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RR RUEHGA RUEHHA RUEHMT RUEHQU RUEHVC
DE RUEHON #0063/01 0861807
ZNR UUUUU ZZH
R 271807Z MAR 09
FM AMCONSUL TORONTO
TO RUEHC/SECSTATE WASHDC 2771
INFO RUCNCAN/ALCAN COLLECTIVE
RUEHNY/AMEMBASSY OSLO 0031
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 02 TORONTO 000063 
 
SIPDIS 
SENSITIVE 
 
TREASURY FOR INTERNATIONAL AFFAIRS (NEPHEW) 
 
E.O. 12958: N/A 
TAGS: ETRD ELAB EFIN EINV PGOV CA
SUBJECT: Ontario Budget: Infrastructure Spending, Deficit, Both 
Increase 
 
Ref: (A) 08 Toronto 327 (B) Toronto 20 (C) Toronto 54 
Sensitive But Unclassified - Please Protect Accordingly. 
 
¶1. (SBU) Summary: The Ontario government's 2009 budget introduces 
significant measures to help stimulate the province's ailing 
economy, including C$27.5 billion in infrastructure spending, and 
the harmonization of the 8% provincial sales tax (PST) with the 5% 
federal goods and services tax (GST).  Corporate and personal income 
tax reforms were also introduced to help stimulate investment in the 
province.  This budget uses deficit spending in a way not seen since 
the recession of the 1990s, under the premiership of Bob Rae, and is 
projected to surpass even the largest provincial deficit during that 
period.  This year's stimulus and predictions of future provincial 
deficits will result in a C$56.8 billion deficit over seven years. 
End Summary. 
 
---------------------------- 
Hard Times Call for Stimulus 
---------------------------- 
 
¶2. (U) On March 26, the Ontario government's plan to spend its way 
out of recession was released in its C$108.9 billion budget for the 
fiscal year beginning April 1.  The province is struggling to offset 
the effects of the global economic downturn, and has pledged to 
spend C$27.5 billion on infrastructure projects, featuring roads, 
schools and hospitals, over the next two years.  This plan 
represents the province's largest two-year investment ever on 
infrastructure.  The province's budget will be topped up with C$5 
billion from this year's federal budget.  Ontario Premier Dalton 
McGuinty announced on March 23 that the province (with the help of 
the GOC) would spend C$15.1 billion on infrastructure projects 
during the upcoming year, and another C$17.4 billion in 2010-11. 
 
¶3. (U) Transportation projects will receive the lion's share of 
spending over the next two years, at C$9 billion, followed by health 
care at C$7 billion, and education at C$4 billion.  The government 
estimates its spending will generate 146,000 jobs in 2009-10, and 
another 168,000 jobs in 2010-11.  These are in addition to the 
estimated 85,000 jobs created in 2007-08, and 100,000 jobs created 
in 2008-09 as a result of Ontario's C$18 billion investment in 
infrastructure over the past two years.  However, from October 2008 
to February 2009, Ontario lost 160,000 jobs, mostly in 
manufacturing, wiping out any job gains over that period.  The 
province's unemployment rate rose to 8.7% in February, a full 
percent above the Canadian average.  Employment numbers are not 
likely to improve as the province's GDP is expected to decline 
between 2.5% and 2.9% in 2009, followed by modest growth in 2010, 
between 1% and 2.3%. 
 
----------------------------- 
Remember The Balanced Budget? 
----------------------------- 
 
¶4. (U) The current budget year's deficit attracted much debate when 
it was projected to be only C$500 million (ref A); it now looks to 
be C$3.9 billion.  This year's stimulus-loaded budget proposal will 
dwarf that, putting the budget into a C$14 billion deficit.  This 
budget is on track to surpass the province's largest ever recorded 
deficit of C$12.4 billion in 1993, during the last recession, when 
the NDP's Bob Rae ran the provincial government.  The total 
forecasted deficit over seven years is C$56.8 billion. 
 
