OCC RAPID POLICY UPDATE

EMERGING STRONGER? WHAT ONTARIO BUDGET 2013 MEANS FOR BUSINESS 

Today, the Government of Ontario tabled its 2013 Budget. What follows is a summary of key highlights from a business perspective. 

Overall, the Budget is a mixed bag. Some measures will improve our overall competitiveness. These measures include: 

• holding the line on Corporate Income Tax rates;
• extending the Capital Cost Allowance for Manufacturers; 
• making progress on Pooled Registered Pension Plans (PRPPs); and, 
• implementing new investments in transportation infrastructure.

Some measures are disappointing: 

• there is still no clear plan on how government will cut costs and meet rising demand for services; 
• government is interfering in auto insurance;
• and, nothing addresses the government’s exposure to an inevitable hike in interest rates.

The bottom line? The plan for long-term transformation and spending constraint is unclear.

1) THE DEFICIT 

The deficit is projected at $9.8 billion for 2012-13. Total net debt is projected at $268 billion or approximately $20,000 per person. The debt to GDP ratio is project at 37.5 percent. 

The government retains its target of eliminating the deficit by 2017-18 and then reducing the net debt-to-GDP ratio of 27 percent. According to Budget, “eliminating the deficit is the single most important thing that government can do to secure Ontario’s prosperity.” 

Note that while the deficit is projected to grow next year to $11.7 billion, government has a history of overstating the projected deficit. 

OCC ANALYSIS

The deficit and debt announcements are of no surprise. In a context of weak economic growth, a balanced approached to eliminating the deficit is probably justified. Too much austerity too fast-particularly in a context of reduced federal spending-could further dampen economic growth. 

However, the projected increase in the deficit for next year is concerning, and likely reflects government’s tendency to overstate the assumption for political reasons. 

A second concern is the absence of a plan on how to constrain costs in the future. Government has already tackled the low hanging fruit when it comes to spending reductions, such as wage and hiring freezes. Where’s the long-term plan for transformation? 

2) SPENDING AND GOVERNMENT TRANSFORMATION 

Government program spending continues to grow. It has increased by 49 percent since 2004-05 and 23 percent since 2007-08. 

The three biggest spending items in the budget are health $48.9 billion (38.3 percent), education $24.1 billion (18.9 percent), and $10.6 billion for interest on the debt servicing (8.3 percent). 

Public sector wages account for 50 percent of all program spending. Average wage settlements across the public sector have averaged at around 0.1 percent. Executive pay has been frozen. 

However, little progress has been made on public sector pensions, which have been, according to the Drummond Commission, “responsible for much of the total increase in program spending.” 

The government notes that it is or will be acting on 60 percent of the Drummond Report recommendations. 

OCC ANALYSIS

Ontario spends the least on a per capita basis of any provincial government in Canada. Spending growth during recession is normal. 

However, in the context of an aging population and increased demand for services, the current path is unsustainable. The government needs to make some tough decisions on issues such as program cuts and public sector benefits such as pensions. 

Interest rates are at a historical low and projected to remain so until 2014. History teaches us they will inevitably go up. Ontario is extremely vulnerable to interest rate increases and must take greater advantage in this low interest rate period to get its fiscal house in order. 

The OCC firmly believes that, in particularly in a context of low economic growth, deficit targets will be achieved through transforming how government does business, including by allowing more private sector delivery of health and human services. To see the OCC’s prescription, read out recent report on alternative service delivery.

3) ONTARIO’S PROJECTED ECONOMIC GROWTH 

Budget 2013 projects that Ontario’s economy will grow moderately over the next few years. GDP is expected to increase by 1.5 percent in 2013, 2.3 percent in 2014, and 2.4 percent in both 2015 and 2016. 

Business investment and trade are expected to contribute to growth over the medium-term, particularly as exports to the U.S. increases. The government projects steady gains in motor vehicle sales-as a result of a strengthening U.S. recovery. 

Continued growth in consumer spending is projected to move in tandem with household incomes over the medium-term. 

400,000 net new jobs are expected over the next four years, which according to the Budget will result in a decline in the unemployment rate to 6.6 percent by 2016. 

That said, the government notes that uncertainty in Europe and the U.S. remains a key risk to Ontario’s economic growth. 

OCC ANALYSIS

Government projections on economic growth are comparable to private sector forecasts. However, Ontario’s fiscal position could be compromised as interest rates increase in tandem with growth. 

4) CAPITAL COST ALLOWANCE FOR MANUFACTURERS 

The Province of Ontario will parallel the 2013 federal budget proposal to extend the accelerated Capital Cost Allowance to 2015. The allowance enables manufacturers to deduct investments in new machinery and equipment from their taxes. It is projected to reduce the tax on manufactures by $265 million between now and 2015. 

