Develop a clear and integrated cluster strategy
In Clusters in Ontario, the Institute recommended Ontario implement a coordinated cluster strategy that identifies and develops regional strengths. Clusters often span across multiple jurisdictions requiring the cooperation across and within all three levels of government. Developing an overall cluster strategy that includes the tools and data resources to identify clusters is essential because it will help attract workers, firms and venture capitalists necessary for cluster growth. The strategy should also include marketing and branding components to promote strong clusters in Ontario both locally and internationally. The overall policy should include individual strategies tailored to each cluster, and should be designed and implemented in coordination with non-government actors within the clusters.
Link Ontario’s carbon market with the Western Carbon Initiative as soon as possible
Linking with the Western Climate Initiative (WCI) is the most effective way to reduce emissions while maintaining robust economic growth. As discussed in Toward a low-carbon economy, Ontario has already undertaken significant decarbonisation initiatives and could take advantage of lower cost abatement opportunities in other jurisdictions and decrease the cost of allowances for businesses. The Ontario government plans to link with the WCI in 2021, however Ontario’s economy could benefit significantly by linking earlier. In the government’s Climate Change Action Plan, it estimated a carbon price of $18 in 2020 if Ontario is linked with the WCI, and $69 to $157 if it is not. Ontario is less likely to achieve its own emissions reduction target in a linked system, but greater reductions can be jointly achieved in Ontario, California, and Québec, while reducing the competiveness risk.
Inform the business community about cap-and-trade
In Toward a low-carbon economy, the Institute outlined the design of Ontario’s cap-and-trade program that would achieve the greatest number of global emissions reductions while mitigating adverse effects on the province’s competitiveness. To accomplish this, Ontario must communicate two key elements to the business community before the end of 2016: to what extent they are considered at-risk of carbon leakage and for how long they will receive free allowances (if any). This is in line with California’s approach which has been widely praised by the business and policy communities for being transparent. California provided a detailed list of industries and support levels upfront for the next eight years. Ontario has only provided details to 2021, and must go beyond if the program is going to succeed.
Revise funding frameworks to boost innovative policy design
Ontario should assure its funding frameworks encourage innovative policy designs. As suggested in Licence to innovate, Ontario should allocate funds according to policy objectives, not ministry or program lines. This can encourage resource sharing and collaboration. Ontario should also expand and centralize innovation funds to facilitate experimentation with policy designs.
Ensure tax policy encourages firm growth
In Making sense of public dollars, and A place to grow: Scaling up Ontario’s firms, the Institute recommended phasing out Ontario’s small business deduction (SBD). The SBD reduces the corporate income tax rate to 4.5 percent on the first $500,000 of income for Canadian-controlled private corporations with taxable capital of less than $10 million. Research suggests that the SBD acts as a disincentive to small business growth because it creates a taxation wall. Though Ontario began phasing out the SBD for businesses with taxable capital greater than $10 million in 2014, it still exists for corporations with taxable capital below this threshold.
Support the industrial shift from goods- to service-production
Ontario’s economic output and labour force have steadily shifted away from goods- and into service-producing sectors. However, compared to its North American peers, Ontario is still highly concentrated in the manufacturing sector. Shifting from general manufacturing toward advanced manufacturing or into service-producing sectors would allow Ontario to benefit from its highly educated workforce, exploit its comparative advantage, and spur economic growth. In Disruptions ahead, the Institute reccomended Ontario target policies towards growing, not contracting, sectors to incentivize sectoral diversification. Although there may be equity concerns, targeting sectors that are growing can have an actual and signalling effect – incentivizing firms to expand in a given area of the economy, and communicating to business owners which sectors are worthwhile to invest in.
Realign compensation in the public and private sectors
In The realities of Ontario’s public sector compensation, the Institute found that lower ranked positions within the public sector experience a positive wage premium. By contrast, higher ranked, managerial positions experience a negative wage premium relative to their private sector counterparts. This is problematic. First, the positive wage premium suggests that the public is paying significantly more than they would for equivalent workers in the private sector. Second, higher ranked workers may leave the public sector for the private sector in search of greater compensation, making it difficult to retain and attract talented managers and leaders. Realigning high- and low-ranked compensation in the public sector with the private sector will not only save public dollars, but can also serve as a human resource strategy.
Adopt a dual-income tax system
In Taxing smarter for prosperity and A push for growth, the Institute recommended Ontario adopt a tax system that is both equitable and efficient – a dual income tax system. This requires a progressive tax schedule for labor income, with a low flat tax rate on capital and corporate income. A dual income tax would encourage Ontarians to increase their savings and make productive investments within Ontario. This type of policy has proven successful in Norway, Finland, and Sweden, and requires further study for Ontario adoption.
Teach innovation in elementary and secondary schools to encourage future growth
To enhance future productivity growth in the province, the Institute recommended, in A push for growth, that the concept of innovation be incorporated into school curricula at the primary and secondary levels. Ontario’s current education system underemphasizes skills required for innovation, namely creativity, intrinsic motivation, collaboration and multidisciplinary learning. The Institute points to Montessori schools and DesignWorks Rotman- program housed at the Rotman School of Management – as examples of successful innovation programs. These curriculums share a common approach by allowing students to challenge the conventional approaches to solving pressing issues.
Reform the Employment Insurance system
Canada’s Employment Insurance (EI) system is grounded in providing temporary financial assistance for the unemployed. There are, however, notable concerns in its structure. In Agenda for our prosperity, the Institute recommended reforming EI to optimize the impact of funds that flow to regions of high unemployment. The 2016 federal budget outlined reforms to Canada’s EI system, extending benefits to high unemployment regions and expanding access for new entrants and re-entrants, to be implemented in July 2016 and January 2017 respectively. Although these reforms increase economic security and facilitate re-training, they also strengthen disincentives to work in regions with high and persistent unemployment. Further reforms are needed.