Chapter 11: Business Support

Like many jurisdictions around the world, the Ontario government provides financial and other forms of support to private businesses to foster investment and economic growth. Many funding programs also aim to create jobs in the private sector, and are often targeted at specific industry sectors and regions. Looked at from the perspective of the total fiscal plan, however, discretionary spending on business support is not in the same league as spending on education and health care — nor is it at the same level of priority. Yet it can have a substantial impact on the economy — both good and bad. It is time for the government to rethink and reset the province’s business support programs (commonly referred to as “business subsidies”).

Economic Vision

Much of Ontario’s economic success was driven by advantages that no longer exist (such as a competitive and often undervalued Canadian dollar, relatively free access to a rapidly growing U.S. market and low-cost energy supplies), so a new direction is now required.1

Ontario must chart a path that reduces Ontario’s reliance on the U.S. economy — a path that features bold policy action by the provincial government in concert with other governments and the private sector. Such a policy should include nine key ingredients:

  • Top-quality labour force;
  • Effective integration of immigrants into the workforce;
  • World-class infrastructure, including transit;
  • Reliable electricity system;
  • Being a leader in the environment;
  • Competitive tax system;
  • Enhanced trade;
  • Shift from dependence (social assistance) to labour-force participation; and
  • Supportive federal policy.

The Ontario government must issue a broad discussion paper this year on where it wants to take the economy over time. Such a report, which would replace the relatively sterile exercise of the mandated long-term economic and fiscal outlook, could form the basis of debate on this issue. It is vital that the discussion paper deal with far more than numbers and budget balances. It should address the fundamental issues that matter to Ontarians — jobs, income and improving people’s lives.

Understand Productivity Challenges

Ontario’s economic vision must also generate interest in and understanding of productivity.2 The aging of Ontario’s population means that labour-force growth will slow; this means that productivity growth is becoming increasingly important to economic success. Despite this importance, governments fear the word “productivity” because of public misunderstanding of its meaning. Polls and focus groups tend to find that many Canadians believe productivity means working harder for less pay — the opposite of an economist’s definition.

Economists and other analysts have compiled lists in recent decades of the actions they believe are needed to improve Canada’s productivity performance. Elements in common on many of these lists include the following:

  • Low, stable inflation;
  • Lower public debt-to-GDP ratios;
  • Free trade externally and internally;
  • Promotion of competition, including removal of foreign ownership restrictions;
  • Removal of barriers to firm growth, including the jump in taxation rates from small to large businesses;
  • Removal of work disincentives, including those embedded in Employment Insurance;
  • Reduction in regulatory burden;
  • Lower taxes on capital;
  • Lower marginal personal income tax rates, especially for very low- and modest-income Canadians (although this might raise labour-force participation rather than productivity);
  • A shift away from taxing income and capital towards taxing consumption;
  • Improvement in the selection and integration of immigrants;
  • Increased investment in public infrastructure, especially transportation and electricity;
  • Investment in post-secondary education; and
  • Attention to the non-post-secondary education stream, including literacy, apprenticeships and training.

To the credit of the federal and Ontario governments, action has been taken in about 70 per cent of these areas. However, productivity has continued to lag. If government policy action does not cure what ails us regarding productivity, what is missing?

Ontario must turn its attention to the role of the private sector. How can the business sector become more competitive, more entrepreneurial, more productive? Shifting private business behaviour to capitalize on the value of investing profits in machinery and equipment is central to improving productivity. Higher productivity, or output per worker, creates opportunities for all segments of the Ontario economy to win. It can raise real wages of workers; allow businesses to expand, thereby creating more jobs; and generate more revenue for the Ontario government.

Government’s role in this cultural shift begins with understanding the underlying causes of puzzling aspects of current business behaviour such as:

  • Why does only four per cent of Canadian small to medium enterprise (SME) revenue come from exports to the emerging economies?
  • Why do we have a much higher concentration of small firms than the United States?
  • Why did firm size not grow in response to NAFTA, as had been predicted?
  • Why did so many firms try so desperately to remain below the small business income threshold?
  • Why do Canadian and U.S. firms deal with information and communications technology (ICT) and computers so differently? Why do Canadian firms dramatically underinvest in ICT on a relative basis and use the equipment in less sophisticated ways?

Transferring the focus of productivity research from macro to micro and exploiting new data at the firm level through collaborations with Statistics Canada and Industry Canada are essential underpinnings of Ontario’s economic vision.

This is not just putting together yet another “expert panel”; it is about getting regular, reliably collected data from Ontario businesses (and preferably businesses across Canada) that can help guide initial policy transformations, educate businesses about the opportunities that lie in investing in productivity improvements and track Ontario’s progress towards economic recovery.