OCC ANALYSIS

In a context of (near) parity with the U.S. dollar and lagging productivity, the allowance is both welcome and necessary. 

5) ADJUSTMENTS TO THE EMPLOYER HEALTH TAX 

The Budget adjusts the Employer Health Tax benefit, increasing the exemption from $400,000 to $450,000 of payroll for small business. Beginning 2014, the adjustment is cost neutral because firms with payrolls over $5 million will no longer qualify for the benefit. 

OCC ANALYSIS 

The OCC will consult is members on the implications of this announcement. 

6) POOLED REGISTERED PENSION PLANS (PRPPs) 

The government has announced that they will consult with interested parties to determine how best to implement PRPPs in the province. 

PRPPs are new, optional and low-cost retirement savings mechanisms that will make it easier for small businesses to offer pension plans to their employees. The federal government has passed legislation enabling PRPPs. Similar provincial legislation is an important next step. 

OCC ANALYSIS

This is a win for the OCC and its members, who have been pushing the government to follow the lead of the federal government and other provinces and introduce a PRPP regime in Ontario. 

The OCC will actively participate in the PRPP consultation process. 

7) AUTO INSURANCE “REFORM” 

The Budget proposes an auto-insurance cost-and-rate-reduction strategy that would reduce auto insurance rates by 15 percent. 

OCC ANALYSIS  

The OCC is leery of any government intervention on pricing in the marketplace unless there is evidence of collusion or a monopoly. Government has demonstrated neither. 

What are the unintended consequences? Will smaller players exit? Will competition in the sector be reduced as a result? Will the purpose be defeated? This may be a short-sighted and band-aid solution to a more complex set of issues and problems. 

8) TRANSPORTATION AND INFRASTRUCTURE FUNDING

The budget commits to $35 billion to funding infrastructure over the next three years.

The Province is committing to convert select high occupancy vehicle (HOV) lanes in the GTHA into high-occupancy toll (HOT) lanes. 

It will also invest $100 million in a new dedicated fund for bridges, roads, and other critical infrastructure in small and rural municipalities. Here, the Budget quotes the OCC’s 2013 Pre-Budget Submission: “Transportation bottlenecks in the GTHA and throughout Ontario are hurting quality of life and productivity. The Big Move… provides an opportunity to engage all stakeholders on how we pay for infrastructure, not just in the GTHA but across the province.” 

OCC ANALYSIS

The quality of infrastructure is one of the single biggest factors in attracting investment to Ontario. Good infrastructure is good for labour mobility, attracting talent, and shipping goods. We also know that spending a $1 billion on infrastructure creates about 18,000 jobs. 

That is why 66 percent of our GTHA members firmly believe that new revenue tools are needed to fund transit projects in the region. 

The OCC is currently consulting with its GTHA members on what revenue tools are best suited to fund The Big Move, Metrolinx’s plan to rebuild transportation in the GTHA. Our members are not so hot on HOT lanes, given the potential administrative overhead. 

Stay tuned for our report-back on our Funding The Big Move consultations with GTHA businesses next week. 

The OCC supports a new dedicated small and rural municipality transportation fund, as it recognizes that many small communities do not have public transit systems. 

9) CORPORATE TAX: RATES AND “LOOPHOLES” 

Ontario’s Corporate Income Tax (CIT) rate remains frozen at 11.5 percent. CIT will be frozen at this rate until the budget is balanced (projected to be 2017-18). The combined federal-Ontario general CIT rate (26.5 percent) is significantly lower than in the U.S. and 0.9 percent over the OECD average. 

Note that the provincial government plans to work with the federal government to close corporate loopholes, although it is unclear what, beyond lip service, this means. 

OCC ANALYSIS 

In a context where Ontario has lost our ‘dollar advantage’ vis-a-vis the U.S., a competitive taxation environment is crucial. Government must resume the planned CIT reductions as soon as possible. 

10) REVIEW OF BUSINESS SUPPORTS

The Budget outlines changes to 2 business support programs: the Apprenticeship Training Tax Credit (ATTC) and the biodiesel exemption. The ATTC will also be modified to better improve completion rates among ATTC-eligible trades. 

The Budget also proposes to eliminate the biodiesel exemption effective April 1, 2014. The province currently exempts biodiesel from the 14.3 cent per litre tax under the Fuel Tax Act. 

The government has announced that it is creating a technical panel that will identify savings in business support programs. The panel will be asked to identify savings of 25 percent in the Province’s administration of the programs. 

OCC ANALYSIS

The OCC is analyzing and consulting with its members to determine the impact of changes to the ATTC and the biodiesel exemption. 

