Ontario Budget: Infrastructure Spending, Deficit, Both

UNCLAS SECTION 01 OF 02 TORONTO 000063

SIPDIS
SENSITIVE

TREASURY FOR INTERNATIONAL AFFAIRS (NEPHEW)

E.O. 12958: N/A
TAGS: ETRD ELAB EFIN EINV PGOV CA
SUBJECT: Ontario Budget: Infrastructure Spending, Deficit, Both
Increase

Ref: (A) 08 Toronto 327 (B) Toronto 20 (C) Toronto 54
Sensitive But Unclassified - Please Protect Accordingly.


1. (SBU) Summary: The Ontario government's 2009 budget introduces
significant measures to help stimulate the province's ailing
economy, including C$27.5 billion in infrastructure spending, and
the harmonization of the 8% provincial sales tax (PST) with the 5%
federal goods and services tax (GST). Corporate and personal income
tax reforms were also introduced to help stimulate investment in the
province. This budget uses deficit spending in a way not seen since
the recession of the 1990s, under the premiership of Bob Rae, and is
projected to surpass even the largest provincial deficit during that
period. This year's stimulus and predictions of future provincial
deficits will result in a C$56.8 billion deficit over seven years.
End Summary.

--------------
Hard Times Call for Stimulus
--------------


2. (U) On March 26, the Ontario government's plan to spend its way
out of recession was released in its C$108.9 billion budget for the
fiscal year beginning April 1. The province is struggling to offset
the effects of the global economic downturn, and has pledged to
spend C$27.5 billion on infrastructure projects, featuring roads,
schools and hospitals, over the next two years. This plan
represents the province's largest two-year investment ever on
infrastructure. The province's budget will be topped up with C$5
billion from this year's federal budget. Ontario Premier Dalton
McGuinty announced on March 23 that the province (with the help of
the GOC) would spend C$15.1 billion on infrastructure projects
during the upcoming year, and another C$17.4 billion in 2010-11.


3. (U) Transportation projects will receive the lion's share of
spending over the next two years, at C$9 billion, followed by health
care at C$7 billion, and education at C$4 billion. The government
estimates its spending will generate 146,000 jobs in 2009-10, and
another 168,000 jobs in 2010-11. These are in addition to the
estimated 85,000 jobs created in 2007-08, and 100,000 jobs created
in 2008-09 as a result of Ontario's C$18 billion investment in
infrastructure over the past two years. However, from October 2008
to February 2009, Ontario lost 160,000 jobs, mostly in
manufacturing, wiping out any job gains over that period. The
province's unemployment rate rose to 8.7% in February, a full
percent above the Canadian average. Employment numbers are not
likely to improve as the province's GDP is expected to decline
between 2.5% and 2.9% in 2009, followed by modest growth in 2010,
between 1% and 2.3%.

--------------
Remember The Balanced Budget?
--------------


4. (U) The current budget year's deficit attracted much debate when
it was projected to be only C$500 million (ref A); it now looks to
be C$3.9 billion. This year's stimulus-loaded budget proposal will
dwarf that, putting the budget into a C$14 billion deficit. This
budget is on track to surpass the province's largest ever recorded
deficit of C$12.4 billion in 1993, during the last recession, when
the NDP's Bob Rae ran the provincial government. The total
forecasted deficit over seven years is C$56.8 billion.

--------------
Sales Tax Harmonization
--------------


5. (U) One of the most contentious parts of the provincial March 26
budget is the harmonizing of Ontario's 8% provincial sales tax (PST)
and the 5% federal goods and services tax (GST) into a 13% single
sales tax, effective July 1, 2010. While sales tax harmonization is
not popular with the general public, many industries favor the
change because PST will be removed from business equipment and
machinery, which is currently not subject to the GST. The Ontario
government will provide middle and low income earners with a
one-time rebate of up to C$1000, spread out over a series of smaller
payments, in order to soften the blow of the new tax to be imposed
on previously PST-exempt goods and services, such as fast food
meals, haircuts, and home heating fuels.


6. (U) Nearly half of Ontario's 2008-9 retail sales tax proceeds -
roughly C$8 billion -- came from taxing business inputs. Under the
harmonized sales tax regime, businesses are expected to save C$4.5
billion over three years. Critics of the harmonization claim that
it will only shift the tax burden from businesses to consumers.
Market analysts estimate that the harmonized tax will save Ontario's
businesses about C$500 million a year in administrative costs alone.
The GOC will provide C$3 billion in transfer payments next year and

TORONTO 00000063 002 OF 002


another C$1.3 billion in 2011 to facilitate the province's
transition to the single sales tax. Business analysts have long
called for tax reform in the province in order to make Ontario more
attractive for new business investment. The tax harmonization is
expected to move Ontario from a high-tax jurisdiction to a
medium-tax jurisdiction by 2012, with the marginal tax rate on
investment falling just over 10%.

--------------
Further Tax Reform
--------------


7. (U) The budget introduced further measures to encourage
investment in Ontario, including cutting the corporate income tax
rate from 14% to 12%, effective July 1, 2010, and to 10% by 2013.
The rate paid by manufacturers and processors will be lowered from
12% to 10% on July 1, 2010. The provincial government will also cut
the corporate tax rate for small businesses from 5.5% to 4.5%,
effective July 1, 2010. The personal income tax rate was also
lowered from 6.05% to 5.05%, beginning July 1, 2010, for the first
C$36,848 earned. The government estimates that under their proposed
tax reforms, the total savings to individual consumers will be
C$10.6 billion over three years.

--------------
Revenue's Down, Spending's Up
--------------


8. (SBU) Ontario sales tax represents about 18% of the province's
2008-09 C$93.4 billion total revenue stream, the second highest
source of revenue after personal income tax (26%). A cyclical
decline in sales tax revenue due to the economic downturn has
resulted in a net drop in revenue for the province. Simultaneously,
the province is presenting a stimulus-laden budget, resulting in a
C$18 billion combined two-year deficit. The 2009 budget forecasts
C$2 billion in new annual revenues starting in 2010, but it is
unclear where the province will find additional revenue to finance
ballooning healthcare spending, which was growing at 8% to 10% a
year before the proposed stimulus was announced. Healthcare
expenses cost Ontario C$42.6 billion in 2008-09, roughly 40% of the
province's total expenses, followed by education and training (19%),
and children's and social services (12%). For the first time in its
history, Ontario will receive equalization payments from the federal
government, worth C$347 million in 2009-10. The province will spend
C$1.2 billion to build 4,500 new affordable housing units and to
renovate 50,000 existing government-subsidized housing spaces to
make them more energy efficient. This housing project is expected
to create some 23,000 short-term jobs.


9. (SBU) Comment. While this budget results in the largest
provincial deficit ever, most of the debate is centered on the
harmonization of sales taxes. While many object to the predicted
increase in Ontarians' cost of living because of the new
consolidated tax, there seems to be little analysis of the long-term
effect of the province's multi-year deficit projections. This is
likely an acknowledgement that despite enthusiastic summaries about
Canada's relative immunity from the global downturn, Ontario's
economy has been hard-hit and will suffer further in the near-term.
The provincial government is focused on ensuring its stimulus
efforts result in job creation now, as well as preparing the
province for a less industrial economic base sometime in the
future.

NAY