Ontario Budget 2000 PAPER A Ontario's Economic and Revenue Outlook:Record Performance and Continuing Strong Growth

Ontario Budget 2000 BUDGET PAPER A Ontario's Economic and Revenue Outlook:
"Record Performance and Continuing Strong Growth"

HIGHLIGHTS

Solid growth in Ontario's economy will continue in 2000 and 2001, resulting in healthy job gains and a falling unemployment rate.

"Ontario, which led all of the other provinces in terms of economic growth in 1999, will grow at a stellar rate...in 2000."

TD Bank, March 2000

Ontario Economic and Revenue Outlook at a Glance
(Annual Average)

	1998	1999	2000	2001
Real GDP Growth (per cent)	4.3	5.7	4.6	3.1
Employment (thousands)	5,490	5,688	Up to 5,887	Up to 6,064
Unemployment Rate (per cent)	7.2	6.3	5.5 - 6.0	5.0 - 5.5
CPI Inflation (per cent)	0.9	1.9	2.5	2.0
Provincial Revenue ($ billions)	55.8	62.5	62.1	63.4

Sources: Statistics Canada and Ontario Ministry of Finance. Revenues are on a fiscal-year basis.

• The robust economy will underpin growing Provincial tax revenues. Since Ontario began cutting tax rates to stimulate economic growth, total Provincial tax revenue has increased by $11.7 billion.
  
  
• Strong growth in consumer spending and residential investment will be supported by income tax cuts, job gains and rising income.
  
  
• Impressive increases in corporate profits, solid domestic demand and high industry capacity utilization rates are leading to vigorous growth in business investment, particularly in productivity-enhancing machinery and equipment.
  
  
• Ontario's export and import growth is expected to outpace overall economic growth. Solid auto sales in the United States and across Canada, and growth in high-tech investment, are stimulating Ontario exports.
  
  

ONTARIO'S STRONG ECONOMIC RECORD Job Creation Booming Since September 1995, total employment has risen by 701,000, almost half of all jobs created in Canada. A record 198,000 jobs were created in 1999, up 3.6 per cent from 1998. Almost all of the job gains were full-time. The unemployment rate has dropped from 8.7 per cent in mid-1995 to 5.6 per cent today. Consumer Confidence Strengthening The Conference Board of Canada's index of Ontario consumer confidence has risen 37.8 per cent since the end of 1995, compared to 25.5 per cent in the rest of Canada. Ontario retail sales rose 7.3 per cent in 1999. Over the first two months of 2000, retail sales were up 8.0 per cent from a year earlier. Housing Momentum Building Housing starts soared 24.9 per cent in 1999, reaching a decade high of 67,235 units. Housing starts in Ontario rose to an annual rate of 78,800 units in the first quarter of 2000, up 24.8 per cent from the same period in 1999. Ontario home resales advanced 7.4 per cent in 1999, to reach a record 148,660 sales. Over the first three months of 2000, resales are up 9.0 per cent from the same period in 1999. Investment Spending Buoyant Real business investment in machinery and equipment has increased by 80 per cent since 1995, while real commercial and industrial construction has grown by 19 per cent. Corporate profits grew by 22.3 per cent in 1999, encouraging the increase in investment. Export Growth Continues Ontario merchandise exports jumped 13.6 per cent in 1999. Ontario exports are up 8.2 per cent over the first two months of 2000 from a year earlier.

ECONOMIC GROWTH REMAINS ROBUST

The economy grew faster in 1999 than the 1999 Budget projection of 3.7 per cent. With real Gross Domestic Product (GDP) growth of 5.7 per cent, Ontario's economic performance surpassed that in the rest of Canada, the United States and all of the other G-7 major industrial countries.

The strong forward momentum of the Ontario economy in 1999 has carried into 2000. Real GDP is projected to grow by 4.6 per cent in 2000 and by 3.1 per cent in 2001. Growth is expected to be broadly based, with household spending, business investment and exports all making a contribution. In keeping with Ontario's policy of prudent forecasting, these projections are marginally below the current private-sector consensus.

Economic Growth Projections
(Per Cent)

	2000	2001
Ontario Real GDP Growth
Private-sector survey average	4.7	3.2
Ontario's projection	4.6	3.1

Note: The private-sector average is based on eight recent forecasts.
Sources: Ontario Ministry of Finance and Ontario Finance Survey of Forecasts (April 2000).

