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Ontarians should brace for bigger – and costlier – government

702 words, with tag

By Niels Veldhuis
and Jason Clemens
The Fraser Institute

With the recent release of the Progressive Conservative platform, People’s Guarantee, and the Liberal government’s 2017 Ontario Economic Outlook and Fiscal Review last month, Ontarians have a better sense of what will follow next year’s provincial election – the continuance of big government.

The most important way to gauge the breadth and depth of government activity is a government’s spending as a share of the economy.

In the last fiscal year (2016-17), Ontario government spending as a share of the economy (gross domestic product or GDP) stood at 17.8 per cent. If we add federal and local government spending, the total size of government in Ontario is about 38 per cent of GDP.

In his book Measuring government in the 21st century, Lakehead University professor Livio Di Matteo examines a wide range of international data to measure how the size of government affects economic growth and social outcomes. Di Matteo finds that economic growth is maximized when total government spending is at approximately 26 per cent of GDP. For social outcomes, there’s little additional benefit once government reaches roughly 30 per cent of GDP.

Unfortunately, the Ontario Liberals have ignored this evidence and increased the size of government over their tenure, from 15.1 per cent in 2002-03 to 17.8 per cent in 2016-17. This works out to nearly $22 billion annually, which is extracted from hard-working families through higher taxes – more than $3,600 per family per year.

Given this Liberal track record, one might expect to see a starkly different vision from the PCs.

A vision for meaningful change in Ontario would recognize that it’s in the best interests of the province’s economic and social well-being to reduce the size of government.

But the PC platform actually proposes a larger government than the Liberals now run.

So the only real guarantee is that Ontario’s era of big government will continue regardless of who’s elected.

The PCs plan to spend $155 billion in 2018-19 compared to the Liberals’ $153 billion. If the PCs win the next election, the government’s spending as a share of the economy will be 17.8 per cent in 2018-19 compared to 17.6 per cent proposed by the Liberals.

To be fair, if the PCs win the next election with a majority and complete their four-year term, they plan to mildly shrink the size of government – from 17.8 per cent in 2018-19 to 17.0 per cent in 2021-22.

The evidence clearly suggests that Ontario would benefit from a smaller, more focused government. Such a government would rely on families, entrepreneurs and businesses to make more economic decisions while focusing more intently on core services government is well-suited to provide. Such refocusing would also allow for personal income tax reductions, which lead to positive economic results by providing substantially better incentives for Ontarians to work hard and succeed.

But this isn’t what’s being proposed.

The PC platform calls for a number of new boutique tax credits aimed at particular individuals and businesses – such as a tax credit for the purchase of snow tires – and a slight reduction in the bottom two of seven personal income tax rates. All told, the proposed PC tax cut in 2018-19 amounts to just 1.1 per cent of total government revenues. That will hardly put a dent in the $17,800 provincial tax bill the average Ontario family will pay this year.

And there’s no mention by the PCs of the most serious problem with the tax system in Ontario – the absurdly high personal income taxes on high-skilled, educated workers (entrepreneurs, business professionals, engineers, lawyers and doctors).

Ontario’s top personal income tax rate (federal and provincial combined) is 53.5 per cent. If Ontario were a country, its tax rate would rank as the sixth highest among 34 industrialized countries and second highest in the G7, behind only France.

It’s no wonder that over the past decade many more people have left Ontario for other provinces than have arrived from elsewhere in Canada.

For those Ontarians still contemplating an exodus, at least the future is a little more certain. The Ontario Liberals and PCs would both continue to burden the province with an oversized government and growth-killing taxes.

Niels Veldhuis and Jason Clemens are economists with the Fraser Institute.

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