Toronto, The Ontario government’s March 29, 2011 budget deserves commendation for adhering to a coherent, growth-friendly plan to keep down the effective tax rate on business investment and for targeting a return to surplus, but the schedule for doing so, by 2017/18, is problematic, according to a C.D. Howe Institute e-briefreleased today.
In “The Fragile Fiscal Pulse of Canada’s Industrial Heartland: Ontario’s 2011 Budget,” author Colin Busby argues unless the provincial government takes aggressive steps to bring its budget to balance, debt service costs could rise sharply, and Ontarians could find themselves contributing a much larger share of their incomes to servicing the provincial debt.
In recent years, Busby writes, a safe-haven image for Canadian government debt has allowed Ontario to issue debt at record low interest rates. But because of the province’s high deficit, rapidly aging population, and rising healthcare costs, its current deficit-reduction plans will be watched closely by rating agencies and their clients alike. On this front, the 2011 budget provides some mixed news: on one hand, lower-than-expected deficit and debt-to-GDP projections are encouraging; yet, the long time-horizon envisioned for deficit elimination seems likely to raise financial market concerns.
A quicker than planned return to surplus would better position the province to cope with future economic shocks, and reduce the risk that financial markets will discipline fiscal policymakers by downgrading government debt. To avoid a retrograde move to higher tax rates, Ontario needs more restraint in spending.
For the e-brief go to website.
