Flaherty blames province for slow Ontario economy

Federal Finance Minister Jim Flaherty has charged the Ontario government with the outright failure to stimulate a lagging provincial economy by providing tax breaks to businesses.

In a speech delivered this morning to an crowd of small- and medium-sized business owners in Toronto, Flaherty bluntly stated that the government of Dalton McGuinty suffers from a “lack of leadership, a lack of vision and a lack of economic stewardship.”

As a result, the province, formerly deemed the “economic engine of Canada,” is lagging behind other provinces, particularly British Columbia and Alberta, in developing plans and tax incentives to stimulate the economy, Flaherty said.

Despite his criticism, Flaherty did not promise any new relief for businesses or Ontario residents in the upcoming budget — set to be released on February 26. He stated that “we’ve done our job [at the federal level], and we’ve done it cumulatively.”

In the past few years, Ontario’s key manufacturing sector was severely hit by job losses, an economic slowdown due to competition from emerging countries and the recent U.S. economic slowdown due to liquidity problems and the sub-prime crisis.

“The business tax burden is putting Ontario manufacturers at a disadvantage,” said Flaherty.

Flaherty also criticized McGuinty for “bailing out” favoured industries, saying this “is just the kind of protectionism that hurts trade and kills jobs.”

While Flaherty conceded that “Ontario is always well positioned to weather economic storms,” he noted that a competitive economy in the midst of global economic uncertainty and emerging developing markets requires distinct and decisive action. He called on McGuinty to eliminate the capital gains tax on all businesses in Ontario — an approach recently adopted by the B.C. provincial government and already implemented in Alberta — and to reduce business taxes to 10% by 2012.

“Ontario business taxes are currently the highest in Canada … and the corporate tax rate has not been reduced since 2001, when I was minister of finance [in Ontario],” said Flaherty. “If this trend continues, the marginal effective tax rate will be 30.2% in 2012, compared to [Quebec’s] rate of 18.8%. If this trend continues, there are real consequences in the real economy. Tax and fiscal policy affects the willingness of businesses to invest. If we reduce the taxes on business and attract investment, we create jobs and strengthen competition.”

Flaherty highlighted that over the past 25 months, the federal government reduced the GST by 2% and provided $2 billion in economic. “Our tax reductions are structural and long-term. The U.S. may send out cheques, but our [plan] will give long-term strength to the economy. We are making broad-based, long-term, structural tax reductions.”

Flaherty’s comments came a day after McGuinty said the federal government needed to help manufacturers and stop lecturing the province about its spending. McGuinty’s comments were fuelled by recent criticisms from Flaherty regarding the province’s spending and tax policies.

Despite Flaherty’s harsh criticism of the province’s economic policy, he did say that “it is not too late for Ontario to take tax action” to provide stimulus to its economy, particularly by reducing corporate taxes.

Originally published on Advisor.ca on February 20, 2008