Ontario budget 2012: Why businesses will pay the price

I'll give Ontario Finance Minister Dwight Duncan some credit: He's left virtually no stone unturned in his austerity budget, and virtually all sectors of the province's economy will pay the price in the years to come as the government struggles to balance the books.

As wrenching as some of the cuts could be if the budget ultimately passes — never a guarantee with a minority government — it's the business community, in particular, that could end up paying the heaviest price of all when the squeezed dollars and lost opportunities are tallied up.

At the core of the issue is the government's plan to freeze previously announced plans to drop the provincial corporate income tax rate. Originally set at 14 per cent, it had been dropping in stages — to 12 per cent in 2012 and 11.5 per cent last year — and if the plan had held it would have moved to 11 per cent this July and finally 10 per cent in July 2013. The budget freezes the rate at the current 11.5 per cent and keeps it there until the deficit is erased. That isn't expected to happen until 2017 at the earliest, which means Corporate Ontario will be tightening its belt for at least the next five years.

More broadly, the planned cuts would have brought the combined federal-provincial corporate tax rate in Ontario down from 33 per cent to 25 per cent - just below the reported average of Organisation for Economic Co-operation and Development (OECD) member nations. Having a combined rate stubbornly stuck above that level for an indefinite period of time could divert investment away from the province toward other lower-rate provinces or countries.

By pushing off the planned rate reductions, the Ontario government expects to save $1.5 billion in the next three years. The cost to business could be much higher, as organizational budgets that had anticipated lower rates in future now need to be revised.

Manufacturing sector hardest hit by corporate tax cut freeze

The change leaves less liquidity available for discretionary spending — something no business, but the manufacturing sector in particular, likely wanted to hear. Hit hard by the recession and a stubbornly high Canadian dollar, manufacturers have been looking into every nook and cranny to find ways to reinvest and remain competitive. More onerous tax structures threaten to divert funds away from critical investments in capital and operations, a reality that potentially hampers future competitiveness.

Businesses in Ontario's manufacturing sector are already grappling with unpredictable energy costs that make it more expensive to keep the lights on, run the machines and ship product to market. Labour costs remain a sticking point, as well, with non-union shops in lower-cost manufacturing zones both overseas and in the U.S. and Mexico offering a tantalizing deals to margin-squeezed owners looking for any break they can find. The new tax timetable darkens the long-term outlook and could prompt those players operating close to the margins to look more carefully outside Ontario's — and Canada's — borders.

For its part, the OECD is no fan of high corporate income taxes. In a 2008 paper, the organization stated, "Corporate taxes are found to be most harmful for growth, followed by personal income taxes, and then consumption taxes."

If Ontario ends up being the last man standing with globally uncompetitive corporate tax rates, it's easy to predict which way capital investment will flow until the disparity is ultimately addressed. The ripple effect in manufacturing, with its heavy focus on technology-intensive infrastructure and a tightly integrated supply chain, could be significant.

No one doubts the need to rein in expenses and shift some of the burden around. Given the economic headwinds that have turned Ontario from a have into a have-not province, the finance minister clearly had no choice. The alternative — unchanged spending leading to ballooning deficits — would have landed the province in an even deeper hole in the long-term. The question remains whether proposed changes to the corporate tax structure will be the straw that breaks the camel's back in a sector that's already taken it on the chin because of the recession.

With Ontario's government gambling that businesses will stick around and pay their fair share to balance the province's budget, attention now turns to tomorrow's expected federal budget. If the austerity theme carries through in the form of cuts to research and development and capital reinvestment, innovation and growth could be more difficult to come by in the years to come.

Carmi Levy is a London, Ont.-based independent technology analyst and journalist. The opinions expressed are his own. carmilevy@yahoo.ca