The OCC will work with the government to ensure that its business support programs create jobs in Ontario and improve our productivity. 

11) MINIMUM WAGE 

Ontario proposes the creation of an Advisory Panel to provide “recommendations on how the government should determine future changes to minimum wage.” The Panel would be composed of representatives from multiple sectors and be headed by an independent Chair. The Panel would be required to consult interested parties and report back to government with six months of passing the budget. 

OCC ANALYSIS 

The OCC is currently consulting its members on both the level of minimum wage and how the wage should be determined.

12) ONTARIO YOUTH JOBS STRATEGY 

The Budget commits $295 million over two years for a Youth Jobs Strategy, $195 million of which is dedicated to an Ontario Youth Employment Fund. The fund would provide hiring incentives to employers. 

The government is also creating a Youth Entrepreneurship Fund of $45 million over two years which will connect youth to mentors and provide more seed capital for start-ups. 

OCC ANALYSIS 

The OCC supports efforts to connect youth to employment opportunities. Ontario’s skills gap is growing, and younger workers represent a large, untapped pool of labour with much to offer.

CHAMBER NETWORK ADVOCACY SOLUTIONS

Feel free to forward this media release to your local contacts and use our key messages when discussing the 2013 Ontario Budget.

Any questions about the 2013 Ontario Budget should be directed to Josh Hjartarson, VP of Policy & Government Relations. 

 Visit occ.on.ca for more policy analysis from the OCC.

OCC Rapid Policy Update

INTEREST ARBITRATION IS HURTING OUR COMMUNITIES 

What is interest arbitration?

Interest arbitration is a mechanism used to renew or establish a new collective agreement for parties without the right to strike. It is the only legal process for municipalities to settle contract negotiation disputes with essential municipal workers, such as police, firefighters, and some paramedics.

Why does it matter?

Interest arbitration decisions give little consideration to local fiscal realities. Instead, arbitrators tend to replicate agreements from other communities. This is problematic. Replicating the salary and benefits from Toronto, for example, to Haliburton, doesn’t consider the differences in communities’ capacity to pay.

Partially as a result of interest arbitration, emergency service costs are growing more quickly than the Consumer Price Index as well as the average of other public sector workers, including nurses and teachers. High interest arbitration awards mean municipalities are forced to either increase taxes and/or reduce services.

Competitive tax rates and quality public services are key to economic development and prosperity. Interest arbitration is hurting municipalities’ economic competitiveness and ultimately hurting the competitiveness of the province.

What needs to change?

Both the Commission on the Reform of Ontario’s Public Services and the Association of Municipalities of Ontario have done extensive research into the interest arbitration system. Both agree that there is significant room for improvement. The Ontario Chamber of Commerce supports the following changes:

• the ‘ability to pay’ criteria used in interest arbitration decisions should be broadened to include economic and fiscal environment, and productivity criteria;
• arbitrators should be required to provide clear assessments and reasons for their decisions; 
• arbitrators must give priority to, and provide clear, written explanations of how the fiscal health of a community was considered when making a decision;
• streamline the process by providing interest arbitrators one year to complete their work.

What can you do?

Download this template media release for distribution to your local media contacts. Make sure to fill out highlighted areas with the applicable information.

Input your details into the following letter or download this template and email it to your local MPP.

Dear [MPP Name]

I am writing to express concern over the impact that the province’s interest arbitration system is having on Ontario’s competitiveness.

Interest arbitration is the only legal process for municipalities to settle contract negotiation disputes with essential municipal workers, such as police, firefighters, and some paramedics.

Partially as a result of interest arbitration, emergency service costs are growing more quickly than the Consumer Price Index as well as the average of other public sector workers, including nurses and teachers. High interest arbitration awards mean municipalities are forced to either increase taxes and/or reduce services.

Competitive tax rates and quality public services are key to economic development and prosperity. Interest arbitration is hurting municipalities’ economic competitiveness, and ultimately the competitiveness of the province.

We recommend that the following changes be made to the interest arbitration system:

• the “ability to pay” criteria used in interest arbitration decisions should be broadened to include economic and fiscal environment, and productivity criteria (as recommended by the Commission on the Reform of Ontario’s Public Services);
• arbitrators should be required to provide clear assessments and reasons for their decisions;
• arbitrators must give priority to, and provide clear, written explanation of how the fiscal health of a community was considered when making a decision;
• streamline the process by providing interest arbitrators one year to complete their work.
• thank you for attention to this important matter.

[Signature]

For any questions about interest arbitration, please contact Josh Hjartarson, VP Policy & Government Relations, at 416-482-5222, ext. 2320.