise down the road. Government should address the very sharp rise in effective taxation of businesses if they cross the small business threshold, as that stifles entrepreneurial behaviour. And finally, at the personal level, reducing the incredibly high marginal tax rates for those at low and modest income levels is fundamental in encouraging greater participation in the labour force.

A supportive federal policy is also central to Ontario’s new economic foundation. One major challenge on this front is the significant net withdrawal of federal funds from the Ontario economy, which exceeded $21-billion in 2005, or 4 per cent of the province’s GDP.

Much of the net federal fiscal withdrawal is due to Ontario’s historical per-capita income advantage over other provinces. That is diminishing. Yet there are federal programs that treat Ontario and its residents unfairly.

An immediate return to federal per-capita block funding for health care – which would amount to about $700-million a year – would be the right thing to do. The Ontario government estimates that a move to per-capita funding would also provide the province with an additional $500-million annually for worker training under EI. More generally, the federal EI program no longer serves Ontario well, with less than half of its unemployed workers eligible for benefits. Other potential amounts include those for immigration settlement, economic development and infrastructure.

A more integrated approach would also be welcomed where myriad federal and provincial programs exist, such as those targeted at low-income individuals.

This is no longer our parents’ province. We can no longer rely on our past formula for success. A different policy backdrop will be required.

This will take bold action from the provincial government in concert with other governments and the private sector.

Parts of the puzzle have already been put into place. But much more needs to be done. Ontario’s current economic difficulties in the wake of softening in the U.S. economy are troubling. Yet this should not defer work on building a new foundation for future Ontario prosperity.

Don Drummond is chief economist and senior vice-president, TD Bank Financial Group.

A report published by TD Economics today called a Time For A Vision Of Ontario’s Economy can be found on http://www.td.com/economics.

Reference: Globe and Mail