Ontario's Budget Draws Criticism
Huge deficit and tax hikes in the budget worry businessmen and the federal government
ONTARIO'S left-of-center government plans to spend its way out of the recession. Most economists say it can't be done. The province's budget deficit will rise to $9.7 billion (Canadian; US$8.4 billion); welfare payments will rise by 40 percent; gas guzzling cars will be hit by penalties of as much as C$7,000; gasoline taxes will rise by 12 cents an American gallon to bring the price to well over C$2 a gallon; cigarette taxes will bring the price of a package to C$6 a pack.
"We had a choice to make this year: to fight the deficit or fight the recession. We are proud of fighting the recession," said Floyd Laughren, the province's treasurer.
Bond rating services in Canada and the United States immediately put Ontario's AAA rating on a credit watch. Ontario is the only province with an AAA rating.
Mr. Laughren said he expected the reaction: "If I knew ahead of time we were going to lose our triple-A credit rating I don't think it would have altered our determination to fight the recession this year."
Ontario's spending and deficit plans are the opposite of the fiscal policies of the federal government which under former Finance Minister Michael Wilson has attempted to cut spending and reduce the deficit. Mr. Wilson was critical of the budget, saying because of Ontario's size - one-third of Canada's population and 40 percent of its gross national product - the budget would have national repercussions including the possibility of higher interest rates.
The budget shocked business economists. "This government is jeopardizing the future of the province in terms of its growth and business activity," says Ruth Getter, senior economist with the Toronto Dominion Bank.
"The size of the deficit is absolutely unconscionable," said John Evans, president of the Trust Companies Association. "They should have gone to school before they got into government, not after." Both banks and trust companies were hit with tax increases in the budget.
Ontario, Canada's richest province, is the manufacturing center of the country and has been hard hit by the recession. With a population of 9.5 million it has a gross domestic product greater than that of Australia, a country with almost double the population.
The New Democratic Party was elected last year under Premier Bob Rae; it calls itself socialist, but is a mildly left-of-center government. In the budget the party has supported what it sees as the constituencies which elected it: unions - which provide much of the NDP's financing - and working people, who the NDP calls "ordinary Canadians".
Income taxes have been cut at the lower end. The government gave an example of a single parent with two dependents who will start to pay tax after C$22,500, rather than C$18,700.
The automobile industry is the largest industrial employer in Ontario. But its products were hit by an energy conservation tax based on mileage. For example a Ford Mustang pays a C$700 tax, a BMW 750i, C$1,200, and a Rolls Royce, C$4,400. The car industry says the tax could cost jobs.
The spending budget in Ontario was matched by a budget of relative restraint in the neighboring province of Quebec.
"We could easily have panicked and attempted ill-advisedly to jump-start the economy, which over the long run would have been weakened by debt," said Quebec's Finance Minister Gerard Levesque, whose budget also came out last week. Quebec's economy, with an unemployment rate in March of 12.5 percent, is actually weaker than Ontario's with 9.9 percent unemployment.
A wage freeze has been imposed on Quebec civil servants; Ontario public employees will receive wage hikes this year.
Quebec will also have a deficit - C$3.5 billion - but it plans to increase spending by only 6.4 percent compared to an increase of 13.4 percent in Ontario.
"What Ontario has done is disastrous," said Martin Barnes, an economist with the Bank Credit Analyst of Montreal. "Trying to spend your way out of a recession has been totally discredited. Quebec is a lot more realistic."
Ontario has traditionally been a better place to do business than Quebec because of lower personal and corporate tax rates as well as grants to business.
But Ontario taxes are going up on incomes over C$84,000 a year while Quebec taxes are remaining the same.
"Quebec has gone from being less hospitable to being ahead of Ontario," said Brien Grey of the Canadian Federation of Independent Business.