Recommendation 11-1: Government needs to publish an “economic vision” for Ontario. 

This should include the context of recent history in terms of what sectors have been growing and declining to identify targeted areas for investment, and summarize the challenges and opportunities provincewide and by sector and region. Finally, and most importantly, it needs to present a strategy that aligns with efforts to realize the economic objectives of the government — one that uses increased productivity as a keystone.

Poised for Growth

Ontario has two critically important assets that support economic growth: it has one of the world’s most highly skilled workforces and an internationally competitive tax regime.

  • About 64 per cent of the province’s population in the 25–64 age group has a post-secondary education.3 More than 28 per cent of the workforce is employed in knowledge-based industries — higher even than in the United States.4
  • When fully implemented, the province’s recent tax reforms will save business about $4.4 billion per year from the removal of the embedded sales tax, $2.5 billion per year from corporate income tax (CIT) rate reductions and more than $1.8 billion per year from elimination of the capital tax. This will amount to more than $8 billion in annual tax savings to business, distributed across all sectors of the economy. These measures will help cut Ontario’s marginal effective tax rate on new business investment in half by 2018, making Ontario one of the most attractive jurisdictions in the industrialized world in which to invest and create jobs.
TABLE 11.1      Total Business Tax Relief by Sector — Annual Savings1,2
($ Millions)
Sector Harmonized Sales Tax (HST) Corporate Income Tax (CIT) Capital Tax3 Total
Agriculture 30 15 s 45
Forestry, Fishing and Hunting 20 s s 20
Mining, Utilities, and Oil and Gas 120 35 85 240
Construction 2,115 145 50 2,310
Manufacturing 465 280 275 1,020
Wholesale Trade 400 255 90 745
Retail Trade 255 120 55 430
Transportation and Warehousing 550 50 50 650
Information and Cultural Industries 575 95 105 775
Financial Services (except Insurance) (875) 685 740 550
Insurance (160) 190 10 40
Real Estate (50) 125 95 170
Rental and Leasing 90 25 40 155
Professional, Scientific and Technical Services 445 285 165 895
Other Services (except Public Administration) 390 195 75 660
Total Business 4,370 2,500 1,835 8,705

1 Represents the annual savings following the full phase-in of the tax measures in 2011 dollars. Savings do not include more than $700 million annually in business education tax reductions and targeted tax measures introduced in 2009, and over $635 million in annual compliance cost savings from a single HST administration and a single corporate tax administration.

2 Annual savings of less than $5 million are denoted by the letter "s" (small).

3 Capital tax savings compared to the capital tax structure before the 2004 Ontario Budget measures.

Source: Ontario Ministry of Finance, December 2011.

Cutting Ontario's Marginal Effective Tax rate on New Business Investment in Half

With a highly skilled workforce and competitive tax regime, Ontario’s economy is well positioned for economic growth. Nevertheless, it faces several significant challenges, including weak productivity growth; increasing global competition; structural changes such as the decline of traditionally strong sectors of the economy; lingering effects of the recent global recession; and continuing turmoil in the United States and European Union. Like most governments responding to the rising anxieties of both the general public and the business sector, the Ontario government has put in place myriad programs to support business investment with the intent of creating private-sector jobs. We question, however, whether such business support can be fiscally sustainable and, even more importantly, whether it is even effective in supporting economic growth.

Types of Business Support

The numerous types of support to business can be generally classified as either direct or indirect. In this analysis, direct support mainly includes grants, loans and equity investments made available to businesses through various funding programs. Some support is aimed at specific sectors such as forestry, agriculture, manufacturing and the entertainment and creative cluster. Programs like the Strategic Jobs and Investment Fund and Northern Ontario Heritage Fund tend to be aimed at a broader range of sectors. In 2010–11, the government provided over $1.3 billion to businesses in the form of grants, loans and loan guarantees as well as support that did not directly involve transfers of cash or credit to individual firms through 44 funding programs across nine ministries5 — an increase of about 95 per cent since 2006–07.

Total Direct Business Support

In 2011, $2.3 billion of indirect support was provided to businesses in two forms: tax expenditures, including tax credits for research and development (R&D) and for specific sectors such as media industries, and lower CIT rates for small business and for income from manufacturing and processing. Tax credits that were introduced when CIT rates were high by international standards have been maintained, even though CIT rates in Ontario have fallen significantly.

Indirect Business Support - Tax Expenditures

In the 2011 Ontario Budget, the government committed to undertake a review of direct business support programs. As well, the 2011 Ontario Economic Outlook and Fiscal Review announced that the province would conduct a review of business tax expenditures to assess their effectiveness and administrative efficiency. The Commission commends the government for undertaking these reviews as an important opportunity for the province to maximize value-for-money and return on investment for taxpayers.

