Making a Budget

Floyd Laughren

A Budget is more than a statement of revenue and spending intentions for the next 12 months; it is a "plan of action" designed to address short-term and long-term priorities.

When we set out to design the 1992 Budget, we had three priorities in mind:

1) Supporting jobs,
2) Maintaining essential public services and
3) Controlling the deficit.

I'd like to spend some time describing how we balanced these three priorities, but first I'd like to set the budget in a larger context.

A recent United Nations Study said Canada is the best place in the world to live; Ontario, in particular, has been and continues to be a good place to live.

The Province has a history of strong growth, with real increase in GDP averaging 3.6 per cent between 1983 and 1991--better than any G-7 nation except Japan. Ontario is centrally located in the North American market. Total household income within one day's trucking distance of Toronto is higher than for any other major North American city.

And with a GDP per capita of $28,000, and roughly 10 million residents, Ontario is Canada's richest and most populous province.

But we shouldn't become complacent about our success. I think the recent recession has underscored the point that our economy is changing--and that we need to change with it. The cyclical recession combined with a structural recession has tested our ways of doing business, our ways of running government, and our relationship to one another.

The 1992 Ontario Budget recognizes these changes and lays out an action plan to address them. The Budget introduces initiatives that will address:

1) Immediate and long-term needs,
2) The needs of individuals and of communities and
3) The need to invest in the economy and to control spending.

The 1992 Budget introduces initiatives to stimulate the economy, and others to help restructure the economy. It does this by, for example, facilitating partnerships among the various economic players, emphasizing training, encouraging investment in new technologies and new ways of working and investing in strategic infrastructure projects that anticipate the changing needs of the economy.

It was not enough to address only the fiscal challenges, although that was one of our priorities. To the degree that a provincial government can influence the economy, we wanted to use the levers at our disposal to address Ontario's economic challenges and to secure the province's capacity for long-term wealth creation. Now let me turn to some of the initiatives in the Budget.

The Budget supports 90,000 jobs in 1992, and many more in the years to come. Our jobs strategy is a comprehensive one, encompassing several components, and involves partnership with the private sector--to link jobs to training for the long-term unemployed, to provide training for people currently working and affordable childcare to help unemployed single parents enter the workforce, to maintain public infrastructure and construct affordable housing, and to work on strategic capital projects that anticipate the changing needs of the economy.

Our plans also involve sectoral partnerships to address common problems, and goals and incentives to encourage business investment in new equipment and research and development.

To support this strategy we created three funds: the Jobs Ontario Training Fund, $1.1 billion over three years; the Jobs Ontario Capital Fund, $2.3 billion over five years, and the Jobs Ontario Homes Fund, 20,000 non-profit units over three years.

We've also made the largest commitment ever to training and adjustment; in total, we'll spend $930 million this year on training and adjustment programs, a 24 per cent increase over last year. We've also made a $3.9-billion commitment to capital projects in 1992, $500 million from the Jobs Ontario Capital Fund and $3.4 billion in base capital spending.

By designing our jobs strategy the way we did, we were able to create jobs and support important community needs, such as the need for affordable housing and a strong infrastructure. By focussing on training and infrastructure development we are also ensuring a strong future for this province.

We believe our jobs strategy produces a nice balance between immediate needs and future needs, individual needs and community needs.

We believe essential public services such as health care, education and social welfare are important to maintaining our standard of living and promoting equity and we will spend 70Q of every dollar on these essential public services.

However, it has long been recognized that the costs of some of these programs have been increasing above both inflation and population growth rates. If we want to keep our public services, then we must control their costs. That's what we have done in this Budget. We have brought costs under control by making programs more efficient and reforming programs to better meet priorities.

Let's take a couple of examples.

For the past 10 years, year-over-year growth for health care has averaged over 11 per cent; this year health care will increase by only two per cent.

We will control costs through a variety of means--none of which affect the essential elements of our health care system. For example, reform of the Ontario Drug Benefit plan, better management of the growth in payments to commercial labs and other practitioners, and changes to current OHIP schedule of benefits to ensure services are of medical benefit.

As Ontario's population ages, the need to review and reform seniors programs becomes more urgent. If we want to protect seniors programs, and if the original purpose for these programs was to assist seniors, then we must focus on those who need assistance the most. Up until now, every senior household received from the government up to the first $600 of property tax (or 20 per cent of rent), regardless of income. In addition, every senior received a $50 sales tax grant, regardless of income.

But with the population aging, with government revenue falling, with the cost of the program increasing steadily, with many more seniors receiving company pensions, we must ask ourselves if the current design of this program meets Ontario's priorities.

