Ontario Government 2016 Budget
Today, Finance Minister Charles Sousa delivered the Wynne Government’s third budget since being re-elected in 2014. Readers will recall that the 2014 Budget – which was defeated in the previous minority parliament and whose defeat triggered the 2014 election – was reintroduced and passed by the majority government in the summer of 2014.
It must be said that the timing of this Budget is early; in fact, many Ontario Budgets have been delivered in March, April, and even May (the government’s fiscal year starts on April 1st of every year). There are a couple of interesting dynamics at play here. First, any organizations or people who perceive that their interests will be harmed in the next fiscal year have about five weeks to let their displeasure be known before new funding arrangements commence. Secondly, the first budget of the new Trudeau-led federal Liberal government will be tabled on March 22nd and, with its expected much larger than the promised $10 billion deficit, will soon make this Ontario Budget a distant memory.
A significant milestone date will occur during the 2016/17 fiscal year for which this Budget was delivered: January 1st, 2017. As many business owners and managers know, this was to be the commencement date for the new Ontario Retirement Pension Plan (ORPP), when large employers without a workplace pension plan were to register, deduct and remit workers’ ORPP premiums, with matching premiums from employers. To the relief of many businesses, Sousa announced several days ago that the implementation date would be delayed by one year.
The other reason that January 1st 2017 is significant is the commencement of the new Cap and Trade carbon pricing regime, with a first auctioning of emissions in March 2017. The cap and trade program is intended to be the primary tool for Ontario to use in achieving its 2020 emission reduction target of 15% below 1990 levels, and beyond. Tabled yesterday, Bill 172, the Climate Change Mitigation and Low-Carbon Economy Act, 2016, and accompanying regulations, outlines provisions regarding Ontario’s emissions reduction targets and action plans, as well as the cap and trade program and use of its proceeds.
As has become the new normal, a number of key components were strategically leaked to the media before the Budget was read aloud in the Legislative Assembly. As well, the Finance Minister’s speech included the key messages that the government wants to see reported on the evening news, while the Budget contents, within a 346 page book, are left to us to examine and analyze.
For about a decade, Ontario has had to contend with a sluggish American economy, high Canadian dollar and high oil and gasoline prices, which combined to hamper the province’s economy primarily by making our exports less competitive. A stagnant economy has a strong direct effect on the finances of government, who depend on growth to increase government revenues without raising tax rates and on the expenditure side as there is a greater demand for social services. Certainly, an improving American economy, a lower Canadian dollar and much lower oil prices exist today; therefore, Ontario’s economy and its government finances should now be reaping the benefits. Judging by today’s Budget, these new conditions may just be starting to bear fruit.
What’s In It
While we intend to provide you with a much more in-depth, sectoral analysis in the days ahead, we did want to provide you with a high level overview of some of the important numbers in the Budget. These include:
The Ontario government will spend $133.9 billion in 2016/17, and have revenues of $129.6 billion;
The provincial deficit for 2016/2017 is projected to be $4.3 billion. The Minister indicated that the government is on track to balance the Budget next year, in 2017/18. Recall that this was a key campaign commitment made during the 2014 election campaign;
Ontario’s cumulative debt, a result of successive years of deficit financing, now stands at about $300 billion. Interest payments on that debt are about $12 billion per year;
Ontario’s GDP, estimated at $722 billion this year, is expected to grow by 2.2% in the coming year; by 2.4% in 2017; 2.2% in 2018 and 2.0% in 2019;
Unemployment is forecast at 6.6% this year, is expected to be 6.4% next year, and 6.3% the following year. If realized, these numbers would put Ontario below the national average; unfortunately, collapsing oil and commodity prices have caused greater unemployment in the western provinces, driving the national average upward;
Health and Education, the two elephants in any provincial budget room, will have their budget growth restrained by 1.8% and 1.2% respectively between 2014/15 and 2018/19.
