Ontario Budget Focuses on Economic Stabilization

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E.O. 12958: N/A
TAGS: PGOV ETRD ELAB CA
SUBJECT: Ontario Budget Focuses on Economic Stabilization


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1. (SBU) SUMMARY: Ontario's 2008 budget, unveiled on March 25,
represents a concerted attempt by Premier Dalton McGuinty to take an
active role in stabilizing and growing the Ontario economy. Against
the wishes of the federal government, which has waged an on and off
war of words with Ontario provincial officials over taxation
policies, the budget contains only modest tax relief for Ontario
businesses. McGuinty has proposed a wide range of spending measures
in line with his election promises to "modernize" Ontario's
workforce and aid ailing industries. Conservative leader John Tory
criticized the budget for its "last-minute" spending spree on
infrastructure that will "be here today and gone tomorrow" and the
absence of corporate tax cuts to attract manufacturers to the
province. END SUMMARY.

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Ontario Government Focuses on Employment
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2. (U) A C$1.5 billion "Skills to Jobs Action Plan" is the
centerpiece of Ontario's 2008 budget. Combined with other
investment proposals, the government plans to invest nearly C$2
billion in workforce training measures. The plan complements
earlier initiatives such as the Next Generation Job Fund, the
Ontario Automotive Investment Strategy (OAIS),and the Advanced
Manufacturing Investment Strategy (AMIS). Ontario estimates that
the initiatives will assist up to 20,000 unemployed workers who
commit to a long-term training plan for a second career.

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Investment and Business Promotion
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3. (U) The budget proposes C$750 million in tax cuts over four
years. This is in addition to the C$1.1 billion of corporate tax
relief from FY2008 to FY2010 announced in Ontario's mid-year budget
update in December 2007. Together, the mid-year 2007 budget update
and this budget offer business tax relief of almost C$600 million in
FY08 and a further C$500 million in FY09. Most prominent among tax
relief measures is the elimination of the business capital tax
retroactive to January 1, 2007, for businesses primarily engaged in
manufacturing and resource activities. The government intends to
eliminate the capital tax on all businesses by July 2010.


4. (U) The budget also proposes tax incentives for start-ups and
"innovative firms." A 10-year Ontario income tax exemption is
included for new corporations that commercialize intellectual
property developed by Canadian universities, colleges or research
institutes. The budget includes C$300 million for new investments
by the Ministry of Research and Innovation and tax credits to small
companies conducting scientific research and development in Ontario.
Provincial Finance Minister Dwight Duncan also announced a C$4
million plan to collaborate with Ontario universities over the next
three years to develop the financial services workforce. Toronto is
the third largest financial center in North America after New York
and Chicago, and the 15th biggest in the world. .

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Infrastructure
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5. (U) The budget includes a one-time C$1 billion expenditure for
infrastructure improvement, to be paid for out of the C$5 billion
FY2007 surplus. In FY2008, which begins on April 1, the province
intends to spend C$7.5 billion on transportation infrastructure
including rail, road, and transit projects throughout the province
with sizable amounts dedicated to supporting projects outside the
Greater Toronto Area. The budget fully funds the province's half of
the cost of the new Windsor access road that will link the end of
highway 401 with the new Detroit River International Crossing (DRIC)
bridge linking Windsor and Detroit. Access road construction is
scheduled to begin in 2009.

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Energy and the Environment
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6. (U) The budget includes funds for the implementation of the
Liberals' election promise to reduce electricity demand by 6,300
megawatts (MW),phase out the use of coal-fired electricity plants
by 2014, and double the use of renewable energy. The replacement of
coal-fired plants could mean a reduction of up to 30 megatons of
greenhouse gas (GHG) emissions, the single-largest emissions
reduction in Canada. The government also committed to consult with
municipalities and the energy generation sector to structure
property tax treatment of renewable energy facilities to promote the
development of green energy. Ontario's nuclear industry will also
benefit from increased funding for apprenticeship programs to
develop skilled workers.

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Budget Deficit Eliminated
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7. (U) The McGuinty government has eliminated the C$5.5 billion
deficit it inherited from its Progressive Conservative predecessors
and is on track to achieve its third consecutive budget surplus. A
C$600 million surplus is forecast for 2007-2008. The province's
accumulated debt-to-GDP ratio should improve from 25.2% in 2003-2004
to 16.2% by 2010-2011.

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Opposition: Too Little, Too Late
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8. (U) Conservative opposition leader John Tory, who currently does
not hold a seat in the Ontario legislature, condemned the McGuinty
budget as excessively interventionist and insufficient to stimulate
economic growth in Ontario. He noted that Ontario was moving
perilously close to becoming a "have-not" province under Canada's
scheme of equalization payments among the provinces.


9. (U) Tory described the budget as "Dalton and Dwight's Deeper
Downturn." Ontario, Tory asserted, is insufficiently prepared to
deal with a prolonged downturn in either the Canadian or U.S.
economy. Instead of industry-specific spending programs scattered
across the province, Tory suggested that the Ontario government (and
any Tory-led government) would focus on reducing the taxation and
regulation burden on all residents. Only a thorough paring-back of
government activity in Ontario would allow the province to improve
its last-place rankings in economic growth, according to the PC
leader.


10. (SBU) COMMENT: The general contours of McGuinty's budget bear
no surprises and largely align with his activist governing
philosophy and expansive campaign promises. Ontario's
export-dependent economy continues to evolve, due in no small part,
to the strong Canadian dollar, slowing U.S. economy, and higher oil
prices. The budget is a reflection of his efforts to minimize pain
resulting from the ongoing restructuring of the Ontario economy.
END COMMENT.

NAY