Ontarians need to rebalance our economic
priorities and policies by investing more today if we want to achieve our full
economic potential and prosperity in the future.
That is the conclusion of
Rebalancing priorities for prosperity, the Fourth Annual Report of the Task
Force on Competitiveness, Productivity and Economic Progress in its Fourth
Annual Report, released today at the MaRS Centre in Toronto.
Ontario has built one of the most successful economies in the world, but
the Task Force’s report demonstrates that Ontario has a widening prosperity
gap with its peer group of North American jurisdictions. The key to closing
this prosperity gap, the Task Force argues, is higher productivity – the
increased capability of Ontarians to add more value to the physical, human,
and capital resources in the province. But to achieve this Ontarians need to
choose a different path than the one we’re on – rebalancing priorities to
increase investment for the future and decrease current consumption.
The Task Force, a group of industry and academic leaders, chaired by
Roger Martin, Dean of the Rotman School of Management, was established in 2001
to stimulate business, governments, educational institutions, and individuals
to increase the pace of innovation and competitiveness. That will ensure that
our standard of living continues to rise.
In Rebalancing priorities for prosperity, the Task Force shows that
Ontario’s prosperity ranks 15th among a peer group of 16 North American
jurisdictions(*) consisting of the 14 most populous US states, Quebec, and
Ontario. Ontario slipped a rank from last year, as its economic growth lagged
most of the peer states. Ontario’s Gross Domestic Product (GDP) per capita is
now $6,000, or 12.6 percent, behind the median of the 16 jurisdictions. GDP
measures the value created by workers and firms in Ontario from the human,
physical, and natural resources in the province
.
“Closing this prosperity gap would have real benefits for Ontario
families,” said Martin. “On average, each family would gain $8,300 in
disposable, after tax income – every year.” “And closing this gap is not an
unrealistic aspiration. As recently as fifteen years ago we were in the upper
half of our peer group,” added Martin.
Today, Ontario individuals, businesses, and governments are under
investing in their future prosperity. By limiting our investment in post
secondary education, Ontarians are under investing in themselves. More highly
educated people are more productive and innovative – and earn higher wages.
Relative to their US counterparts, businesses continue to under invest in
machinery, equipment, and software, which are important contributors to higher
productivity and higher wages. Governments are shifting their spending balance
away from investment in infrastructure, and post secondary education toward
consumption, mainly in health care and social services.
“The flawed logic that we have in place is that we can enjoy to the
maximum the fruits of our prosperity today – and that prosperity will just
continue without ongoing investment,” said Martin.
“Better logic concludes
that investing today and forgoing some consumption of current prosperity will
create even higher prosperity down the road.”
The Task Force sees nothing fundamental that would block Ontario from
closing the prosperity gap. Instead the report calls for the rebalancing of
key priorities required to achieve greater productivity and prosperity. These
include:
– Businesses need to invest more in physical and human capital. More
modern machinery, equipment, and software will strengthen productivity
for businesses and the economy as a whole. Managers and workers with
more education and training will be more innovative.
– People have to invest more in themselves through more education,
particularly at the post secondary level and through a commitment to
life-long learning.
– Government spending needs to be re-oriented so that it invests more in
future prosperity and consumes less of current prosperity. “Our
governments have got their fiscal houses in order by attacking
investment spending, such as higher education, more than current
consumption spending, like health care and social services,” said
Martin. “If we return to a more balanced investment-consumption
pattern, we will increase our prosperity and ultimately have greater
ability to fund our important social programs.”
– Governments need to shift taxation to encouraging firms to invest in
productivity-enhancing capital instead of discouraging business
investment. Canada and Ontario are currently among the highest in the
taxation of business investment.
– Governments also need to reduce the effective tax rate paid by the
working poor. The combination of increased income tax rates and the
loss of social benefits through clawbacks means that a single earner
family of four faces an effective marginal tax rate of 60 percent as
income passes $31,000. Smarter taxation would motivate individuals and
businesses to work and invest more.
– Fiscal federalism needs to be fixed by shifting to a system that
encourages investment for higher long-term prosperity potential in all
regions and away from the current system that emphasizes the narrowing
of current regional income disparities. We have a built a self-
perpetuating system of regional transfers that limits investment.
Ontarians transfer four times as much per capita to the rest of Canada
as residents in the peer states transfer to the rest of the United
States. By making fiscal federalism more effective, Ontario will be
able to invest more in our own future prosperity.
– Innovation policies need to change course to build more pressure for
the demand for innovation to balance the current emphasis on
supporting the supply of innovation. As Martin explained, “Currently,
too much of federal and provincial innovation policy is aimed at
support mechanisms, like R&D spending and tax incentives. But we
haven’t balanced this with policies that build pressure for innovation
from capable business managers, demanding customers, and competitive
rivals. A better balance would result in more commercialization of our
research efforts into innovative products and services.”
– Venture financing needs to focus more on achieving higher quality
investment and less on the quantity of capital. Public policy
emphasizes creating the supply of risk capital and then funneling it
into organizations that have neither the incentives nor the capability
to help Ontario succeed in commercialization and innovation. A more
balanced public policy would increase commercialization of our R&D and
lead to a more innovation-based economy.
Through its recommendations the Task Force is encouraging businesses,
governments, and individuals to work together over the next few years to
realize Ontario’s prosperity potential for generations to come.
