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Ontario Fall Economic Statement: Fair is Fair

Published on
November 14, 2017

Today, Ontario Minister of Finance, Hon. Charles Sousa rose to deliver an election-ready fiscal update, tabling the 166-page fiscal update with the campaign-ready titled “A Strong and Fair Ontario,” and announcing in Question Period that the Liberals are balancing the budget this year and for the next two years.

The Fall Economic Statement is typically a mid-year update to the budget. With voting day set for June 7, 2018, the budget in 2018 is anticipated to be the basis of the Liberal election platform. This edition of the Fall Economic Statement gave a preview of how Premier Kathleen Wynne and the Ontario Liberals are planning to frame their re-election campaign.

On Friday, Premier Wynne gave a speech at the Ontario Economic Summit, hinting at her party’s broad approach to 2018. She focused on the “fair society” and how opportunity for everyone is possible in Ontario. She said even though Ontario is leading the economic growth in Canada, seeing its lowest unemployment rate in 17 years, with high corporate profits: “the numbers don't tell the whole story. There are real concerns about how people are feeling the economy, and who's feeling the impacts in a positive way, and who's not feeling those positive impacts and why,” said Wynne.  

Actions speak louder than words, and the Liberals have been taking action that is seemingly in line with this focus on “fairness and opportunity”. From a minimum wage increase, to free prescription medication for children and free tuition for low income students, to rent control initiatives, the Liberals appeared to have turned decidedly left.

But the Liberals used today’s announcement to address fears expressed by business groups over raising the minimum wage. This, in hand with measures to cut red tape, can be viewed as the Liberal strategy to position itself as the center party as the three parties continue to battle for the center.

On this note, Minister Sousa announced today a whole set of new initiatives to help small businesses, namely lowering the corporate income tax rates for small businesses to 3.5 per cent from 4.5 per cent on Jan. 1 2018. Below are highlights:

Small business deduction and Mitigating Bill 148

· Ontario will cut its corporate tax rate on the first $500,000 of profits to 3.5 per cent effective Jan. 1, 2018, down from the current level of 4.5 per cent.
· The government noted that with the proposed federal changes, the combined federal–Ontario CIT rate for small business would be reduced from the current 15.0 per cent to 12.5 per cent as of January 1, 2019.
· Small businesses with fewer than 100 employees will get an incentive of $1,000 to hire a young person aged 15 to 29 and another $1,000 if the company retains that worker for six months.
· As announced last month, Ontario will designate 33 per cent of its procurement spending to small and medium-sized businesses by 2020.
· Partnering with the Ontario Chamber of Commerce, launching the Small Business Access Service, a “one-window service” that will provide resources online and over the phone to make it easier for small businesses to interact with the government.

Cutting Red Tape
In addition to Cutting Unnecessary Red Tape Act, 2017:
· Improving the data analytics government uses to target government inspection programs, and reduce inspections for consistently compliant businesses.
· Developing a Coordinated Inspection Pilot for the restaurants and bars sector. Under this approach, regulators will share data and information on critical compliance issues, as well as compliance best practices.
· Exploring new provisions that allow businesses to comply with regulatory requirements if they have an alternate approach that meets or exceeds the requirements.

Other Measures
Implementing a Graduated Apprenticeship Grant for Employers to provide incentives to encourage apprentices to complete training.
· Supporting multiple employers to pool together and form consortia to hire, register and train their apprentices for skilled trades.
· A two-pronged strategy to help Ontario be a FinTech leader.

FinTech (financial technology to the uninitiated) is a promising economic opportunity for Ontario. The Fall Economic Statement set out the first phase of a strategy to help this sector thrive, which consists of two initiatives: a Regulatory Super Sandbox and the creation of the Ontario FinTech Accelerator Office. The Sandbox concept will give these emerging companies greater freedom and space to experiment with different business models, delivery mechanisms and so forth. In this structure, products and services can be brought to market quicker, under the supervision of multiple regulators, to ensure consumer protection. The Ontario FinTech Accelerator Office is meant to assist with knowledge transfer and navigating regulatory requirements, help to create partnerships between companies and complement existing government support for innovative businesses.