Personal income tax, corporate tax and the provincial sales tax (HST) rates remain unchanged
Healthy Homes Renovation Tax Credit, the Children’s Activity Tax Credit, and the Tuition and Education Tax Credits will all be ended
The cost of gasoline will rise by 4.3 cents per litre (carbon pricing)
Ontario remains committed to a 12 (formerly 10) year, $160 billion (formerly $130 billion) public infrastructure plan.
$178 million over the next three years in a Long-Term Affordable Housing Strategy
Notably, the Ontario government will introduce significant changes to the Ontario Public Drug Program, which has remained largely unchanged since 1996. The program, which pays for 50% of the prescriptions written in this province (seniors, the disabled, social assistance recipients) set the low income bar for a single senior at $16,000 and $24,000 for a couple. Starting August 1, 2016 these levels will increase to $19,300 and $32,300 respectively, so more low income seniors will qualify for the most generous benefits. However, those seniors whose income is above these levels will be asked to pay more for their prescriptions, a significant shift that may cause some pushback from the seniors’ community. This will result in significant savings for the province.
In another significant change, tuitions for post-secondary students will now take family/household incomes into account. Specifically, a student whose family/household income is below $50,000 will essentially be free of tuition. The government will create a single upfront grant, the Ontario Student Grant starting in the 2017-18 school year (combining the Ontario Tuition Grant, Ontario Student Opportunity Grant and Ontario Access Grants and those offered by OSAP). As part of this reform, Ontario tuition and education tax credits will be discontinued, beginning fall 2017. Generally, students from families earning combined income of up to $175,000 will qualify for funds through the new OSG; no student will receive less than they are currently eligible for through the 30% off Ontario Tuition grant. Students from high income households ($175,000 or higher) will effectively pay more as they will no longer benefit from the eliminated tax credits.
If you are having trouble determining who is considered a high income earner in Ontario (and Canada) in 2016, you are not alone. It seems to depend on what the subject matter is (personal income taxes, drug plans for seniors, post-secondary student households).
Cap and trade is estimated to generate $1.9B annually, starting in 2017/18. By law, all proceeds from auction would go towards funding green projects. The $325M Green Investment Fund commits dollars to projects that address climate change including $100M for home retrofits, $20M for electric vehicle charging stations, $92M for social housing retrofits, $74M for large industrial emitters to develop technological innovations, $26M Green Smart energy efficiency initiative and $13M for climate change activities in Indigenous Communities. Based on the current forecast for the price of carbon, as a result of cap and trade the price of a litre of gasoline is expected to rise 4.3 cents and the cost of a cubic metre of natural gas is expected to rise 3.3 cents.
The government will be launching a consultation on the sharing economy in the coming months. It will look at how to further enable home-sharing, allow greater flexibility for ride-sharing, and explore sharing economy platforms and other new business models. The budget also notes that consultations with industry and communities will commence in Spring 2016 on options to facilitate new intercity passenger travel. A new pilot with Airbnb to ensure participants are aware of their tax obligations was also highlighted.
The Business Growth Initiative will commit $400M over five years to modernize business regulations, lowering business costs and support Ontario firms. Ontario’s Going Global Export Strategy is to invest an initial $30M over three years to help firms expand exports. Ontario has also committed to create vouchers for leading high-growth firms to help get their products to the marketplace, and will create a pilot program so government can be an early adopter of innovation and purchase successful new technologies from emerging companies to support innovation.
At the same time, the government will reduce the level of support provided through the Ontario Research and Development Tax Credit by decreasing the rate from 4.5% down to 3.5%, and will reduce the Ontario Innovation Tax Credit rate from 10% to 8%. These changes would be effective for eligible R&D expenditures incurred in taxation years that end on or after June 1, 2016. Ontario’s non-eligible dividend tax credit rate will decrease from 4.5% to 4.2863% for 2016 (paralleling reductions announced by the federal government in its 2015 budget). The province will review the tax credit rate for 2017 and onwards.
Base funding for Ontario hospitals is going up by $345 million, after years of zero increases. An additional $130M is to be invested in cancer care services over the next three years and $85M is to be invested over three years for primary care teams. The Shingles vaccine is to be made available free for eligible seniors aged 65-70.