The province also provides businesses with a wide range of other supports not traditionally considered to be subsidies, though businesses can benefit from them, which are included in this analysis but not in government reviews. These include various business services such as funding for general services provided by industry, information, consulting and marketing services, certain public procurement activities, targeted training/skills development programs, and research and development (R&D) performed at public institutions6 where a business is often a co-funder. While these programs are included in our analysis, we refrain from commenting on them at length as data have not been gathered and evaluated consistently across ministries.

Recommendation 11-2: Expand government reviews of direct business support programs and tax expenditures to include supports such as business services, procurement, and publicly funded research and development (see Chapter 7, Post-Secondary Education, for details on research funding for universities and colleges).

Business subsidies are not the only way government can help make Ontario a more competitive jurisdiction for doing business. The province has made significant investments in public infrastructure such as roads and bridges to facilitate the movement of goods and labour, and in a skilled workforce through education and training. It is working collaboratively with the federal government and other provinces in areas such as immigration and international trade. It has taken major steps to reduce the regulatory burden on firms and, as noted above, has significantly reduced business taxes. All told, these policy initiatives by the provincial government have dramatically improved the opportunity for firms in Ontario to succeed in an increasingly competitive global economy and they have reduced the need for business support programs aimed at subsidizing the costs of business inputs such as labour, machinery and equipment, and buildings.

Our View on Business Subsidies

Empirical evidence suggests that business subsidies are often not an efficient use of public resources and have done little to raise living standards. Subsidy programs can distort business decisions to the point that they are no longer based on sound economic criteria or require a reasonable degree of private risk. Without proper accountability, these programs are also susceptible to stakeholder lobbying, which can result in an economically inefficient allocation of funds. Furthermore, the outcomes of these programs are often vague and difficult to measure, preventing thorough evaluation and analysis. It is not enough to demonstrate that a program creates or retains jobs, especially as these jobs may have been created without government support. We agree with the conclusion reached by the Task Force on Competitiveness, Productivity and Economic Progress, headed by Roger Martin, that an economic policy focused on job creation “can be very costly with few results.”7

Subsidies that are used to bail out failing firms or declining sectors are also problematic. While they can achieve short-term objectives such as job retention, over the long term they can impede structural shifts and allocation of resources that would improve productivity in the overall economy. Bailouts entail a potential political risk, provoking questions of fairness and the creation of an “un-level” playing field among business competitors. The record of such interventions has generally featured more failures than successes.

Certain sectors and activities rely considerably on government support. When the combined subsidy of federal and provincial grants and tax credits is considered, the support can be significant. For example, it is estimated that almost 60 per cent of all film and television production spending in Ontario in 2010 was subsidized by federal and Ontario film tax credits, grants and other related funding.8 Similarly, federal and provincial tax incentives for research and development can reduce the after-tax cost of a $100 R&D expenditure in Ontario to as low as $37. There are also situations where a single dollar of business expense is eligible for two or more provincial tax incentives, or in which tax incentives are provided on expenses where the business received direct funding from the provincial or federal government.

An Illustrative Example:

In many cases, current incentives are geared towards stabilization instead of industry transformation. Ontario’s new Risk Management Program (RMP) is an example of a business support program in which incentives are not aligned with productivity growth and market principles. This program helps manage business risk by providing income stability to participating farmers in grain and oilseeds, cattle, hog, sheep and veal, as well as edible horticulture sectors. As it is currently designed, it is a so-called “risk-sharing” program, but the province assumes the lion’s share of the risk by assuming all the liability to compensate for any drop in commodity prices. A significant drop in prices could drive up the cost of the program by hundreds of millions of dollars, with no share being borne by the businesses.

Programs like the RMP serve to support the status quo. By focusing the program objective on maintenance, not improvement, it provides businesses with no incentive to increase efficiency or expand markets — the very activities necessary to increase incomes and jobs. Instead of stabilizing industries, the province should be shifting efforts towards investments in innovation that support efficiencies and productivity gains. In the case of the RMP, investments in equipment and process improvements that help farmers become more competitive and less sensitive to shifting costs are the preferred route.

Reviewing the RMP, and other programs like it, within a broader context of support for businesses could lead to a more integrated bundle of mutually supportive and complementary initiatives that support producers in the short term but also align incentives to assist the target sectors in achieving long-term competitiveness and, in turn, job creation.

 

Currently, Ontario has a hodgepodge of direct and indirect programs scattered across a variety of ministries with various economic development mandates. This unco-ordinated system leads to duplication in delivery and processing, resulting in unnecessary costs. Many firms, especially small ones, have difficulty navigating this complex program landscape, which is further complicated by the existence of federal and local subsidies and other programs. Business support programs are fragmented and lack clear and coherent objectives. This creates significant challenges for tracking and evaluating program costs against outcomes. As data on outcomes are often poor and inconsistent, it is unclear whether the programs are achieving any economic benefits for Ontario.

