A strange thing happened in the province of Ontario last year. The economy performed so well, despite the loss of thousands of manufacturing jobs, that the provincial government wound up with an unexpected tax windfall of $5 billion. But, like sand slipping through an hourglass, the money was being spent as fast as it was rolling in.
The Liberal administration of Premier Dalton McGuinty blew the entire $5 billion on unbudgeted, unplanned spending.
Finance Minister Dwight Duncan disclosed this startling fact in the provincial budget he unveiled on March 25, a budget that keeps Ontario at the forefront of this country's profligate governments.
Figures available in provincial and federal reports reveal that between 2000 and the current fiscal year, program spending in Quebec rose 35 per cent (from $41.9 billion to $56.9), 45 per cent in Alberta (from $20 billion to $29), 57 per cent in British Columbia (from $22.5 billion to $35.4), 59 per cent federally (from $130.6 billion to $208.1) and a whopping 64 per cent in Ontario ($53.5 billion to $87.3).
Times have been so good that some of these governments have been able to cut taxes even while spending like the proverbial drunken sailors. And prior to the release of the Ontario budget, federal Finance Minister Jim Flaherty repeatedly harangued the McGuinty government about the need to cut business taxes in order to attract investment. It did no good.
Ontario was in no position to heed the advice from on high. The government had spent its windfall and with it any latitude to cut taxes. The provincial economy is expected to grow more slowly this year. The budget calls for a $600-million surplus but could easily wind up in a deficit if growth comes to a halt, or the economy slips into recession.
Meanwhile, the province remains saddled with an uncompetitive tax regime. The general corporate rate in Ontario is 14 per cent, well above Alberta's 10 per cent, Quebec's 11.4 per cent and B.C.'s 12 per cent. The province imposes a 12-per-cent tax on manufacturers, which puts it on par with B.C., but above the 10-per-cent rates in Saskatchewan and Alberta and the rate of 11.4 per cent in Quebec.
Ontario could get away with high taxes if its manufacturing sector - once the foundation of its economy - were booming. But it isn't. We are in an economic cycle that favours resource-producing regions at the expense of those where manufacturing is pre-eminent.
The magnitude of this shift is evident from a report released March 26 by the Calgary-based Canada West Foundation. Entitled State of the West 2008, it provides a dramatic snapshot of the westward shift of economic activity and prosperity over the past five years.
By almost any measure, the West is winning these days, largely due to world demand for its energy, forest products, minerals and agricultural output. Last year, unemployment in each of the four western provinces was, on average, below five per cent. In the East, it started at 6.4 per cent in Ontario and rose to 13.6 per cent in Newfoundland and Labrador.
The West accounts for 35.5 per cent of the country's gross domestic product with only 30.4 per cent of the population. Alberta leads the country in GDP per capita, a commonly used measure of overall economic well-being, at $54,403, followed by Ontario at $41,057. Saskatchewan is third at $38,919 and B.C. fourth at $36,649.
These western provinces are all enjoying resource-driven economic booms and, at the same time, have been reducing business taxes.
Ontario's singular failure is that, even while faced with adverse economic conditions, it is doing little or nothing to make itself more attractive to investors.
"There's no doubt that the private sector in Ontario is slipping," says Colin Busby, a policy analyst with the C.D. Howe Institute in Toronto. "It's quite simple. You have a dollar that's closely linked to energy prices and you have high energy prices. That's good for Alberta, but it's undermining manufacturing.
"Those factors are beyond the control of the Ontario government. They have to look at other ways of getting around these problems. They have to look at creating a positive business climate. They should be giving private business a reason to invest."
Reducing corporate and manufacturing taxes is one sure way to do that. But Premier McGuinty and his cabinet have stubbornly resisted the obvious. Instead, they are relying on old-fashioned, largely discredited pump-priming and profligate spending.
(D'Arcy Jenish can be reached at jenish@businessedge.ca)
