The Hon. Floyd Laughren, Minister of Finance, Province of Ontario
ONTARIO'S 1994 BUDGET
Chairman: John A. Campion
President, The Empire Club of Canada
Head Table Guests
Beverly Mascoll, President, Mascoll Beauty Supply Ltd. and a Director, The Canadian Club of Toronto; The Rev. Charles Plaskett, Minister Emeritus, Timothy Eaton Memorial Church; Anne Creighton, Senior Consultant, SAMCI; John A. Rogers, President and CEO, MDS Health Group Limited; John A. MacNaughton, President and CEO, Burns Fry Limited and a Past President, The Empire Club of Canada; Hugh J. Bolton, FCA, Chairman and Chief Executive Partner, Coopers & Lybrand; W. Alfred Apps, President and COO, The Lehndorff Group and a Director, The Empire Club of Canada; Wendy Leaney, Vice-President, Toronto Dominion Bank; Arnold A. Auguste, Publisher and Owner, Share Newspaper; Bill Winstanley, FCGA, President, Certified General Accountants Association of Ontario; and Isabel Bassett, President, The Canadian Club of Toronto.
Introduction by John Campion
William Pitt Learns His Math
When William Pitt the Elder, the Earl of Chatham, formed his first ministry in 1766, Great Britain's public finances were in a disastrous state. Great Britain had just finished the Seven Years War. She was just on the edge of losing her most boisterous colony in North America, in part on matters of taxation, but was at the same moment in the early stages of the Industrial Revolution which was to lead to empire. Pitt learned the magic of a sinking fund and compound interest in the early stages of his ministry and through that device retired the national debt. That put the country into a position to finance the demands of a world-wide empire which was to follow a century later.
As we are all too well aware, the decisions made by heads of state and their treasurers on budgetary matters are the stuff of tomorrow's prosperity or disaster. Modern budgets are scrutinized by unknown and unseen investors around the world. Their review is instantaneous and their verdict delivered unemotionally and mechanically. Modern budgets reflect our government's view of our society, its priorities, its equities and the health of its public financial management. Budget preparation is demanding and politically one of the most significant events of the political calendar. There is no easy sinking fund solution in today's complex and changing society.
Mr. Laughren has prepared four budgets in the term of the present government. He did so amid the most searing recession since the 1930s. The recession followed on from a period of economic hyperactivity and therefore brought the new economic realities into high relief. In that regard, he has served the province with vigour, commitment and distinction. Please welcome The Honourable Floyd Laughren.
Good afternoon. I welcome this chance to discuss Ontario's 1994 budget. In this budget we kept our promises and stuck to our plan. Last year, we promised to reduce the deficit and to get Ontario back to work. Our budget is the proof that we are meeting those goals. We promised not to increase taxes. We kept our word. The budget contains no new taxes or tax increases. In fact, we cut taxes. Our permanent cut to payroll taxes will create 12,000 jobs in Ontario. We're clearing the way for loan and trust companies to give thousands of companies better access to capital. We're cutting red tape, adopting new technology to serve you better, and getting rid of paperwork and bureaucracy.
But while we're trimming our overhead and getting rid of waste, we're not losing sight of the longer term. We're still making strategic investments in people and assets--investments that are vital to our future. Our efforts are paying off. All the indicators are moving in the right direction. The provincial deficit is down more than 30 per cent from two years ago. Spending on programmes will fall for the second year in a row--for the first time in more than half a century.
Economic growth accelerates
The signs that Ontario is well positioned for the growing recovery aren't just in our budget. They're also out there in the businesses that fuel Ontario's economy. On the very day that I tabled the budget, the Conference Board of Canada said that its latest survey showed Ontario business and consumer confidence was at its highest level in five years. Statistics Canada's figures agree: they show that manufacturers' optimism reached a record high in April. Businesses are backing up that confidence with hard cash. They plan to invest more than $21 billion in Ontario this year--that's up by over 10 per cent from last year. Investors are choosing Ontario.
There is good reason for this growing confidence. The recovery is here, and growth is accelerating. Last year Ontario turned in its best economic performance in four years, ending the year with fourth-quarter growth at a very strong 5.3 per cent. International merchandise exports rose almost 17 per cent in the year. The evidence continues in 1994. New motor vehicle sales were up 21.6 per cent in January and February from last year, and housing resales increased by about 40 per cent between the first quarter of last year and the same period this year.
Ontario is better positioned to compete on world markets in this recovery. In the past four years Ontario business has undergone restructuring that has made this province more competitive and export-oriented than before. Unit labour costs in manufacturing, measured in U.S. dollars, have dropped by 14 per cent since 1991. Productivity in the manufacturing sector has risen by 12.4 per cent in the past two years, and we expect continuing productivity growth to help keep unit labour costs moving down through 1997.