Some argue that since other jurisdictions employ subsidies to lure business investment, Ontario must do the same to remain competitive. This line of thinking can lead to situations where companies are able to bid up incentives across competing jurisdictions, resulting in what is known as the “winner’s curse.”

The government’s business support programs require a reset in light of Ontario’s fiscal and economic challenges. If we were to design business support programs from scratch, they would not look like what we have now.

Towards a New Business Support Framework

Given the spending reduction targets we propose in Chapter 1, The Need for Strong Fiscal Action, spending on business support at current levels is unsustainable. To address the challenges noted above, we can either restructure the existing programs, including ending poor performers, or make a clean break and start over by asking ministries to develop fewer programs that are better focused on helping Ontario businesses become more productive and competitive.

We believe the second option is the better way. We suggest that the government develop a new business support framework built on five policy pillars:

  • Refocus mandate to sharpen objectives and incorporate evidence-based analysis;
  • Consolidate funding across ministries;
  • Include tax expenditures;
  • Integrate delivery; and
  • Strengthen accountability and transparency.

Refocus Mandate

A refocused mandate for business support programs would shift from an emphasis on job creation towards encouraging firms to enhance productivity through innovation; technology adoption and training; improved business practices; and energy conservation and efficiency. It also means encouraging entrepreneurship. Innovative new firms can increase productivity directly, as well as drive incumbent firms to become more productive in order to compete. Research performed in universities, colleges and hospitals is an especially fertile field for harvesting commercial opportunities by entrepreneurs and risk capitalists.

The impetus for improving productivity is clear. As noted in Chapter 1, it will be difficult to achieve Ontario’s deficit target by 2017–18 with a continuation of the weak productivity growth seen in the private sector in recent years. Business support programs that promote improved productivity growth will therefore play an important part in ensuring Ontario’s fiscal viability. Improving private-sector productivity allows businesses to successfully compete in domestic and global markets and create jobs. Governments do not create jobs in the private sector — only successful businesses can do that. Rather than the traditional focus on job creation as an end in itself, government should focus its business support on those areas with the greatest potential to improve productivity. New programs must clearly demonstrate that they are aligned with this objective.

The productivity lens should also be applied when using subsidies to attract foreign business investment to Ontario. Some flexibility will be needed, as there may be opportunities where government support can attract a substantial anchor investment to the province. Such action, however, should be reserved for exceptional or extraordinary cases. In the global context, especially as developing economies ramp up their business investments, Ontario must collaborate nationally and build international bridges to be competitive. Efforts should continue to strategically target international investment based on the province’s potential to improve productivity.

Similarly, further consideration needs to be given to whether a productivity focus should apply across all industries or if it needs to be fine-tuned to specific industry sectors. Our preference is for a more broad-based approach.

Recommendation 11-3: Refocus the mandate of business support programs from job creation to productivity growth in the private sector.

Consolidate Funding

To develop new and better business support programs, the government must change the process by which ministries allocate funds for such programs. Currently, direct business program funding resides within a ministry’s “envelope,” or annual funding allocation.
Tax-based support is currently not counted as part of this allocation. This hinders alignment and decreases efficiency, as money cannot easily be shifted away from underperforming programs. As well, it often results in duplicated and unco-ordinated efforts by different ministries.

Recommendation 11-4: Starting in 2012–13, make ministries responsible and accountable for tax expenditures that align with their respective program areas. Ministries should initially be provided with the means to fund the tax expenditures (i.e., a net zero impact for the ministries), but after that they will have to manage the pooled envelope of tax expenditures and direct business support programs to meet budgetary targets.

This will provide an incentive to tighten inefficient tax expenditures as the ministries responsible for the tax expenditures will have the ability to reform tax expenditures when seeking potential savings.

Recommendation 11-5: Introduce a new funding model that encourages efficiency and harmonizes efforts across ministries. We propose that money for both direct and indirect business support programs, including refundable tax credits, should be pooled into a single funding envelope.