The cautious economic projection is, as in previous Budgets, supplemented by a reserve, as part of prudent budgeting practices. A $1 billion reserve has been included in the 2000-01 fiscal plan to protect the balanced budget against unexpected and adverse changes in the economic and fiscal outlook.

VIGOROUS JOB GROWTH

Tax cuts create jobs. Government policies of lower taxes, reduced regulation and sound fiscal management have laid a solid foundation for strong growth and job creation. Ontario is on track to surpass the Government's ambitious goal of 725,000 new jobs by the end of 2000 and is well positioned to reach the Government's new target of 825,000 jobs over the following five years.

• Ontario created a record 198,000 new jobs in 1999, on the heels of 177,000 new jobs in 1998. These are the best two consecutive years of job creation in Ontario's history. Almost all of the jobs created in 1999 were full-time. Job creation has been broadly based with employment rising in most sectors of the economy.
  
  
  
• Strong economic growth is projected to support average annual job growth of up to 3.5 per cent in 2000 and up to 3.0 per cent in 2001.
  
  
• Rising job openings, tax cuts and welfare reform are encouraging more Ontarians to enter the labour force.
  
  
• The growth of income associated with more jobs and greater capital gains boosted Personal Income Tax (PIT) revenue by $1,835 million above the 1999 Budget projection. In addition, Employer Health Tax revenue was $135 million above last year's projection.
  
  

INFLATION REMAINS MODERATE

Despite strong growth, Ontario's CPI inflation is expected to remain in check, averaging 2.5 per cent in 2000 and 2.0 per cent in 2001. This is well within the Bank of Canada's target range.

CONSUMER SPENDING BUOYED BY TAX CUTS AND RISING CONFIDENCE

Personal tax cuts and high and rising consumer confidence have led to robust growth in consumer spending. This pattern will continue in 2000 and will contribute to solid gains in real output and employment.

"With after-tax household incomes...outpacing inflation and solid growth in profits, consumer and business confidence are on a strong upswing."

Scotiabank, February 2000

• The Conference Board's index of consumer confidence has risen by 37.8 per cent since the end of 1995. This surpassed the 25.5 per cent increase for the rest of Canada during the same period.
  
  
• Real consumer spending surged 4.1 per cent in 1999, supported by strong growth in real after-tax income.
  
  
• Tax cuts and strong job creation have increased Ontarians' confidence in their economic prospects and reinforced their willingness to make important investment and spending decisions such as buying a home or purchasing a car. In 1999-00, Retail Sales Tax revenue was $674 million higher than projected in the 1999 Budget.
  
  
• From the second quarter of 1996, when Ontario income tax cuts began, to the fourth quarter of 1999, Ontario real disposable income has increased by 11.6 per cent, more than double the 5.7 per cent pace for the rest of Canada.
  
  
• During the same period, Ontario real consumption has increased by 15.4 per cent, much stronger than the 10.8 per cent rise recorded for the rest of Canada.
  
  
  
• Real disposable income is expected to rise by 4.3 per cent in 2000 and 3.6 per cent in 2001. The sharp rise in income is supported by Ontario Government policies to reduce taxes and improve the business climate. These policies leave more money in the pockets of taxpayers and encourage business investment and job creation. Real consumer spending is expected to grow in line with disposable income, rising 3.9 per cent in 2000 and 3.0 per cent in 2001.
  
  

HOUSING OUTLOOK BRISK

"Ontario's home markets will remain among Canada's top performers."

Canada Mortgage and Housing Corporation, February 2000

The residential construction sector is expected to remain brisk in 2000, supported by strong job gains, rising incomes and population growth.

• The Land Transfer Tax (LTT) rebate for first-time buyers of new homes will continue to support the housing industry. Ontario housing starts are expected to rise to 73,000 in 2000. Residential construction spending in Ontario is projected to rise by 5.4 per cent in 2000 and a further 2.3 per cent in 2001.
  
  
• The vibrant housing market in Ontario in 1999 increased Land Transfer Tax revenue by $90 million above the 1999 Budget forecast.
  