To ensure this program does meet Ontario's priorities, we are establishing a more progressive form of property and sales tax support to seniors. The existing seniors tax grants program will be replaced with refundable property tax and sales tax credits. This new program will direct more money to senior households with low-incomes, reduce benefits to senior households with middle-incomes and eliminate benefits for most senior households earning in excess of $50,000 a year.

These changes will reduce the overall cost of the program saving $100 million a year, enable us to help those seniors who most need property and sales tax support, and ensure the viability of seniors programs in the years to come.

Our spending will grow by just 4.9 per cent this year, the lowest in 39 years. If you subtract spending on social assistance and PDI, then government spending will grow by only 1.5 per cent this year, less than inflation.

In January we faced an operating deficit of over $11 billion and total budgetary requirements of more than $14 billion. But, through a lot of hard work, we have lowered the operating deficit to $6 billion and our budgetary requirements to $9.9 billion, $1 billion less than in 1991-92. We have reduced our growth in spending by over $3 billion this year.

We froze the salaries for MPPs, cabinet ministers and 3,900 senior government managers; the Government and the Ontario Public Service Employees Union negotiated a one per cent wage increase for 1992. Transfer agencies such as municipalities, schools, and hospitals have been limited to a one per cent increase and non-salary overhead costs for all ministries were reduced by 10 per cent. In fact, most ministries will actually get less money this year.

We have modified many of our major programs to make them more efficient and more effective. I mentioned a few to you--health care, social assistance and benefits to seniors.

In the days to come we will reduce the number of layers in government so that operations will be more efficient and front-line workers will have more decision-making responsibility. And, through early retirement incentives and redeployment, we will reduce the size of the public service by 2,500 jobs over the next two years, and appoint a small group of people from outside government to find ways to make our operations more efficient.

A few people have said to me in the past few days: "You're not doing enough to reduce the size of government and what you are doing isn't fast enough. Many companies have restructured and downsized rather quickly, why can't you?"

Let me just say this. Most companies downsize because demand for their product or service decreases. But demand for our services has increased; it is challenging to downsize during a time when demand for your product is going up. But, despite that caveat, we are determined to make government more efficient.

Before continuing, I'd like to address a few areas where some confusion exists: what we mean by reducing growth in spending and how confident are we in our revenue forecasts.

A reporter questioned me the other day: "Sure, I can claim I saved $20,000 by deciding not to buy a new car. How real are these savings in government spending?"

To me, a better analogy would be paying an electrical bill. You know you have to pay the bill, and based on current rates and projected use, you anticipate you'll be paying $50 a month on hydro (or $600 a year). So that amount is what you would expect to pay.

But let's say you make some changes to the way you use electricity. And now you expect to reduce your monthly bill to $40 a month. That means you have reduced your expected rate of spending by $120 a year. That's what we've done. Based on changes we've made and changes we plan to make this year to the programs we must provide, we expect to save $3 billion over what we would have spent without those changes.

We are also confident in the revenue projections in the Budget. I am quite confident the two stabilization claims we filed last year will be forthcoming in this fiscal year. I am also confident about the revenue numbers from the sale of non-strategic government assets. The dollar amounts outlined in the Budget are not unrealistic given the size of the Government's total holdings. And, we have already shown our willingness to sell off non-strategic assets (such as Skydome and Suncor).

Naturally, so as not to disrupt markets, I will disclose the sale of other non-strategic assets only after decisions have been finalized. I am also quite confident in the numbers for the years ahead. Our economic projections are not out of line with other forecasters. And data of the last three months show promise of a recovery.

We worked very hard to ensure we would have the funds to meet Ontario's three priorities--jobs, services and controlling the deficit--and most of the funds for addressing these priorities have come from within government. As I said, we reduced the growth in government spending by $3 billion this fiscal year.

In the end, this wasn't enough to meet Ontario's needs while controlling the deficit at the same time, and it was necessary to raise some taxes, about $770 million in total for the 1992 fiscal year. But for every $1 in new taxes this year, we saved $4 in costs by better management and greater efficiency.

And we raised the taxes in as fair a way as possible. Those taxpayers who can most afford to pay will be shouldering most of the increase, but almost everyone will have to pay more.

Many of this Budget's tax changes are designed to encourage business investment in new equipment and new technologies so that Ontario will be well positioned as the recovery gains speed. I'd like to highlight some of the tax changes in the Budget.

