A selection of links and commentary by experts reacting to Ontario's 2009-2010 Budget.
Go straight to: Conference Board of Canada | Royal Bank | BMO Nesbitt Burns | TD Bank | CIBC World Markets | Scotia Economics
The Conference Board of Canada
The coming year will prove to be a year of “firsts” for Ontario, the traditional engine of growth in the Canadian economy. For the first time since the inception of provincial trade records in 1981, Ontario will record a net trade deficit. This unfortunate development will trickle into the medium-term outlook for the province even as U.S. consumer sentiment revives. Ontario is also poised to go from “have” to “have not” status for the first time, and it will receive $347 million in federal equalization payments. Budget 2009 revealed the final “first” in the trifecta of the province’s woes: Ontario will run the largest provincial deficit in history—$14.1 billion—for the coming fiscal year! With an ambitious near-term spending plan and soft own-source revenue growth as a result of the global downturn, the province will not return to fiscal balance until 2015.
Despite this bad news, Ontario’s most recent budget does provide a silver lining to an otherwise dismal outlook in the form of timely stimulus. Many of the measures introduced in Budget 2009 are consistent with the Conference Board’s view on how to mitigate the effects of the current recession
The decision to convert Ontario’s retail sales tax to a harmonized value-added structure in partnership with the federal government by July 1, 2010 is arguably the centrepiece of Budget 2009. In the long run, harmonization with the federal base will generate myriad economic efficiency benefits for businesses and consumers
Royal Bank [PDF]
The move to a harmonized rate should be applauded in terms of removing the inefficiencies of the current PST that applies to business inputs which raises production costs. One earlier reservation by the provincial government about the move to harmonization was that the GST had a much broader tax base that included items the McGuinty government preferred to have kept exempt. (On this front, the provincial government won some concessions retaining exemptions for such areas as children’s clothing and footware.) This wider tax base did provide the benefit of bringing in additional tax revenue to the province to the tune of $3.8B over fiscal 2010-11 and 2011-12
… Though [corporate and personal income] tax cuts are welcome and should help boost growth and productivity over the medium term, the delay until 2010 does little to counter the current economic weakness. A 2010 implementation is largely a reflection of the means to fund these cuts not starting to flow until then. Given the severity of the downturn, the argument could be made to accelerate the cuts and take the temporary hit to the deficit that would be reversed in 2010. However, currently proposed these tax changes have negligible net impact on the overall budget balance ($400 million) over fiscal 2009-10 and fiscal 2010-11.
BMO Nesbitt Burns [PDF] Robert Kavcic:
The Province of Ontario served up an aggressive budget against the worst economic backdrop since at least the early-90s, providing a mix of tax relief for individuals and businesses, infrastructure investment and still-strong growth in program spending. Overall, this budget addresses the near-term need for economic stimulus, while taking some steps to improve the province’s medium-term competitive position….
Ontario’s challenges, however, are not just cyclical as it has been shedding manufacturing jobs for about six years. Indeed, postrecession policy will still be challenged by the need to make Ontario an attractive and costeffective place to do business—this budget is a start.
TD Bank [PDF] Derek Burleton and Pascal Gauthier:
it has presented a broad
plan to eliminate the deficit over the next seven years.
But as importantly, today’s budget includes a series of bold
changes to bolster the province’s competitiveness beginning
in mid-2010, with sales tax harmonization and reductions in corporate income tax rates forming the package’s
centerpieces. The latter move was today’s most notable
surprise…Whereas business inputs such as machinery and
equipment are taxed under the retail sales tax (RST), firms
will now get a tax credit as they do with the federal GST.
As such, business competitiveness will improve. Even
though a broadening in the tax base means that the household
sector will bear a larger sales tax burden, low and
middle-income households are being compensated with
a transitional one-time credit and a permanent credit.
Furthermore, some of the savings to business from removing
embedded sales taxes and streamlined tax administration
get passed onto consumers through lower
prices. Past experience of sales tax harmonization in
Québec and the Maritimes in 1997 suggests that overall
price level, or inflation as measured by the CPI, does not
increase as a result of harmonization. Instead, relative
prices of goods and services within a typical household’s
consumption basket are likely to changeToday’s budget marks a major step forward to raising
Ontario’s competitiveness. Undeniably, not everyone will
benefit from sales tax harmonization in the short term. And
many might question the government’s decision to allocate
billions of dollars of precious revenues to lower business
income taxes. However, over a longer term horizon, these actions should represent a win for businesses, households
and governments as new investment translates into higher
employment, income and government revenues.
CIBC World Markets – Avery Shenfeld and Meny Grauman
All told, the removal of the sales tax burden on nonfinancial
business and the rate reductions, together with
earlier enacted cuts at the federal and provincial levels,
will see the marginal effective tax on new investment fall
from 32.8% to only 18.9% after July 1, 2010 (Chart 3),
and to 17.3% by 2013. The business sector will also
benefit from pension reforms that will allow definedbenefit
plan sponsors to spread out solvency payments
over a longer period, a pressing need given the recently
poor performance of capital market investments…
Scotia Economics: Mary Webb
In the extremely competitive environment anticipated as an economic recovery takes hold, this Budget focuses
on elevating Ontario’s competitiveness. Near-term, an essential part of this strategy is the $33.6 billion of
infrastructure spending anticipated over FY10 and FY11, following investments of more than $18 billion during
the prior two years. Mirroring Ottawa’s guidelines, the provincial funds must be spent in the next two years, and
the projects must reflect additional investments that otherwise would not have occurred.First steps in the Province’s Poverty Reduction Strategy include
raising the maximum annual payment per child under the Ontario Child
Benefit from $600 to $1,100 as of July 2009, two years ahead of schedule.
A 2% increase for the benefits under the Ontario Works and the Ontario
Disability Support Program and the comfort allowance for long-term care
residents is proposed for FY10. For the repair and energy retrofits for social
housing units, more than $700 million is allocated over the next two years,
with an additional $360 million for new affordable units for low-income
seniors and individuals with disabilities.