  
• Five-year mortgages have risen from their historic lows, with the posted rate at most financial institutions at 8.35 per cent in late April. Mortgage rates are expected to stay within 50 to 100 basis points of their current levels and will remain well below the peak of over 14 per cent reached in 1990.
  
  
• More significantly, housing remains very affordable. In 1999, the monthly carrying cost for an average-priced home in Ontario was $970 compared to $1,489 in 1990. As a share of after-tax household income, the same carrying cost fell to 21.2 per cent in 1999 from a high of 36.4 per cent in 1990.
  
  

FIRMS CONTINUE UPGRADING AND INVESTING

New technologies, which are lowering costs and transforming the way we do business, require new capital goods and software. Ontario firms are rapidly upgrading their capital stock with modern, highly productive machinery, equipment and structures. These investments are leading to dynamic job creation, rising productivity and stronger output growth. Healthy investment growth over the past few years has been instrumental in enhancing Ontario's competitive position in the international economy.

Corporate profits rose by 22.3 per cent in 1999, significantly stronger than expected. As a result, Corporations Tax revenue exceeded the 1999 Budget projection by $776 million.

The real value of Ontario business investment in machinery and equipment rose by 80 per cent between 1995 and 1999. Real investment in commercial and industrial construction rose by 19 per cent over the same period.

• Machinery and equipment investment is projected to increase by an average of 7.0 per cent over 2000 and 2001.
  
  
• Spending in the commercial and industrial construction sector is expected to remain healthy, with a projected average increase of 2.1 per cent over the next two years.
  
  
  
• Large firms continue to demonstrate their commitment to the province. Firms with major current projects under way or announced include Dofasco, DuPont Canada, Nortel Networks and Stelco. Ontario's attractiveness as an investment location continues to draw new capital expenditure projects in the key automotive sector. DaimlerChrysler Canada, Ford of Canada, General Motors Canada, Honda Canada and Toyota Motor Manufacturing Canada are all making significant new investments in Ontario.
  
  
• Capacity utilization remains above its long-term average, prompting firms to invest further. Capacity utilization in the transportation equipment industry, for example, jumped to 91.4 per cent in 1999, a record high.
  
  
  
• Ontario industrial real estate development is growing strongly. Commercial and industrial building permits rose an average of 23.8 per cent over the past three years.
  
  

EXPORT GROWTH REMAINS SOLID

Ontario export industries recorded another banner year in 1999, with real exports up 10.7 per cent. Ontario's real exports are projected to remain strong in 2000 and 2001 with continued U.S. growth and rising demand in Europe and Asia.

• International trade has increased in importance to the Ontario economy through the 1990s. The province's international orientation has increased sharply. Ontario's exports were equivalent to only 29.4 per cent of GDP in 1989. This ratio rose to 54.4 per cent in 1999.
  
  

Strong growth in exports has been accompanied by rising imports. In large part this reflects the increasing integration of the North American economy. A significant consequence of this trend is the increasing import content of manufactured exports. This matches the experience of the Canadian auto industry, which has benefited from free trade with the United States since 1965. It has long been completely integrated on a North American basis, with the import content of exports exceeding 50 per cent.

• The following chart shows that, in recent years, since the implementation of the North American Free Trade Agreement (NAFTA), the import content of other manufactured exports also has increased sharply. A recent Statistics Canada study shows that this trend is particularly evident in the fast-growing industries producing electronic equipment and other capital goods for the world economy. Increased integration and specialization brings with it the promise, over time, of the strong productivity growth that has characterized Ontario's auto industry.
  
  
  
• Since 1995, net trade (exports minus imports) has accounted for 16.0 per cent of Ontario's total GDP growth.
  
  
• The auto sector, which accounts for nearly half of Ontario's total international exports, led export growth in 1999, rising 26 per cent. Ontario's auto industry recorded another record-breaking year in 1999, producing nearly three million cars and trucks.
  
  
• Prospects for Ontario's auto industry exports are bright. New investment is expanding and improving plants, while U.S. demand for autos and trucks is projected to remain strong.
  
  
• Knowledge-based, high-technology industries continue to grow in importance to the Ontario economy. In 1999, telecommunications equipment exports grew by 12.3 per cent in real terms, while computer exports jumped 18.1 per cent.
  