With respect to other taxes, LCBO will increase the ad-valorem mark-up for wine by 2% in June 2016, 2% in April 2017, 2% in April 2018 and 1% in April 2019. Basic tax on non-Ontario wine purchased at winery retail stores will increase 1% on each of June 2016, April 2017, April 2018, and April 2019. The minimum price for wine will be increased to make it consistent with spirits and beer. Effective February 26, 2016, tobacco tax will increase from 13.975 cents to 15.475 cents per cigarette and per gram of tobacco products other than cigars. Tobacco tax rates will increase based on inflation, beginning 2017.
For their part, the two opposition parties certainly tried to use the pre-budget period to lay some important groundwork. The Progressive Conservatives, buoyed by two recent by-election victories in Simcoe North (Leader Patrick Brown) and Whitby-Oshawa (Lorne Coe) have used the daily Question Period to attack the government over their management of the health care and electricity systems. On the health care file, the PCs are trying to pre-empt the tried, tested and true Liberal election campaign tactic of predicting that a PC government will slash and burn health care funding. As well, anticipating that the Liberal government will actually balance the budget as promised, the PCs will likely say that the feat was accomplished on the back of health care. As for electricity, the PCs have detected that hydro bills are an irritant, used to their benefit in the Whitby-Oshawa by-election, and tie those bills to the government’s managerial competence. NDP Leader Andrea Horwath has repeatedly suggested that Premier Wynne is disconnected from the priorities of average Ontarians, proceeding with the selloff of Hydro One to the benefit of Bay Street, while ignoring health care, education, auto insurance, and hydro rates, which matter most to the people. Not surprisingly, their post-budget reactions followed suit.
What We Think
The drive to balance the budget by 2017/18 is an interesting dynamic. Certainly, more Ontarians voted for the only federal party (the Trudeau Liberals) that promised to run a deficit, and not immediately balance its budget, than for any of the other parties. Recall too that the next provincial election will take place in May or June of 2018, affording the Wynne Government another budget opportunity after the 2017/18 fiscal year, and before having to go to the people to have their electoral contract renewed. So why endure the political pain that results from spending restraint, and the initiatives described above?
In our view, this speaks to the feeling within the Wynne Government of the need to demonstrate its managerial competence. Certainly, it is difficult to argue with the social goals and objectives of this government, whether they pertain to cleaner air, fairer treatment of indigenous peoples, or tackling problems like human trafficking. All are worthy of government’s time and attention. The problem is that more media focus is put on those items where the government, unfairly at times, is perceived to have mismanaged a file. Who can blame a politician if, on a very cold day, a bridge in northern Ontario breaks, literally snapping out of place?
What can we expect going forward? We believe that while the Wynne government will continue to champion some social justice causes, attempting to right past wrongs, the Premier and her government will be much more focused on jobs and the economy going forward. Polling that we have seen indicates that there is a fair degree of anxiety about the economy out there, with household debt at a high level. Couple that with a seemingly endless stream of bad economic headlines, and it is understandable why the populace is uneasy. Governments have their own polling and have undoubtedly reached similar conclusions; at any given time, there are literally thousands of issues and matters that the Premier, her senior staff, cabinet and caucus can focus and work on. The province’s economy and jobs for people are always on that list. We expect these will be elevated as priorities, and will look for the Wynne Government to talk about, and demonstrate that they think more about these matters in the second half of the mandate. A good indication of this is the most recent talk from government about how the new carbon pricing regime can/might/should help to spawn new clean tech companies in the province; delaying the implementation of the ORPP is a friendly signal to businesses that were concerned about its costs; the very name of the Budget, Jobs for Today and Tomorrow, as opposed to more of a social message, is another.
This shift in tone should be welcomed by the business community. The Wynne Government has demonstrated a large capacity for consultation; there will undoubtedly be opportunities for input. Overall, most should be happy with this Budget. We will conduct a more in-depth analysis and will advise those of you who may be impacted by specific measures. In the interim, please feel free to contact your Sussex consultant for additional information. Thank you for your continued confidence in Sussex.