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Ontario’s economic future is nearing a crossroads

Ontario's next election is going to be fought, as so many elections in challenging times are, on the economy. But it won't be about simply who is the party more capable of managing the province's economic fortunes. No, this is shaping up as a fundamental clash in economic philosophy.

Provincial Progressive Conservative leader Tim Hudak this week laid out an economic platform built upon a corporate tax cut (to 10 per cent from 11.5 per cent). The idea is that a lower tax regime will attract business investment – and, by extension, jobs – to the province. A back-of-the-envelope estimate suggests this would reduce the government's corporate tax take by close to $1.5-billion annually – but the belief is that the resulting growth in business would more than make up for this.

Premier Kathleen Wynne's Liberal government, in stark contrast, has laid out an economic plan built upon rebuilding and expanding the province's infrastructure. The long-term costs are unclear – the province has budgeted $35-billion over the next three years, but it's talking about a 10-year planning horizon. But again, the idea is that better infrastructure will attract businesses, improve efficiency and drive economic growth.

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The end goals of the two plans are remarkably similar. The approaches are vastly different. The Liberal plan is grounded in the belief that the required investments to create the conditions for economic prosperity must come from governments. The Progressive Conservative plan is predicated on the idea that the most efficient investments driving economic prosperity come from the private sector.

In a sense, both platforms get at the root of what is possible on the provincial level. University of Western Ontario economist David Laidler noted that provincial economic policy is hampered on several fronts: The provinces have no control over monetary policy, no say in how the federal government spends its much more considerable fiscal resources, and no control over international trade policy. That severely limits any provincial government's ability to manage its own economic growth.

But Ontario does control its own tax regime, and it is responsible for the bulk of infrastructure. If it is going to have any leverage in promoting economic growth, these are probably its best bets. Indeed, as Jack Mintz of the University of Calgary's School of Public Policy asks, since there is economic merit to be found in both ideas, "Why not do both?"

One answer to his question is political ideology; the two economic platforms represent not just different approaches, but strongly divergent beliefs about the role of government. But there's another, simpler answer: Cost. Ontario already has an $11.7-billion budget deficit and one of the highest debt burdens in the country (debt-to-GDP is nearly 40 per cent). Cutting taxes and increasing infrastructure spending would take astounding creativity and considerable risk.

Ms. Wynne is leaning heavily toward tax increases (possibly gas taxes or road tolls) to help finance her plan – politically risky, and a potential economic drag. With long-term borrowing costs still at historic lows, the province could borrow to fund its infrastructure ambitions without incurring particularly onerous debt-servicing costs to its budget bill – but this would still ramp up a debt load that needs to go the other way.

Mr. Hudak's corporate-tax-cut plan contemplates government spending restraints to pay the bill – which also could create an undesired economic drag. It's also a leap of faith that money left in corporate hands will end up being invested. As we have learned from Canada's post-financial-crisis lack of corporate investment despite $500-billion-plus of cash holdings, just because the corporate horse has plenty of water doesn't mean it will drink.

Ontario's politicians, and its voters, face some tough economic policy choices, and there are no easy answers. But it does appear that, despite their differences, the province's two leading parties are increasingly hitting on the right questions.

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About the Author
Economics Reporter

David Parkinson has been covering business and financial markets since 1990, and has been with The Globe and Mail since 2000. A Calgary native, he received a Southam Fellowship from the University of Toronto in 1999-2000, studying international political economics. More

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