Ministries would compete for access to this funding to deliver their proposed business support programs. A proposed program should satisfy the following criteria:

  • The program is designed to fix a particular economic problem related to productivity growth based on solid evidence-based analysis. The rationale for government involvement must constitute a compelling case that the support is still necessary despite Ontario’s internationally competitive tax regime.
  • The support program is based on a logic model that uses economic theory and evidence to link policy action to a desired outcome that would not have been achieved without the program in place, and that the incentives are aligned with basic business practices and market principles.
  • The program is the most cost-effective way to achieve the same or better result. In other words, the outcomes or economic benefits must exceed all the potential costs of implementing the program to government, business and the economy as a whole. These would normally include the costs to government for administering the program and the costs to business in effort and money for accessing the program. Just as important, however, the cost-benefit analysis must include the economic costs of the distortions from the taxes used to finance the program.
  • The program does not create market distortions and other perverse consequences such as crowding out private investment and skewing benefits to certain groups. If it does (most programs will have some negative effects), are these issues managed or corrected through the design of the program?
  • The program does not duplicate other programs and services offered at the federal or local level. (Better yet, it complements or leverages business support from other government, community and industry sources.) It should, however, prohibit “double dipping” (where grants are used in calculating tax support) and limit the “stacking” or combination of federal and provincial grant and tax support to no more than 30 per cent of the business expense.

To support continuous program improvement, the program design should include a formal evaluation component that would assess performance against these criteria on an ongoing basis.

To fund this single envelope, we propose that a sunset of all existing direct business support programs occur at the end of fiscal year 2012–13 (see Recommendation 11-8 regarding refundable corporate income tax credits). This would help distinguish between priority services and programs that have simply continued beyond their need. Instead of the government creating more programs to address the same concerns, outdated initiatives would be eliminated, giving ministries enough time to prepare for the funding model being proposed by the Commission. The government would still be expected to meet all legal and financial commitments of existing programs, and complete legacy projects. The remaining money should be devoted to the single envelope, while also allowing some savings to help the government meet its 2017–18 deficit reduction target. By following this approach, we believe it should be possible to reduce the current level of direct business support by one-third or possibly more.

Recommendation 11-6: Sunset all current direct business support programs in 2012–13. After accounting for legal commitments and legacy projects, as well as the 2017–18 deficit reduction target, pool the remaining funds and tax expenditures into a single envelope used to fund business support programs submitted by ministries. These programs must align with the productivity focus of the government economic development policy and meet rigorous design criteria.

Through these changes, we hope that ministries will work together to develop better-aligned and more strategic business support programs that address Ontario’s key economic challenges.

Include Tax Expenditures

In 2011, Ontario provided approximately $2.3 billion of support to business per year in the form of tax expenditures such as refundable and non-refundable tax credits. This is in addition to the annual savings from the recent tax reforms introduced by the province that, when fully implemented, will amount to more than $8 billion for business across all sectors of the economy. The savings include about $4.4 billion per year from the removal of the embedded sales tax, $2.5 billion per year from CIT rate reductions and more than $1.8 billion per year from elimination of the capital tax. The level of support provided through tax credits may have made sense at a time when provincial tax rates were high and credits could help make Ontario more competitive for business investment. It makes less sense when Ontario’s tax system is already competitive for business investment because of major tax reforms.

Refundable Corporate Income Tax Credits

Tax expenditures are a form of spending through the tax system. However, for external reporting purposes, most tax expenditures are currently offset against tax revenue, with only the net amount of revenue being reported. The Public Sector Accounting Board (PSAB) of the Canadian Institute of Chartered Accountants has released a new standard for tax revenue that distinguishes between tax concessions and transfers made through a tax system. It has been recommended that this new standard be applied to financial statements for fiscal years beginning on or after Apr. 1, 2012. Adopting the PSAB standard would result in the reporting of certain tax expenditures as expenses, which would strengthen fiscal accountability and transparency in financial reporting.

Recommendation 11-7: Follow the Public Sector Accounting Board (PSAB) recommendation to report transfers through the tax system as expenses, and adopt the PSAB standard for tax revenue beginning with the 2012 Ontario Budget. In 2011, Ontario provided refundable business tax credits (tax credits that are “refunded” or paid out, even if no tax is payable) totalling $723 million to three main areas: media industries, research and development, and apprenticeship and co-op student training. Many of these tax credits overlap with the objectives of direct business support programs, and all should be subjected to the same degree of scrutiny as program spending. Further gains could be achieved by making the tax system more neutral, removing special preferences that favour some business activities over others and better aligning refundable corporate income tax credits with direct business support programs.

Recommendation 11-8: Introduce legislation to sunset all current refundable corporate income tax (CIT) credits in 2012–13 as part of the government’s tax expenditure review. Add refundable CIT credits that demonstrate effectiveness and administrative efficiency into the single envelope used to fund business support programs, and include revenue forgone from those tax credits in the funding allocation of an appropriate ministry.

Non-Refundable Tax Credits and Other Business Support in the Tax System

Refundable tax credits are not the only form of government spending in the tax system. With a more competitive business tax structure, non-refundable tax credits and business support in other areas of the tax system should also be examined for effectiveness and administrative efficiency. The province should aim to maximize value for money and ensure that the tax system directly supports economic growth in Ontario.