  

STRONG REVENUE PERFORMANCE

Ontario's tax cuts have fuelled robust growth in domestic demand and substantially increased government revenues. This performance was well above forecasts. Taxation revenue in 1999-00 was $3.1 billion above the 1998-99 level. Tax revenues are expected to continue to grow in 2000-01 as a result of continuing strong growth in the Ontario economy.

Total revenue in 2000-01 is projected to be slightly below the 1999-00 level due to the inclusion in 1999-00 revenue of $1,580 million for the net proceeds from the sale of Highway 407.

Ontario Revenues: 1998-99 to 2000-01
($ Millions)

	Actual 1998-99	Interim 1999-00	Projected 2000-01
Taxation Revenue	43,077	46,192	47,323
Personal Income Tax	17,190	17,505	17,530
Retail Sales Tax	11,651	12,784	13,400
Corporations Tax	7,447	8,596	8,765
All Other	6,789	7,307	7,628
Federal Payments	4,515	5,888	6,032
Income from Government Enterprises	2,547	3,507	3,423
Other Revenue	5,647	6,885	5,282
Total Revenue	55,786	62,472	62,060
Total Revenue Excluding Highway 407 Sale	55,786	60,892	62,060

Driven by continued gains in employment, incomes, consumer spending and corporate profits, tax revenue is forecast to increase by over $1.1 billion in 2000-01.

• Personal Income Tax revenue is projected at $17,530 million.
  
  
• Continued strong growth in business and consumer spending, raising retail sales by 6.4 per cent in 2000, is expected to boost Retail Sales Tax revenue to $13,400 million.
  
  
• Corporations Tax revenue is forecast to increase to $8,765 million in 2000-01.
  
  
• Strong job creation and healthy wage gains are expected to increase Employer Health Tax revenues to $3,320 million in 2000-01.
  
  
• Transfers from the Government of Canada are forecast to be $6,032 million in 2000- 01. This amount includes $4,857 million for the Canada Health and Social Transfer (CHST), including the increase in CHST allocation and Supplements. This will be 27 per cent lower than in 1994-95.
  
  
• Income from Government Enterprises is expected to be $3,423 million.
  
  
• Other Revenue is expected to be $5,282 million. This is $1,603 million below the 1999-00 level, which included $1,580 million for the net proceeds from the sale of Highway 407.
  
  

CONCLUSION

The Ontario economy is poised for continued vigorous growth in 2000. Robust domestic demand assisted by solid export growth is underpinning future growth. Strong job creation is continuing; the unemployment rate is declining. The private-sector consensus projects real GDP growth of 4.7 per cent in 2000 and a further 3.2 per cent in 2001. This is, once again, faster than economic growth in the rest of Canada or any of the other G-7 major industrial countries.

By reducing tax rates and eliminating obstacles to market-led growth, the Ontario Government has established a framework for a strong economy that generates the revenues needed to pay for valued public services and infrastructure. Provincial tax revenues are projected to grow by over $1.1 billion in 2000-01.

PAPER A
Appendix

DETAILS OF THE ONTARIO ECONOMIC AND REVENUE OUTLOOK

The following tables and charts provide further details about the Ontario Ministry of Finance economic and revenue projections.

The Ontario Economy, 1998 to 2001
(Per Cent Change)

	Actual		Projected
	1998	1999	2000	2001
Real Gross Domestic Product	4.3	5.7	4.6	3.1
Personal consumption	3.4	4.1	3.9	3.0
Residential construction	(1.2)	14.6	5.4	2.3
Non-residential construction	(3.8)	0.8	2.3	1.9
Machinery and equipment	10.6	11.8	8.6	5.3
Exports	8.8	10.7	7.9	5.3
Imports	6.4	11.2	8.6	5.6
Nominal Gross Domestic Product	4.3	7.1	6.5	4.7
Other Economic Indicators
Retail sales	6.9	7.3	6.4	4.8
Housing starts (000s)	53.8	67.2	73.0	70.0
Personal income	4.8	4.5	5.7	5.0
Corporate profits	0.3	22.3	13.2	3.6
Ontario Consumer Price Index	0.9	1.9	2.5	2.0
Labour Market
Employment*	3.3	3.6	3.0 – 3.5	2.5 – 3.0
Unemployment rate * (per cent)	7.2	6.3	5.5 – 6.0	5.0 – 5.5

* Based on Labour Force Survey.
Sources: Statistics Canada and Ontario Ministry of Finance.

