Once-mighty Ontario Slides Further Behind

Ontario, historically among the most attractive provinces for business investment, is now on the losing side of the competitiveness battle. While Ontarians are subjected to a plethora of explanations -- high dollar, troubles in manufacturing, unfair foreign competition, and unequal treatment by Ottawa -- there seems little desire to look inward. Indeed, economically damaging policies implemented by the current provincial government have contributed to Ontario’s woes. Fortunately, a road map to recovery is available and ready for the taking.

There is no doubt that Ontario’s economy is struggling. From 1997 to 2002, Ontario’s economic growth exceeded the national average. The trend reversed in 2003 with Ontario falling short of the Canadian average. Economic forecasts indicate that Ontario will continue to underperform. Similar trends are evident in the labour market for both employment growth as well as unemployment rates.

While part of the explanation for these economic troubles stem from external forces, one cannot underestimate the influence of public policy. Specifically, the marked deterioration in Ontario’s investment climate was caused in part by increases in personal and business taxes and counterproductive changes to labour laws. The change in investment climate is particularly damaging given that business investment is increasingly acknowledged as a powerful driver of a jurisdiction’s economic success.

Between 1998 and 2004, investment and pension fund managers were surveyed regarding the provincial investment climates. Prior to 2004, Ontario consistently ranked first or second along with Alberta. In fact, the results indicated that Alberta and Ontario were in a league of their own among Canadian provinces.

The survey results turned in 2004. Over a two-year period, British Columbia, once the investment laggard of the country, leapt from last place to second and in doing so unseated Ontario. But it wasn’t just British Columbia’s dramatic changes in tax, spending and regulatory policies that explain the change. Ontario was simultaneously moving in the opposite direction by increasing the same taxes B.C. was cutting, while introducing more biased labour laws. These changes were reflected in the 2004 survey results: Ontario was no longer a leader and it fell to third place, well behind Alberta and British Columbia.

Those subjective responses have now been quantified by a new study that empirically measures investment climates in the provinces. The Canadian Provincial Investment Climate Report uses empirical measures in seven areas of public policy to determine the relative investment climates of the Canadian provinces: corporate income tax, fiscal prudence, personal income taxes, infrastructure, corporate capital taxes, labour market regulation and regulatory burden.

The results of the study mirror those of the survey. Specifically, Ontario’s investment climate ranked third with a score of 5.9 out of a possible 10. In fact, provinces like Manitoba and Saskatchewan are now within striking distance of overtaking Ontario. In addition, there is a substantial gap between the country’s two leading jurisdictions, Alberta and British Columbia, and Ontario.

Ontario ranked reasonably well in just two of the seven areas analyzed: infrastructure and labour market regulation. Unfortunately, it received weak scores in both areas: 6.3 for infrastructure and 5.0 for labour market regulation. These weak scores indicate that Ontario ranked well among the provinces not because Ontario is doing well but rather because the other provinces are doing much worse.

The news in the other five areas is much worse. Ontario ranked fifth in three indicators: fiscal prudence, corporate income taxes and regulatory burden, and it ranked sixth for its use of corporate capital and personal income taxes.

The rankings in these areas are instructive in terms of the role of public policies. The government of Premier Dalton McGuinty reversed course on several tax fronts, increasing the corporate income tax, cancelling the elimination of the capital tax, and instituting the Ontario Health Premium. In addition, the province changed labour laws in the direction of introducing more rigidity and bias than previously existed. These changes have had an effect on the province’s investment climate as witnessed by the deterioration in rankings in both the survey data as well as the more recent empirical evaluation.

Ontario’s investment climate is in need of serious repair. To re-establish Ontario as one of the most attractive places for business investment in Canada, the provincial government must undo much of what it has implemented in recent years. Specifically, it must reduce personal, corporate, and capital taxes, improve the province’s finances, promote investment in infrastructure, implement balanced labour laws and dramatically reduce the cost of regulation. Such changes will begin to repair the damages of the past few years and move Ontario’s investment climate in a positive direction.