Thursday, August 19, 2010

2007 Ontario Economic Outlook and Fiscal Review


The Ontario economy has proven remarkably strong and resilient in the face of an increasingly challenging global economic environment. Since 2002, higher oil prices, a high Canadian dollar and increased competition from newly industrializing countries have tested Ontario businesses’ ability to compete and thrive. More recently, businesses have felt further pressure due to a slowing U.S. economy.

Despite these adverse developments, Ontario has seen continued strong job creation and business investment. Incomes are on the rise and the standard of living is one of the highest in the world. Ontario’s economic growth continues to exceed expectations. Private-sector forecasts of Ontario’s 2007 real gross domestic product (GDP) growth now average 2.0 per cent, up from 1.7 per cent at the time of the 2007 Ontario Budget.

The clearest sign of the Ontario economy’s resilience has been its job creation record. Since October 2003, 417,900 net new jobs have been created. Over 95 per cent of these jobs were in occupations that paid on average over $19.50 per hour, including jobs in natural and applied sciences, management, social sciences, and education.

Still, challenges remain. This strong job creation has not occurred across all sectors of the economy, and many families and communities have been affected by job losses. While total service-sector jobs (private and broader public sectors) have expanded by 10.8 per cent since October 2003, employment in the goods-producing sector has contracted.

There are continued risks on the horizon. The weakened outlook for the U.S. economy, higher oil prices and the stronger Canadian dollar have reduced private-sector Ontario economic growth projections since the time of the 2007 Budget. This also means greater pressure on Ontario businesses over the next few years as they adapt to a much more challenging economic environment.
Investments for a Stronger Ontario

The Ontario Government is taking immediate action to further strengthen Ontario’s economic advantage and help the manufacturing, forestry, agriculture and tourism industries weather economic challenges. The government’s investment strategy builds on its five-point economic plan set out in the 2007 campaign platform, Moving Forward Together. In particular, the government is taking immediate action to keep taxes competitive, support innovation and accelerate its investment in infrastructure.

Measures announced in the 2007 Ontario Economic Outlook and Fiscal Review will boost Ontario’s ability to compete in the global economy by:

enhancing competitiveness through immediate tax reductions
investing in people and communities
investing in infrastructure.

In this document, the government is announcing more than $3 billion in new investments and tax reductions. These actions will boost Ontario employment by about 30,000 jobs over the next three years.
1. Enhancing Competitiveness through immediate tax reductions

The Province is proposing important new tax measures that support manufacturers and other sectors in Ontario challenged by current economic conditions. They would help Ontario manufacturers invest in their own businesses, creating and preserving jobs.

These new measures, totalling $1.1 billion in tax reductions over three years, include:

eliminating Capital Tax on January 1, 2008 for corporations primarily engaged in manufacturing and resource activities
providing a 21 per cent Capital Tax rate cut for all businesses retroactive to January 1, 2007, on the way to full elimination in 2010
increasing the small business deduction threshold to $500,000 from $400,000, retroactive to January 1, 2007.

The measures proposed would provide immediate tax relief for businesses, particularly for Ontario’s manufacturing and resource industries. This will help to further encourage business investment, strengthen manufacturing and enhance the province’s competitive position. See Annex II: Enhancing Ontario’s Tax Competitiveness for further details of these proposed tax cuts.

To assist manufacturers in acquiring new and advanced equipment and technologies, Ontario is paralleling the 2007 federal budget incentives related to accelerated capital cost allowances (CCA). A key incentive for manufacturers is the 50 per cent accelerated tax writeoff for investments in manufacturing and processing (M&P) machinery and equipment from March 19, 2007 until December 31, 2008. By paralleling the federal CCA measures, the Ontario Government will provide more than $400 million in tax relief over three years to manufacturers investing in the province. Ontario urges the federal government to quickly commit to extend this incentive for three more years to 2012.

The government has worked steadily to enhance the competitiveness of Ontario’s tax system. Since 2004, it has implemented or announced more than $2 billion a year in tax cuts for business when fully phased in. This support includes accelerating Capital Tax elimination to July 1, 2010 and reducing high Business Education Tax (BET) rates by $540 million when fully implemented in 2014.

Ontario’s current combined federal–provincial CIT rate for manufacturers and resource industries of 34.12 per cent is more than four percentage points below the average federal–state rate among its main trading partners, the U.S. Great Lakes States. Ontario’s rate is also lower than the current corporate tax rates in Japan, Germany and Italy.1 Once the proposed federal tax measures are fully implemented in 2012, Ontario’s combined CIT rate for manufacturers and resource industries will be even lower at 27 per cent.

Successful economies rely on a competitive tax and regulatory climate that supports innovation and economic growth. Modern and flexible regulation that promotes public policy goals while reducing compliance burdens can unleash the growth potential of Ontario businesses of all sizes. Ontario will continue to bring forward ways to reduce the regulatory burden on businesses to help them thrive in today’s competitive global economy.

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