The hiring incentives and tax cuts for small business will cost the treasury about $500 million over the next three years. Minister Sousa may or may not admit that the announced tax cuts are a form of relief from the higher minimum wage. While it can serve to nudge the Liberals back to the center, it seems that the government is also worried about politics south of the border. With NAFTA up in the air, and congress set to vote as early as this week to slash the corporate tax rate to 20 per cent from the current 35 per cent, the Liberals may be trying to make sure small businesses in Ontario can compete. But Sousa’s announcement missed the mark on business taxes for bigger corporations, as the new measures target small businesses specifically. Without relief for big business, this comes off as cushioning for the political impact of the minimum wage increase.

The numbers
·Forecasting real GDP growth of 2.8 per cent in 2017, up from 2.3 per cent in the 2017 Budget.
·Projecting that revenues will rise to $158.2 billion in 2019–20, up from $140.7 billion in 2016–17, an average annual growth rate of four per cent.
·Projecting that the net debt-to-GDP ratio will decline to 37.3 per cent in 2017–18
·Unemployment at 5.9%, below the national average for 31 months. 
·Gaining 800,000 net new jobs since the recession and expecting to create more than 300,000 net new jobs by 2020.

The government is projecting a balanced budget in 2017–18 and continued balance in 2018–19 and 2019–20, unchanged from the 2017 Budget forecast. See below for a detailed breakdown:



Balanced Budget?

Polls show that Kathleen Wynne is running second to PC Leader Patrick Brown.  The announcement today was a medium to give the Liberals an edge by showcasing that the economy is performing well. The Liberals unveiled a balanced budget in April 2017, the first Ontario budget without a deficit since 2008 – just before the global financial crisis that led to the biggest recession since the Great Depression almost 90 years ago. The Liberals unveiled a record $141.1-billion spending plan that increases funding for health care by $7 billion over the next three years.

But is the budget balanced? Last month, the Auditor General estimated in a special report that the way the Ontario Liberal government is cutting hydro bills by 25% purposely obscures the true financial impact of the measure to avoid showing a deficit on the province's books. The Liberals didn’t agree, saying their financing structure is indeed in compliance with accounting standards and wasn't intended to avoid a deficit.

To add to the uncertainty, in the same month, Ontario's Financial Accountability Officer (FAO), who gives independent advice to the legislature about budget matters, said in October that without an adjustment to Ontario’s fiscal policy, demographic changes such as ageing baby boomers, will lead to increasing budget deficits and higher levels of provincial debt in the long-term.

Opposing Voices

Patrick Brown and the Progressive Conservatives have been using the above as an opportunity to say that “the books were cooked for an election illusion,” and that the budget is far from balanced. This morning in Question Period, they continued with that narrative again, tying into their bigger strategy of painting the Liberals as a government plagued with mismanagement, and themselves as the more capable option.

Shortly after Sousa’s announcement, Finance Critic Victor Fedeli said the announcement is “nothing more than a pre-election Hail Mary pass from an out of touch government,” bringing up again concerns from the Auditor General and the FAO, further stating that Liberal debt reduction claims are based on “unlikely assumptions.” He continued to say that the one per cent income tax reduction too little too late to mitigate minimum wage increase.

NDP Finance Critic John Vanthof reiterated the NDP narrative throughout the past few months and from this morning, with a focus on overcrowded hospitals. He then continued to question how things are fair in Ontario, stating “they are talking about balancing the budget, but what people see on the ground is not the same rosy picture.”

Concluding Remarks

As the FAO noted in October, convincing Ontarians of the need for significant fiscal restraint beyond balancing the annual budget would be challenging for any Ontario government. This is probably true for Canada as well. The narrative from the Ontario Liberals is pretty similar to Trudeau’s federal Liberals when it comes to fairness and opportunity. And this holds true when it comes to lessons learned on small business. Perhaps the Liberals are worried about tax changes south of the border, and yes, they are worried about NAFTA, but today’s announcement also connects to the Federal government’s hard learned lesson this summer to not mess with small businesses, especially when you have an election on the horizon. In other words, today’s announcement is a piece of the Liberal election platform.

All in all, now is the time to engage the Ontario government and opposition parties. November  9th  represented six months before the writ period, when certain rules about campaign spending kick in. As always, the Sussex team is happy to help you navigate this rapidly evolving landscape. Please contact us with any questions.