Ontario Fall Economic Statement tackles pension reform

Ontario Fall Economic Statement tackles pension reform

The Ontario Fall Economic Statement and Fiscal Review (FES) will likely indicate that the province is on track to eliminating the provincial deficit by 2017-18. Charles Sousa, Ontario’s Minister of Finance, indicated that Ontarians should not expect a dramatic change in the province’s fiscal situation in the update which is to be released November 7th

The most recent figures from the Ministry of Finance indicate that the deficit will rise in 2013-14 to $11.7 billion - this is consistent with earlier projections in the 2013 budget. The FES should include greater detail in how the province will balance the deficit by 2017-18.

The economy continues to grow in Ontario despite challenges like the strong Canadian dollar (which has made exporters in Ontario less competitive) and the downturn in several European countries. Private sector forecasters project real GDP growth to be 1.5 percent in Ontario in 2013 which will pick up to 2.3 percent in 2014 – both forecasts are consistent with projections from the Ontario Ministry of Finance.

An important issue in the FES will be pension reform in Ontario. Kathleen Wynne has been vocal in her support of enhancing the Canada Pension Plan (CPP) so that it provides greater retirement benefits to seniors in Ontario and Canada. CPP reform is difficult, however, because it requires approval from two-thirds of Canadian provinces and two-thirds of the population of Canada. If Wynne is unable to marshal the required support, sources say that the Ontario government will consider creating a mandatory provincial pension plan to enhance the retirement security of seniors. This would surely be a second best solution to CPP enhancement because of the difficulties involved in creating a plan from scratch.

The current CPP program requires mandatory contributions of 9.9 percent of earnings (split between employees and employers) up to $51,100 per year. The maximum payout from this plan is roughly $12,000 per year which is low for middle-income Canadians. The Ontario government has supported a proposal from the PEI Finance Minister, Wes Sheriden, which would dramatically expand insurable earnings, mandatory contributions and maximum pensionable benefits.

The FES will provide commentary on the province’s progress in following through on policies introduced in the 2013 Budget. An update is likely on the status of the negotiation process between the government and public sector unions surrounding constraining public sector wage growth. An update on transit funding plan will not, however, be provided until December 15th when the Premier’s transit strategy advisory panel reports on ways of funding public transit in the province.

Finally, there will be an update on the government’s progress in implementing the remaining recommendations from the Commission on the Reform of Ontario’s Public Services, led by Don Drummond. These recommendations have so far enabled the government to deliver public services in a more efficient manner.

The FES will include the latest copy of “Transparency in Taxation” which details how much the government spends on a variety of taxation measures for both business and individuals. The Institute used these figures in its most recent Working Paper which analyzed taxation policy in Ontario – Taxing for growth: A Close Look at Tax policy in Ontario. We hope the FES will consider implementing some of the recommendations contained therein.

The FES will likely discuss potential taxation reforms to discourage companies from holding “dead cash”. The Institute completed a white paper on this subject and found that Canadian firms held an estimated $45 billion in excess cash and cash equivalents in 2011. While there has been discussion that the government will introduce a payroll tax “that would punish companies that fail to spend on training, technology or equipment”, the Institute strongly opposes this idea. Punishing companies for holding excess cash is not the solution. Instead the solution is to encourage companies to make productive investments within the economy.

Providing additional tax credits which encourage investment in machinery and equipment (M&E) and information and communications technology (ICT) are steps in the right direction. In both areas Ontario lags its North American peers – in 2011 Ontario businesses invested 32 percent less in M&E than their competitors in the US and 35 percent less in ICT investment. This is an area of policy concern because investments in M&E and ICT have historically had a positive relationship with labour productivity.  The productivity gap between Ontario and the North American peer median was $8,400 annually per capita in 2011.

Photo Credit: Scar1984, Getty Images

Category: Economic Progress, Income, Benefits, and Pensions, Taxation