Tax expenditures should provide only the degree of support necessary to achieve the intended results. For example, the Ontario small business deduction (SBD) provides a reduced CIT rate of 4.5 per cent (versus the general CIT rate of 11.5 per cent) on the first $500,000 of Ontario active business income of Canadian-controlled private corporations (CCPCs). The SBD is intended to provide tax relief to small CCPCs that have historically had difficulty raising capital, a process generally achieved through the use of loans and/or equity contributions. Small firms’ access to these sources of funding is often limited by the inherent risks associated with investments in small or start-up businesses; small business owners tend to rely on their personal savings as a source of capital. Federally, and in all other provinces, the benefit of the SBD is generally phased out for CCPCs with levels of capital between $10 million and $15 million. Ontario is alone in extending the benefit of the SBD to all CCPCs without regard to the size of the company. Given the considerable capital requirements of larger companies compared to the relatively small tax benefit provided by the SBD, this tax measure is unlikely to generate efficient or effective investment decisions by larger companies.

Recommendation 11-9: Restrict the Ontario small business deduction (SBD) for large Canadian-controlled private corporations by paralleling the federal business limit reduction, and include the Ontario SBD in the review of tax expenditures for effectiveness and administrative efficiency.

Ontario’s corporate tax base parallels the federal tax system and, as such, federal tax expenditures can have a significant impact on Ontario’s revenue and support to business. With a few exceptions, tax expenditures should be restricted to promote business activity that generates taxable income. For example, the deduction of expenditures related to investment in, or operations of, a foreign business should not be deductible against Canadian income where the foreign income is exempt or not otherwise taxed in Canada. Also, tax expenditures that provide personal benefits must be captured in the income of the recipient or denied as a deduction. Currently, businesses may deduct 50 per cent of expenditures for meals and entertainment. However, the individuals who benefit from these expenditures do not have to include those benefits when calculating their own income for tax purposes. A practical way to correct the failure to include the personal benefit in the income of the recipient would be to deny businesses the deduction for meals and entertainment.

Recommendation 11-10: Work with the federal government to ensure that tax expenditures outside of Ontario’s control maximize value for money and directly support economic growth in Ontario.

The horse racing industry is another area where subsidies to racetracks and horse people require a review and adjustment to realign with present-day economic and fiscal realities. Ontario has more racetracks than any other jurisdiction in the U.S. or Canada. In addition to revenues from wagering, since the late 1990s the industry has benefited from a provincial tax expenditure (a reduction to the provincial pari-mutuel tax) and a percentage of the Ontario Lottery and Gaming Corporation’s gross slot revenues that together are worth an estimated $400 million in 2011–12. Over the past 12 years, approximately $4 billion has flowed through 17 racetracks to support purses, racetrack capital improvement and operating costs. Ontario’s support is 10 times that of British Columbia, which has six racetracks, and 17 times that of Alberta, with five racetracks. Ontario’s approach is unsustainable and it is time for the industry to rationalize its presence in the gaming marketplace. For more on the horse racing and breeding industry, please see Chapter 17, Government Business Enterprises.  

Recommendation 11-11: Review and rationalize the current provincial financial support provided to the horse racing industry so that the industry is more appropriately sustained by the wagering revenues it generates rather than through subsidies or their preferential treatments.

Ontario’s mining tax system, including CIT expenditures such as the Ontario resources tax credit and mining tax expenditures, was designed to encourage investment when corporate tax rates were high. The tax regime for this sector is also designed to ensure that the province is appropriately compensated for extraction of its non-renewable resources. With the significant improvement in Ontario’s international tax competitiveness, the cost of doing business in Ontario is more favourable, encouraging businesses to invest and extract the province’s minerals. As such, Ontario needs to review the impact of tax expenditures for the mining sector and, more broadly, on its resource pricing.

Recommendation 11-12: Eliminate the Ontario resource tax credit and review the mining tax system to ensure that the province is supporting the exploration and production of minerals in Ontario while receiving a fair return on its natural resources.

Integrate Delivery

Changes in how ministries receive program funding must be accompanied by changes in the way ministries deliver programs to make them more accessible and user-friendly.

For example, a more user-friendly “one-window” portal would make it easier for firms, communities and individuals to find and use information about all provincial economic development programs, policies and services. It would feature standardized online applications and a system for tracking a proposal as it goes through the approvals process. Subject to confidentiality requirements, it could also allow for proponents to submit financial statements and other information such as meeting project milestones. It should include a help-desk function for anyone having difficulties using the system, although it is important that an additional layer of bureaucracy not be created and that clients can be linked seamlessly to specialized expertise in ministries, agencies and regional centres. More efficient, streamlined and effective program delivery using the latest information technology will lead to less duplication of effort, resulting in savings in time and money for both business clients and the government. Local communities will also be better able to align their economic development plans with provincial objectives and facilitate more collaborative, community-based economic strategies.

