March 26, 2008 / 1:23 AM / in 10 years

Ontario budget shuns Ottawa's tax cut demands

TORONTO (Reuters) - Ontario trod its own fiscal path in its 2008-09 budget, refusing to follow federal advice to cut business taxes and insisting that tax cuts were not a silver bullet for a rapidly slowing provincial economy.

“The government has invested, and continues to invest, in tax cuts for business,” said the budget, which the provincial Liberal government released on Tuesday. “However, simply lowering taxes is not enough to ensure that an economy can compete in global markets.”

In highly unusual comments on Monday, federal Finance Minister Jim Flaherty, a Conservative and a former Ontario finance minister, said he expected Ontario to lower corporate taxes to stimulate the economy.

Otherwise, Ontario is on the way to becoming a “have-not” province, or one that receives payments from other provinces, he said.

Ontario Finance Minister Dwight Duncan declined to speculate on the reason behind Flaherty’s criticism, and said Ontario would focus on its own plan.

But John Tory, leader of the opposition Progressive Conservative Party in Ontario, said the federal government has every right to comment on what goes on in Ontario, which has traditionally been Canada’s economic powerhouse.

“So goes the Ontario economy, so goes a large part of the Canadian economy,” Tory said. “Mr. Flaherty has made no secret of his desire to see Ontario get on board with every other government in this country, to lower taxes, to provide some relief from the regulatory burden, and to make sure that we stimulate the private sector to create jobs.”

However some newspapers said Flaherty’s comments smacked of interference, and argued that federal government should butt out of provincial affairs.

“Canada requires a full-time finance minister - not one who moonlights as a provincial opposition leader,” the Globe and Mail newspaper opined.

In a commentary published in the Toronto Star, Canada’s largest circulation newspaper, TD Bank chief economist Don Drummond said the federal-provincial vitriol on corporate taxation “(does) not strike us as an appropriate manner to debate serious policy matters” and risks damaging confidence in the Ontario economy.

Many of Ontario’s manufacturers are not turning a profit, and therefore are not paying tax, regardless of the rate, he said.

The Ontario government, for its part, argued that tax cuts alone will not stimulate economic growth and improve competitiveness.

The budget cited a 2006 KPMG study on competitiveness that found that many factors went into selecting a business site, including business costs, the business environment, personnel costs and quality of life issues.

Reporting by Lynne Olver; Editing by Peter Galloway and Janet Guttsman

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