For prudent planning purposes, the interest rate on three-month Government of Canada treasury bills is assumed to be 50 to 60 basis points higher than the average private-sector forecast. Interest rates on 10-year Government of Canada bonds are assumed to be 20 basis points higher than the average private-sector forecast.

Interest Rate Assumptions
(Average Per Cent)

	1999	2000 Jan-Apr	2000 May-Dec	2001
3-month Government of Canada treasury bills
Private-sector survey average	4.7	5.2	5.7	5.7
Ontario's assumption			6.3	6.2
10-year Government of Canada bondsa
Private-sector survey average	5.6	6.2	6.3	6.3
Ontario's assumption			6.5	6.5

Sources: Bank of Canada, Ontario Ministry of Finance and Ontario Finance Financial Market Survey (April 2000).

The following table shows the sensitivity of the fiscal balance to the direct impact of lower interest rates on public debt interest and the impact of stronger economic growth on revenues and expenditures.

Impact of Changes in Economic Assumptions on the Ontario Surplus
($ Millions)

	2000-01
100 Basis Points Lower Canadian Interest Rates	80
1 Percentage Point Higher Real GDP Growth	565

Note: These responses would hold "on average" and could vary significantly depending on the composition of change in income and expenditures.
Source: Ontario Ministry of Finance.

Revenue
($ Millions)

	Actual 1996-97	Actual 1997-98	Actual 1998-99	Interim 1999-00	Projected 2000-01
Taxation Revenue
Personal Income Tax	16,357	16,293	17,190	17,505	17,530
Retail Sales Tax	9,964	10,843	11,651	12,784	13,400
Corporations Tax	5,852	7,456	7,447	8,596	8,765
Employer Health Tax	2,772	2,851	2,882	3,125	3,320
Gasoline Tax	1,951	2,028	2,068	2,175	2,260
Fuel Tax	540	563	592	635	665
Tobacco Tax	356	425	447	481	510
Land Transfer Tax	452	565	470	570	580
Mining Profits Tax	54	40	23	53	55
Race Tracks Tax	46	4	6	5	5
Preferred Share Dividends Tax	73	60	50	35	40
Other Taxation	113	141	251	228	193
Total	38,530	41,269	43,077	46,192	47,323
Government of Canada
Canada Health and Social Transfer	4,814	3,970	3,553	3,767	3,548
Increase in CHST Allocation	-	-	-	190	552
CHST Supplements	-	-	-	755	757
Social Housing	341	387	358	503	533
Student Assistance	9	18	64	171	171
Indian Welfare Services	128	87	155	112	114
Bilingualism Development	44	49	55	65	64
Employability Assistance for People with Disabilities	65	53	71	66	66
Canada-Ontario Infrastructure Works	142	116	71	25	-
Other	235	418	188	234	227
Total	5,778	5,098	4,515	5,888	6,032
Income from Government Enterprises
Ontario Lottery and Gaming Corporation*	1,248	1,485	1,764	1,811	1,695
Liquor Control Board of Ontario	701	745	809	844	915
Ontario Hydro Successor Companies	-	-	-	820	795
Other	10	61	(26)	32	18
Total	1,959	2,291	2,547	3,507	3,423
Other Revenue
Vehicle and Driver Registration Fees	816	820	890	923	920
Other Fees and Licences	560	548	661	637	670
Liquor Licence Revenue	520	506	519	528	530
Royalties	264	286	289	294	240
Sales and Rentals	543	582	640	2,339	790
Fines and Penalties	157	174	50	40	35
Local Services Realignment - Reimbursement of Expenditure	-	519	2,109	1,665	1,572
Miscellaneous	323	425	489	459	525
Total	3,183	3,860	5,647	6,885	5,282
Total Revenue	49,450	52,518	55,786	62,472	62,060
Total Revenue Excluding Highway 407 Sale	49,450	52,518	55,786	60,892	62,060

*Effective April 1, 2000, the Ontario Lottery Corporation and Ontario Casino Corporation merged to form the Ontario Lottery and Gaming Corporation.
Source: Ontario Ministry of Finance.