• Reduced corporate tax rate on manufacturing and processing sectors as well as farming, mining, logging and fishing profits: from 14.5 per cent to 13.5 per cent.
• Increased capital cost allowance rate for investment in new manufacturing and processing machinery and equipment: from 25 per cent to 30 per cent.
• Broadened eligibility under the R and D Super Allowance.
• To encourage the small business sector, we are reducing the corporate income tax rate on small businesses by half a percentage point to 9.5 per cent, allowing small businesses to pay the Employer Health Tax once a year, instead of quarterly, and complementing the small business financing program announced in the recent federal budget.

The banks have fared better than other sectors of our economy during this recession; overall, their profit levels have increased. In 1991 banks represented two per cent of Ontario's GDP, yet earned 20 per cent of profits. During these difficult times, the banks are the most able to increase their contribution to the province.

That's why we imposed a temporary income tax surtax of 10 per cent on banks. In addition, we are increasing the capital tax rate paid by banks from one per cent to 1.12 per cent and providing an offsetting adjustment to capital tax paid by bank mortgage subsidiaries. Thus temporary surtax will sunset October 31, 1993.

Another group, the life insurance sector, has paid little or no income tax since 1969 despite healthy profits; both Ontario and the federal government are moving to correct this situation.

And lastly, we are preparing a technical paper which will make recommendations regarding a corporate minimum tax for Ontario. We will release the technical paper in the fall, and will consult on its recommendations before legislation is introduced. Let me assure you there are certain principles that will guide the design of such a tax

• Inter-corporate dividends and equity income would be excluded (to avoid double taxation).
• Loss carryovers would be allowed.
• It would be sensitive to concerns regarding retroactive taxation.
• It would be creditable against regular income tax liability.
• Small business would be exempt.

Despite perceptions, when all corporate taxes (including payroll taxes) are included, Ontario's corporate tax system is competitive with other provinces and states. And the tax measures announced in this Budget will further enhance Ontario's tax competitiveness.

Personal Income Tax is one of the fairest taxes we have, in that it is based on the "ability to pay." After all the changes to the Personal Income Tax are phased in, by 1993, the changes won't have as much impact as at first glance. In fact, for lower and middle-income taxpayers--less than $53,000 per year--there will be no increase in the combined federal and Ontario income tax in 1993 as a result of this Budget. Only those earning more than $53,000 (or 10 per cent of taxpayers) will contribute more on an annual basis. And even then, in 1993, a single earner (married with two kids) making $60,000, will pay only a $1 week extra in combined federal and provincial taxes.

I would like to conclude by summarizing how the 1992 Budget will strengthen Ontario's investment climate and economy. We have introduced policies designed to encourage investment in new manufacturing equipment and in research and development. We have set up a Sectoral Partnership Fund which will devote $150 million over the next three years to fund co-operative industry projects that lead to higher value-added jobs.

The Government is already working in many important industries to build Ontario's competitive fundamentals:

• The Telecommunications Advisory Committee is working to help Ontario become a world leader in the development and application of telecommunications.
• The Ministers of Energy, Environment and Industry Trade and Technology have been working with private sector firms and communities to support the development of green industries and markets.
• The Minister of Industry Trade and Technology is also working with the automotive industry on ways that automotive parts producers can successfully meet the challenges of restructuring.

We have made a large commitment to investing in Ontario's infrastructure, and thus spending will benefit the construction industry and other related sectors.

This budget introduced a comprehensive jobs strategy, the largest commitment ever in Ontario to skills training. This will assist in Ontario's industrial restructuring by ensuring business has access to a well-trained labour force.

Besides offering a trained workforce, we also are eager to ensure that Ontario's businesses have access to diverse sources of investment capital. And so we are making some changes to the Labour-Sponsored Venture Capital Corp so that people can contribute more--$5,000, up from $3,500 a year--and so larger firms will be eligible for investment, firms with up to $50 million in assets.

We are also starting the process of discussions for the Ontario Investment Fund--another potential source of capital for small and medium-size business.

In summary, we believe this is a Budget that meets Ontario's priorities in a fair and balanced manner. It provides for immediate job creation, while investing in the future to ensure more jobs. It expresses our confidence in the private sector as a partner in job creation. It recognizes that the preservation of public services requires us to mange our spending in an efficient manner. It shows our commitment to investing in the province while recognizing deficits must be controlled. And it reaffirms our commitment to taxes based on the ability to pay.

The 1992 Budget shows our faith in the economy. The recovery is coming. And Ontario will have many strategic advantages in that recovery--our people, a modem infrastructure, abundant natural resources, universal education and health care, and a prime location in the North American marketplace.

The 1992 Ontario Budget is an action plan to support our strategic advantages.

The appreciation of the meeting was expressed by John F. Bankes, Immediate Past President, The Empire Club of Canada.