Ontario needs hard truths

The candidates aiming to lead the Ontario Progressive Conservatives are already putting their own marks on ex-leader Patrick Brown’s platform, “The People’s Guarantee,” which was released in November. All of the candidates have come out against a carbon tax, for instance. But in addition, they may wish to keep in mind other developments that have emerged regarding Ontario’s fiscal health and the competitiveness of the Ontario business climate since the original platform was released.

The fiscal situation in Ontario is expected to deteriorate, according to a new 50-year outlook. Ontario already has the dubious distinction of being the world’s largest sub-national debtor. But Ontario’s fiscal situation is worse than thought. The province’s Financial Accountability Office (FAO) released its long-term budget outlook in December 2017. Its long-term fiscal projections are based on a number of assumptions including that the tax system and federal-provincial fiscal arrangements will remain largely unchanged. The projection also assumes that the government will continue to fund public services at the same rate.

The report describes a projection of Ontario’s fiscal position up to 2050 that has Ontario’s net debt-to-GDP ratio rising to 63 per cent by 2050–51, which is significantly above today’s ratio of 40 per cent. Demographic changes including an aging population and slower population growth would combine to lower tax-revenue growth and raise spending. This would lead to large and will likely be needed. The U.S. Federal Reserve began increasing its target range for its federal funds rate in 2017 and has signalled its expectation that economic conditions will evolve in a manner that will warrant further gradual increases in the federal funds. Central banks are not entirely to blame for higher interest. For example, yields have been increasing on 10-year treasuries. Ontario’s investment includes short and long-term instruments with because of a U.S. tax cut. This includes a drastic decrease in the U.S. corporate tax rate, which declined from 35 to 21 per cent. With an Ontario provincial tax rate of 11.5, the total corporate tax rate is 26.5 per cent. The combined U.S. federal and state rate is lower in some of the states that Ontario competes with.

The U.S. also provided for lower personal tax rates. The Ontario PCs’ election platform provides for personal tax relief but the bulk of tax reductions for Ontarians are directed at lower tax brackets. Families with incomes over $200,000 will see only seven-per-cent relief on average. But in the U.S., the highest personal tax bracket for individuals is US$500,000 while for couples it is US$600,000. For high-income earners, the U.S. just became more attractive.

Will the Ontario PC leadership candidates want to discuss policy? Even just tweaking means debating the new developments affecting Ontario’s finances and competitiveness. The biggest challenge facing the next leader may be marketing policies that are not popular.