The Ontario government's plan to encourage corporate investment is equal parts lunacy, desperation and a return to failed 1970s-style state planning. The government is essentially demanding non-economic investment in a period of slow growth and adding a layer of management complexity likely to force business to faster-growing Alberta.
Finance Minister Sousa's proposal is focused on tax breaks for research and development and staff training, and includes a payroll tax for companies that fail to invest in research and development. On their own, these measures are unlikely to force Ontario businesses to pull up stakes. But combined with a limping provincial economy, companies with the option of moving are likely to look west for greener, faster-growing pastures.
On paper, Finance Minister Sousa's measures sound reasonable. Still, the lack of detail is telling. What exactly will employees in Ontario's manufacturing-heavy economy be trained to do? Use Excel? Operate more complex machinery allowing productivity enhancement, layoffs and higher profit margins?
There is a very clear sense in which the Ontario government is playing "blame the victim" for the sorry state of the provincial economy. The most recent data shows Ontario's GDP expanding at a glacial 1.0 per cent annualized pace, the same ironically as the one-year yield on the corporate cash hoards. The economy isn't slow because companies won't invest – investment is slow because there's no demand to meet.
Responsible corporations do not borrow money at five per cent interest to expand production capacity where demand is only growing at one per cent.
Yes, products manufactured in Ontario can be exported to where demand is stronger. But this is only the case when goods can be produced at a cheaper price than other places – China and Mexico for example – attempting the same strategy.
The current state of Ontario's competitiveness is painfully clear in the economic data . The machinery and equipment sector is shrinking at a 3.1 per cent pace. The old business school joke, "we're losing money on every widget we sell, but we'll make it up in volume!" applies here. Why expand uncompetitive production? The auto sector needs $200-million per year in subsidies to keep functioning as it is.
A surge in investment could provide short term, Keynesian boost to the economy but unless the long-term benefits on this investment are higher than the costs, companies might as well light the money on fire – it's quicker and we can move on to a better idea.
To be fair to the government, the problem of tons of money around with nothing to invest it in is not unique to Ontario. U.S. companies hold record amounts of cash and their economy remains almost as anemic as Ontario's. There is a global surplus of capital and a worldwide dearth in demand.
But faced with weak demand the answer is not to force unprofitable investment just so it looks like you're doing something.
Scott Barlow