Ontario Lags on GDP

on | Filed under Economics

November 25, 2008

Ontario lags almost all its North American peers in prosperity and has shown little improvement this decade, a new task force report concludes.

A report by the province’s Task Force on Competitiveness, Productivity and Economic Progress says the province ranked 14th out of 16 regions in North America in terms of per capita gross domestic product in 2007, trailing only Michigan and Quebec.

That’s a modest improvement from 15th position in 2006, but the report says it occurred only because Michigan’s economy was hit hard by the slumping auto industry.

The report is the seventh annual update by the task force, which was created by the Ontario government in 2001 to recommend strategies to bolster long-term wealth.

Part of its mandate is to report annually on progress in closing the province’s gap in per capita GDP compared with “peer” states or provinces with populations of at least six million.

Ontario has ranked near the bottom rung of its peer group since the recession of the early 1990s, and has continued to have a growing productivity gap with other regions since then, the report says.

Task force chairman Roger Martin said the current economic downturn should not stop the province from taking steps to improve its prosperity, even if some bigger spending initiatives cannot be done at this time. The report is entitled Leaning into the Wind because it urges the government to continue to make systemic changes despite facing tough times.

Mr. Martin said the Ontario government, for example, could still make targeted tax changes to encourage investment in equipment and technology by allowing accelerated depreciation of the assets. Or, he said, it could harmonize the provincial sales tax with the federal goods and services tax, which would essentially mean the PST would no longer apply to machinery and equipment.

He said both measures would be stimulative and more affordable than broader business tax cuts.

“Our tax system over all in Canada is designed to discourage investment and encourage consumption,” he said in an interview. “How are you going to prosper in a global economy by discouraging investment?”

Mr. Martin said the task force concluded both government and business in Ontario have had a tendency to “consume” their wealth on short-term spending rather than invest heavily in education, technology and infrastructure that produce long-term prosperity.

He said that until 1995, Ontario spent more on higher education, measured in dollars per capita, than its U.S. peers – a classic investment in long-term prosperity. But despite some large recent increases in funding, Ontario has fallen far back and now trails the U.S. by a sizable margin.

“The biggest and most important investment in future prosperity is education, and [the United States has] gone from being even with us to almost out of sight,” Mr. Martin said.

The report says that if Ontario were able to raise its GDP per capita to even the median of its peers in North America, the after-tax disposable income per household in the province would rise by $9,200.

Moreover, such a gain would increase the province’s income tax revenue by $29-billion a year – more than enough to fund needed expenditures on education or infrastructure.

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