Recommendation 11-13: Establish a more user-friendly, “one-window” portal where clients can have seamless access to information about all business support and other economic development programs provided by all ministries, and be able to make online transactions such as applications, approvals, and financial and other types of reports.

In addition, a single, shared back-office would support all ministries in the delivery of their business assistance programs to eliminate duplicated functions. The single back-office could also include enhanced automation to help track spending and outcomes. Ministries would retain lead responsibility for current clients, but centralize their contract administration and payment processing in one branch. Provisions should be made to allow interfacing with federal and municipal governments as needed. The net effect should be a faster, more nimble public service that is better able to deliver business assistance programs for the needs of today’s business community. A step towards this approach is the recent merging of two ministries into one Ministry of Economic Development and Innovation, which should achieve efficiencies by consolidating the processing of transfer payments.

Another vital element to this approach is ensuring that regulatory administrations and processes are also supportive to businesses.

Recommendation 11-14: Establish a single, shared “back-office” support for all ministries in the delivery of their business support programs, including contract administration, payment processing, expenditure tracking, client contacts, project milestones and outcomes.

Strengthen Accountability and Transparency

The final, yet very important, component of our proposed framework for business support programs is improved accountability and transparency. In an era of fiscal restraint, the use of public funds must be closely monitored and studied to ensure that they are being spent in the best way possible.

Business support programs must be subject to rigorous evaluation that links public expenditures to new, incremental activities by business. The impact of these expenditures on the economy as a whole must also be evaluated. We acknowledge, however, that measuring short-term and long-term effects of a particular program is challenging.

Recommendation 11-15: Establish a four-year sunset rule for all future business support programs. Extend only programs that have demonstrated their merit through a mandatory, comprehensive evaluation in the third year of operation — and end all others.

The final accountability component should be greater transparency. The Commission was surprised to find that something as simple as an inventory of direct business support programs and spending across ministries seemed to be difficult for the Ontario Public Service to produce. Existing inventories were either limited to certain sectors or incomplete; some even stated that spending was “unknown.” Such weak transparency impedes accountability.

In the current system of public accounts, information is available on which companies have received government funding during a fiscal year. However, it is difficult to determine whether this funding was from a business support program or for other types of government activities. A clearer linkage between which program is supporting what company is preferable, so that the public can decide if their funds are being used appropriately.

Recommendation 11-16: Publish an annual list of direct business support programs, tax expenditures and related annual spending. In addition, a list of companies receiving direct financial support from the government, including total amount received, should be published.

We believe that the new framework for business support outlined above will have positive and demonstrable impacts for Ontario. The changes that are identified represent a significant but necessary shift in how government tries to help business. By following an objective of improving productivity, the outcome will hopefully be a better-focused, more flexible and more cost-effective use of public resources to achieve longer-term economic objectives. The impact of these changes should result in stronger, more productive firms able to produce higher-value products and services, while creating more higher-paying, skilled jobs for Ontarians.