----------------------- 
Sales Tax Harmonization 
----------------------- 
 
¶5. (U) One of the most contentious parts of the provincial March 26 
budget is the harmonizing of Ontario's 8% provincial sales tax (PST) 
and the 5% federal goods and services tax (GST) into a 13% single 
sales tax, effective July 1, 2010.  While sales tax harmonization is 
not popular with the general public, many industries favor the 
change because PST will be removed from business equipment and 
machinery, which is currently not subject to the GST.  The Ontario 
government will provide middle and low income earners with a 
one-time rebate of up to C$1000, spread out over a series of smaller 
payments, in order to soften the blow of the new tax to be imposed 
on previously PST-exempt goods and services, such as fast food 
meals, haircuts, and home heating fuels. 
 
¶6. (U) Nearly half of Ontario's 2008-9 retail sales tax proceeds - 
roughly C$8 billion -- came from taxing business inputs.  Under the 
harmonized sales tax regime, businesses are expected to save C$4.5 
billion over three years.  Critics of the harmonization claim that 
it will only shift the tax burden from businesses to consumers. 
Market analysts estimate that the harmonized tax will save Ontario's 
businesses about C$500 million a year in administrative costs alone. 
 The GOC will provide C$3 billion in transfer payments next year and 
 
TORONTO 00000063  002 OF 002 
 
 
another C$1.3 billion in 2011 to facilitate the province's 
transition to the single sales tax.  Business analysts have long 
called for tax reform in the province in order to make Ontario more 
attractive for new business investment.  The tax harmonization is 
expected to move Ontario from a high-tax jurisdiction to a 
medium-tax jurisdiction by 2012, with the marginal tax rate on 
investment falling just over 10%. 
 
------------------ 
Further Tax Reform 
------------------ 
 
¶7. (U) The budget introduced further measures to encourage 
investment in Ontario, including cutting the corporate income tax 
rate from 14% to 12%, effective July 1, 2010, and to 10% by 2013. 
The rate paid by manufacturers and processors will be lowered from 
12% to 10% on July 1, 2010.  The provincial government will also cut 
the corporate tax rate for small businesses from 5.5% to 4.5%, 
effective July 1, 2010.  The personal income tax rate was also 
lowered from 6.05% to 5.05%, beginning July 1, 2010, for the first 
C$36,848 earned.  The government estimates that under their proposed 
tax reforms, the total savings to individual consumers will be 
C$10.6 billion over three years. 
 
----------------------------- 
Revenue's Down, Spending's Up 
----------------------------- 
 
¶8. (SBU) Ontario sales tax represents about 18% of the province's 
2008-09 C$93.4 billion total revenue stream, the second highest 
source of revenue after personal income tax (26%).  A cyclical 
decline in sales tax revenue due to the economic downturn has 
resulted in a net drop in revenue for the province.  Simultaneously, 
the province is presenting a stimulus-laden budget, resulting in a 
C$18 billion combined two-year deficit.  The 2009 budget forecasts 
C$2 billion in new annual revenues starting in 2010, but it is 
unclear where the province will find additional revenue to finance 
ballooning healthcare spending, which was growing at 8% to 10% a 
year before the proposed stimulus was announced.  Healthcare 
expenses cost Ontario C$42.6 billion in 2008-09, roughly 40% of the 
province's total expenses, followed by education and training (19%), 
and children's and social services (12%).  For the first time in its 
history, Ontario will receive equalization payments from the federal 
government, worth C$347 million in 2009-10.  The province will spend 
C$1.2 billion to build 4,500 new affordable housing units and to 
renovate 50,000 existing government-subsidized housing spaces to 
make them more energy efficient.  This housing project is expected 
to create some 23,000 short-term jobs. 
 
¶9. (SBU) Comment.  While this budget results in the largest 
provincial deficit ever, most of the debate is centered on the 
harmonization of sales taxes.  While many object to the predicted 
increase in Ontarians' cost of living because of the new 
consolidated tax, there seems to be little analysis of the long-term 
effect of the province's multi-year deficit projections.  This is 
likely an acknowledgement that despite enthusiastic summaries about 
Canada's relative immunity from the global downturn, Ontario's 
economy has been hard-hit and will suffer further in the near-term. 
The provincial government is focused on ensuring its stimulus 
efforts result in job creation now, as well as preparing the 
province for a less industrial economic base sometime in the 
future. 
 
NAY