Ontario remains very competitive as a place to do business. Our corporate income tax rate for manufacturing is more than four percentage points below the U.S. average. Payroll taxes and the cost of employer-paid health benefits are well below the U.S. average. And with this budget's cut to the Employer Health Tax, those costs for a new employee will be about half what they are in the United States.
Last week the Toronto-Dominion Bank moved Ontario to the top of its list for provincial growth in the medium term, predicting real expansion of 3.7 per cent this year and four per cent next year. The forecast is right in line with a growing consensus--which we are share--that Ontario's economy will grow faster than any of the G-7 nations over the next years. Accelerating growth will help Ontario to create 100,000 new jobs by March of next year, and 350,000 new jobs in the next three years. On Friday we got new evidence that we're moving toward those targets. The latest figures on job growth show that the Ontario economy was employing 15,000 more people in April than a month earlier.
Doing our part
We are supporting job creation, just as we have created and protected private-sector jobs for the past four years. In our pre-budget consultations we heard from businesses that payroll taxes can stand in the way of hiring--and we showed that we were listening. We gave employers in the private sector a permanent break every time they increased their payroll from one year to the next. Because it cuts payroll taxes on an incremental basis, this strategic measure will do more to create new jobs than a simple, across-the-board tax cut. With our partners, we are also continuing to create and to protect jobs through our capital and training programmes. In the coming year, our actions will provide almost 167,000 jobs, while building vital public assets that make Ontario businesses more productive and competitive. We are working with the private sector to create long-term jobs and to reduce the cost of social assistance.
We are also creating innovative partnerships, such as the Sector Partnership Fund, which brings together business, labour, customers and suppliers to develop new initiatives that benefit strategic economic sectors. To encourage high-tech industry in Ontario, we are encouraging small- and medium-size firms to increase their spending on research and development. This programme, called the Ontario Innovation Tax Credit, will invest $35 million into innovative Ontario companies. We are giving thousands of firms better access to capital by allowing loan and trust companies to make their lending and investing decisions on prudent business principles, not arbitrary rules. No longer will there be a cap on commercial lending, a ban on doing business with firms that are less than five years old, or a prohibition on longer-term lending. Small- and medium-size firms will be the engines of job creation in the coming years, and if I heard one clear message from them in our pre-budget consultations it was that they are not getting the service they need from banks. These changes will improve their access to the funds they need in order to grow.
We have done more to clear the path for business. We are making it easier for start-up firms to register and to hire their employees, through a "one-stop shopping" concept that will eventually become province-wide. And I have to emphasize that many of these measures that make it easier to do business in Ontario will cost taxpayers next to nothing. In fact, many of them flow from our efforts to clear up the government so that we can spend less on bureaucracy and more on priorities.
Some people talk about common sense, but we've done more than talk. We've taken a common-sense approach to management that lets us cut our programme spending again this year--after a drop of more than three per cent last year. That's one of the reasons the deficit is going down in 1994-95 without taxes going up.
I want to talk in a little more detail about our record on deficit reduction, because quite frankly I don't think most people are aware of our achievements. I just mentioned that we cut programme spending last year by some 3.2 per cent. Those efforts helped us come to within three per cent of our 1993-94 deficit target. The final figure was $9.4 billion instead of our planned $9.2 billion. And our revenues and spending were both within one per cent of our projections.
In the same year, the reported deficit of the federal government ballooned by some 40 per cent--from a planned $32.6 billion to more than $45 billion. And I'm willing to stack our record up against previous Ontario governments. I mentioned earlier that this is the first government in more than five decades that has cut programme spending for two consecutive years. In fact, we have kept the real growth in programme spending to an average annual increase of less than one per cent since 1990.
How did our predecessors do? In the early 80s real spending grew by almost three per cent a year on average. And between 1985 and 1989, spending in real terms grew up 4.5 per cent on average, every year.
Let's put those numbers into an economic context. On average, our spending on programmes increased by only nine-tenths of one per cent per year during the worst recession this province has seen since the 1930s--a period of unprecedented demand for our services. In contrast, the huge expansion in spending in the late 1980s--fully five times, on average, the increases we've allowed--took place at a time when the Ontario economy was booming. A time when prudent management would have given Ontario a substantial cushion to see it through the hard times of the early 1990s.
If you don't believe me, look at a recent report from the Investment Dealers Association. According to the IDA, Ontario could have built up $18 billion in surpluses just by keeping spending increases to the provincial average. That's right--it wouldn't have taken any spending cuts, or even flat-lining. Just sensible and responsible management. But because of our predecessors' spending spree, this government inherited almost $40 billion in debt--just as Ontario moved with the rest of the world into a major recession. Again, I will let the facts tell the story. Ontario was hit harder, and lost more jobs, than any other province in this country. We had to increase programme spending to keep up with the demand for social assistance, training, and other vital services. That didn't stop the federal government from deciding unilaterally to step back from its commitment to this province on the Canada Assistance Plan. That decision cost Ontario almost $5 billion during the past three fiscal years, and will cost us another $1.7 billion this year.