Appendix 11.1 List of Business Support Expenditures1
Program 2006–07 Expenditures ($M) 2010–11 Expenditures ($M)
Ministry of Aboriginal Affairs    
Aboriginal Community Capital Grants Program 3.4 3.6
New Relationship Fund — Economic Development Funding 0.0 14.0
Ministry of Agriculture, Food and Rural Affairs    
Ontario Ethanol Growth Fund 2.5 72.0
Rural Economic Development Program 11.3 40.1
Business Risk Management (also known as Risk Management Program) 370.0 145.2
Growing Forward 0.0 32.4
Rural Summer Jobs 2.7 4.5
Rural Connections 0.0 4.5
Ministry of Citizenship and Immigration    
Provincial Nominee Program 0.0 1.2
Ministry of Economic Development and Innovation2    
Communities in Transition Initiative 1.6 1.0
Ontario Automotive Investment Strategy Fund (OAIS) 59.7 8.8
Eastern Ontario Development Fund (EODF) 0.0 11.8
Advanced Manufacturing Investment Strategy (AMIS) 2.0 7.1
Strategic Jobs and Investment Fund (SJIF) 0.0 3.0
Next Generation of Jobs Fund — Jobs and Investment Program N/A3 101.4
VQA Support Program 1.0 6.0
Ontario Wine Strategy Fund 2.0 3.0
Ontario Craft Brewers Opportunity Fund 0.0 2.0
Ontario Small Brewers Strategy Fund 1.0 0.9
Grants in Support of Business Development 0.3 5.2
Ontario Life Sciences Commercialization Strategy4 0.0 6.0
Next Generation of Jobs Fund — Biopharmaceutical Investment Program (BIP)(incl. interest incentives)4 0.0 6.8
Ontario Emerging Technologies Fund4 0.0 23.1
Innovation Demonstration Fund (incl. interest incentives)4 0.6 15.6
Grants in Support of Innovation and Commercialization4 0.4 4.9
Business Ecosystem Support Fund4 0.0 11.8
Commercialization and Innovation Network Support4 60.3 75.6
Water Technology Acceleration Project4 0.0 0.05
Ministry of Energy    
Ontario Clean Energy Benefit to Business6 0.0 299.8
Ministry of Finance    
Grants in Support of Economic and Financial Services Policy Research 0.4 11.7
Ministry of Natural Resources    
Forest Sector Prosperity Fund 2.7 17.4
Forest Access Roads 75.0 75.0
Ontario Wood Promotion Program 0.9 1.1
Ministry of Northern Development and Mines7    
Northern Ontario Heritage Fund 60.0 90.0
Export Assistance N/A 2.0
Northern Communities Investment Readiness Initiative 0.4 0.5
Northern Industrial Electricity Rate Program N/A 104.5
Forestry Loan/Guarantee Program (Bad Debt Expense) 0.4 7.3
Ministry of Tourism, Culture and Sport8    
Entertainment and Creative Cluster Partnership Fund 0.0 3.0
Interactive Digital Media Fund 0.0 2.0
Tourism Development Fund 1.6 1.4
International Fund 0.0 1.3
Other Ontario Media Development Corporation Funding 14.3 19.8
Grants in Support of Tourism Regions 0.0 65.0
Total 674.5 1,313.3

1 This list is not comprehensive. It reflects information in Ontario's 2010–11 Public Accounts and ministry responsibilities at the time of printing, but the Commission is aware of other programs for which information is not available. Where available, the former names of ministries are provided.

2 Formerly two separate ministries: Ministry of Economic Development and Trade (MEDT) and Ministry of Research and Innovation (MRI).

3 N/A indicates data were not available. This means the program name was not listed in the Public Accounts, either because the program did not exist at the time or the program name has changed.

4 Indicates programs formerly with MRI prior to the amalgamation of MEDT and MRI.

5 Program to be funded in 2011–12, budget to be determined.

6 The Ontario Clean Energy Benefit helps over four million residential consumers, and more than 400,000 small businesses, farms and other consumers by providing eligible consumers with a benefit equal to 10 per cent of the total cost of electricity on their bills, including tax, effective January 1, 2011.

7 Formerly the Ministry of Northern Development, Mines and Forestry. Responsibility for forestry was transferred to the Ministry of Natural Resources.

8 Formerly the Ministry of Tourism and Culture (MTC). MTC took responsibility for the "Sport" component from the Ministry of Health Promotion and Sport (MHPS) when MHPS was merged with the Ministry of Health and Long-Term Care.

1. The analysis in this section is drawn directly from Don Drummond and Derek Burtleton’s TD Economics Paper, “Time for a Vision of Ontario’s Economy: Much of the Foundation of Past Economic Success Has Crumbled,” Sept. 29, 2008, downloaded from http://www.td.com/document/PDF/economics/special/td-economics-special-db0908-ont.pdf.

2. The analysis in this section is drawn directly from Don Drummond’s paper, “Confessions of a Serial Productivity Researcher,” International Productivity Monitor 22, (Fall 2011), pp. 3–10, downloaded from http://www.csls.ca/ipm/22/IPM-22-Drummond.pdf.

3. Statistics Canada, Labour Force Survey (special tabulation for Ontario based on Organization for Economic Co-operation and Development (OECD) postsecondary education attainment classification), 2010.

4. 2011 Ontario Budget, p. 8, Ministry of Finance estimate. Following the OECD, knowledge-based industries include “high tech” manufacturing industries such as automotive manufacturing and aerospace, and “knowledge-intensive” service industries such as financial services, digital media and computer system design.

5. See Appendix 11.1 for the list and note that two ministries have since merged into one.

6. Based on data reported by Statistics Canada in its annual survey of scientific activities of the Ontario government, the province transferred an average of $386 million per year over 10 years from 2001–02 to 2010–11 for R&D performed by universities and hospitals. Direct assistance to business for R&D averaged $19 million per year for the same period.

7. “Prospects for Ontario’s Prosperity,” Task Force on Competitiveness, Productivity and Economic Progress, November 2011, p. 31.

8. Ministry of Finance estimate based on data from the 2010 Ontario Transparency in Taxation Report, the Federal Tax Expenditures and Evaluations 2010, the Canada Media Fund, Telefilm Canada, the Ontario Media Development Corporation, and Statistics Canada.