Saturday, October 20, 2007

REB Comments on Ontario - Forecast lowered; competitiveness waning

Ontario Forecast lowered; competitiveness waning

We have shaved our 2008 growth forecast down significantly, but expect that growth will rebound modestly in 2009 as the U.S. economy accelerates, currency relief materializes, major capital spending by the provincial government kicks in and new auto sector investments swing into production. Renewed upward pressures on the currency, ongoing strength in oil and other commodity inputs, weaker U.S. growth and the surge in China's exports as a share of U.S. imports all mean that central Canada's manufacturers will face another challenging year.

Also, forestry, Ontario's second biggest sector, faces at least another year of weak commodity prices and escalating costs.

While 2009 may bring modestly stronger growth, our chief concern is for the economy's long-run competitiveness under the crushing corporate tax burden that acts as a sharp disincentive to invest. If the province were a country, then, when properly measured, it would have the second highest tax burden on new business investment in the world. Much of this goes to funding very rapid growth in short-term government program spending, with health accounting for about one-half. Ontario has had the second fastest growth rate on program spending behind Alberta in recent years, but in a relatively soft economy and without the Alberta government's resource royalties backing this spending.

Addressing this high tax burden would be a significant offset to the currency pressures on the province's businesses. In fact, much of the incentive to invest as a result of the 60% currency-induced cheapening in imported capital goods gets yanked right back by extraordinarily high rates of taxation. From RBC Economics

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