Those are the facts, and that is the context in which we have kept real growth in programme spending to less than one per cent. In 1994-95, our deficit will be more than 30 per cent lower than it was two years ago, no matter how we measure our spending. And I have to emphasize that we have worked very hard to achieve those goals without creating hardships for the people who rely on our services.
The Expenditure Control Plan and the Social Contract that we put in place last year were intended to make permanent changes to the way the public sector operates in this province without destroying services. And they are doing that: last year these two initiatives saved close to $6 billion in the costs of public services throughout Ontario. We are sticking to our plans to extend those savings into 1994-95 and beyond. We have put our own house in order. Our own direct overhead has fallen by $1.2 billion during the past three years--that's a drop of 16 per cent. We have met our goal of reducing public service by 4,500 positions, and by the end of this year the reduction will be 5,000 positions. I know that many private-sector firms made similar cuts during the recession. But remember that--unlike them--we had to make our cuts when demand for our products and services was going up, not down.
Our challenge is to give people in Ontario services that work at a cost we can afford. We're achieving that. Look at health care. After a decade in which costs grew on average by more than 10 per cent per year, we will have kept them flat by the end of this year. That's despite the demographics of an aging population and the increased costs of new and more sophisticated medical technology. Through better management of the system, we have still been able to move money into priority areas such as cancer treatment and long-term care. Now we're tackling the social assistance system. We recognize that the only sensible approach is to get people into the work force and off social assistance. That's why we're expanding our existing training and placement programmes through jobsOntario training. That programme is already saving us at least $190 million in social assistance costs by getting long-term unemployed people off welfare and into the job market.
I have outlined some of the steps we've taken to bring our operation spending under control. But getting a handle on day-today costs and overhead is only one part of good management. The other part is knowing your long-term priorities and keeping to them. We have kept to our priorities. We have cut programme spending, but at the same time we've invested more money on capital projects than any government in Ontario ever has. We are building roads, bridges, water and sewage treatment facilities, schools and hospitals. These are the assets that make businesses more competitive and productive, and that maintain the quality of life for people in this province. This is also the programme area in which cuts have the greatest impact on the private sector, because capital spending directly supports hundreds of thousands of private-sector jobs. Moreover, it adds to Ontario's strengths as a place to invest. Crumbling infrastructure does nothing to attract investment.
For all those reasons, we consider our capital spending to be a strategic investment in Ontario's future, and that is why I am proud that we are putting close to $4 billion into this investment. I know that there has been a lot of discussion about this number, particularly about the non-budgetary portion of $1.6 billion. I would like to make some points. First, I don't think there are any firms in the private sector that would put capital spending through their income statements. The accounting profession long ago recognized that there's a big difference between day-today expenses and investments in long-term assets. It makes sense for us to adopt the same approach--not just for the sake of logic, but because the outmoded standards of government accounting actually worked against sensible investment in capital. This new approach to capital funding allows us to invest now, when the projects are needed, and to get them finished with certainty as to the availability of funding over the project's life. This means, simply, that projects will cost less and get finished sooner.
The second point I would like to make is that we have always laid out in our budget exactly what we intended to spend on operations and on capital, whether budgetary or not. We have provided essentially the same numbers that a private-sector firm would give in its statement of changes in financial position--only we have given them out at the start of our fiscal year, as well as at the end. People have a lot of different ideas about accounting treatments, but the important element in looking at any entity--private or public sector--is the flow of funds. In our budgets and in the public accounts we have outlined fully the cash flows that underlie our transactions. So we are keeping analysts and investors in the picture as to what we are planning and what we have done.
At the same time, our updated approach to capital investment is getting projects built faster and cheaper. One very important example is Highway 407. With our new approach to capital financing it will be finished by 1999, removing a major transportation bottleneck 16 years ahead of schedule. I can see absolutely no reason to go back to the old way.
I have given you the facts. People and businesses feel more confident about the future than they did at any time in the past five years. Led by exports and buoyed by consumer confidence, Ontario's economy is poised to lead the G-7 nations over the medium term. We have done our part for Ontario through the recession and into the recovery. We worked hard to preserve services and to keep them affordable. We got a handle on programme spending after years of other governments' mismanagement. We put measures in place to deal with spending in the longer term.
We're doing our part again with our 1994 budget. We're reducing the deficit without increasing taxes. We're cutting taxes to create jobs and we're making it easier to do business in Ontario. We're sticking to our plans to make government work better and get more value for tax dollars. And we have kept sight of our strategic goals. We're investing in jobs, in people and in the vital assets that Ontario needs to be stronger, more competitive and more productive in the new global economy.
The appreciation of the meeting was expressed by Isabel Bassett, President, The Canadian Club of Toronto.