CANADA

AGAINST THE GRAIN

CRITICS CHARGE THAT BY RAISING TAXES, ONTARIO’S NDP GOVERNMENT WILL PROLONG THE RECESSION

PAUL KAIHLA May 11 1992
CANADA

AGAINST THE GRAIN

CRITICS CHARGE THAT BY RAISING TAXES, ONTARIO’S NDP GOVERNMENT WILL PROLONG THE RECESSION

PAUL KAIHLA May 11 1992

AGAINST THE GRAIN

CANADA

CRITICS CHARGE THAT BY RAISING TAXES, ONTARIO’S NDP GOVERNMENT WILL PROLONG THE RECESSION

Only a year ago, Ontario Treasurer Floyd Laughren declared that he would not raise personal income tax rates because “such moves would worsen the recession.” Since then, the economic outlook for Canada’s most recession-battered province has scarcely changed—but the NDP treasurer’s views on tax increases clearly have. Last week, Laughren slapped more than $1 billion in new taxes on a province still reeling from the worst economic downturn since the 1930s. And although Laughren predicted that his budget would create jobs and restore investors’ confidence, some economists cautioned that the array of tax hikes would discourage consumer spending and make it harder for the country as a whole to climb out of recession.

Indeed, the Ontario New Democratic Par-

ty’s economic strategy runs counter to that of most governments in the rest of Canada. Of the seven provinces that have tabled budgets so far this year, only two—British Columbia and

Newfoundland—raised personal income taxes. The federal government, for its part, actually cut income taxes in its February budget, by about $160 a year for a married person with two children and an annual income of $50,000. Unlike other Canadians, however, Ontario’s taxpayers will be denied the benefit of even that small change: Laughren plans to capture the entire federal tax savings—and then some. The treasurer’s budget also imposed a higher surtax on middleand upper-income taxpayers, defined as those with taxable incomes in excess of $53,000 a year—down from last year’s threshold of $84,000. Complained Loudon Owen, 34, a Toronto commercial lawyer who has organized public rallies by businessmen opposed to Premier Bob Rae’s government: “At a time when the economy of this province is under siege, it really is the wrong message.”

Laughren, a 56-year-old former economics instructor from Sudbury, Ont., insisted that his government’s planned spending of $51 billion during 1992 would create 90,000 new jobs and hold the provincial deficit to a projected $9.9 billion. That figure is several billion dollars lower than government predictions earlier this year. Among other changes, the NDP said that it will generate new revenues by licensing casino gambling in Ontario (page 14). As well, the government estimates that it can sell some of its assets, including Toronto’s SkyDome and a Crown-owned petrochemicals company, Suncor Inc., for about $1 billion.

But business and opposition critics charged that the tax increases will siphon spending

money from workers’ pockets and stifle demand for everything from clothing to cars and building materials. “So much for a consumerled recovery,” said Gordon Floyd, president of Toronto-based Public Affairs Management. Added Floyd, whose firm lobbies the Ontario government on behalf of business clients: “The personal tax increases are going to prolong the recession.” That sentiment was echoed by Colin Dodds, an economist at Halifax’s St. Mary’s University. “By continuing to send Ontario further into a recession,” Dodds said, “the [Ontario] government will hurt Atlantic Canada.”

Several other analysts predicted that Ontario’s spiralling tax burden would fuel migration out of the province. Declared Michael Walker, executive director of Vancouver’s Fraser Insti-

tute, a conservative think-tank: “The fact that people with more than $53,000 of income are now regarded as plump is ludicrous. People will move and business activity will go to other parts of Canada and the United States.”

Still, the recession-induced strains on Ontario’s finances left Laughren with a difficult choice. If, instead of raising taxes, he had let the provincial deficit rise even higher, the resulting demand for borrowed funds would likely have put upward pressure on Canadian interest rates, said Douglas Peters, chief economist for the Toronto-Dominion Bank. Another option would have been to impose dramatic cuts in provincial government spending—but that, too, would have dampened the prospects for economic growth. Added Peters: “You really can’t have it both ways. Whatever route you take, it’s going to have an adverse impact on consumer demand.”

While Laughren rapped taxpayers, his budget made new overtures to the province’s business community by providing $69 million in corporate tax breaks. Senior New Democrats privately say that they are trying to placate the business community, which has blasted the government for its record deficits and planned overhaul of labor legislation that would increase the powers of unions.

Last year, the NDP dismissed claims by business critics that the 1991-1992 deficit—which came in at $10.9 billion, $1.2 billion higher than forecast—would lead to higher taxes. But the result of Laughren's additional borrowing will be another $843 million in interest payments on the provincial debt this year—almost as much as the projected revenue from this year’s tax hikes. Declared Lyn McLeod, leader of the opposition Liberals: “Laughren had to build this budget on the disaster of last year’s budget. But you can’t tax your way out of a deficit.” For his part, Rae told reporters that the government planned a series of new public works projects that would help to stimulate economic recovery. In fact, the budget actually reduced capital spending by $122 million from last year’s figure of $5.65 billion. And although Laughren’s budget imposed cuts of $447 million on government operations, the province’s total spending will still rise by 4.9 per cent— roughly three times the current rate of inflation. Indeed, some departments, including the ministries of skills development and industry, trade and technology, will receive budget increases of more than 30 per cent.

Rae’s political advisers acknowledge that the NDP’s chances of re-election hinge on building credibility as economic managers. For now, New Democrats appear to be hoping that a recovery will generate a flood of new personal and business tax revenues, reducing the province’s record deficit and setting the stage for a recovery before a provincial election in 1994 or 1995. But even if it lives up to its fiscal promises, Rae’s government risks alienating Ontario’s taxpayers—whose economic bruises may take even longer to heal.

PAUL KAIHLA

BRIAN BERGMAN

JOHN DeMONT

CANADA WATCH

The Quebec government appears close to rejoining national unity talks, making a constitutional settlement more likely. Quebec has boycotted federal-provincial meetings since the 1990 collapse of the Meech Lake accord. But the province’s intergovernmental affairs minister, Gil Rémillard, said that Quebec would return to the bargaining table if it were offered substantially the same powers that it won in the Meech round—including the right to three of nine Supreme Court judges and a veto over future constitutional changes. In Edmonton, negotiators for Ottawa and the nine other provinces agreed to most of those conditions, although Alberta and several others vowed to oppose Quebec’s veto demand until they win agreement on a reformed Senate. In other developments:

• Federal officials said that they expect to propose legislation later this month to create the legal framework for a national referendum.

• Native leaders said that they are closer to satisfying their demands on self-government and other issues.

QUOTE OF THE WEEK “I’m courageous, but I’m not silly.” —Prime Minister Brian Mulroney on why a federal election this year is unlikely