SECTION A: OVERVIEW

Table 1
2008 Budget — Numbers at a Glance

Ontario’s Economy:		Provincial Finances:
Projected Real GDP Growth, 2008	1.1%	2007–08 Interim Surplus	$600 million
Avg. Private-Sector Growth, 2008	1.2%	2008–09 Revenue Plan	$96.9 billion
Projected Real GDP Growth, 2009	2.1%	2008–09 Expense Plan	$96.2 billion
Jobs since October 2003	456,800	2008–09 Reserve	$750 million
Jobs Created in 2007	101,100	Debt1-to-GDP Ratio (03–04)	25.2%
Real GDP (2007 above 2003)	10%	Debt1-to-GDP Ratio (07–08)	18.1%
Real Disposable Income (2007 above 2003)	12%
Real Machinery and Equipment Investment (2007 above 2003)	41%
1 Debt is defined as accumulated deficit.

Ontario’s economy has been strong and resilient in recent years, with higher-than-forecast employment growth, and robust consumer and business investment spending. Modest economic growth is anticipated in 2008, as the Ontario economy faces a slowing U.S. economy along with ongoing challenges related to high oil prices and the strong Canadian dollar. Growth is expected to rebound after 2008 due to investments under the Ontario Government’s five-point plan to strengthen the economy and an improving U.S. economy.

With a $0.6 billion surplus projected for 2007–08, the Province is on track to exceed its planned fiscal target for the fourth year in a row and to achieve its third consecutive surplus. The Province remains resilient and is on track to post six consecutive balanced budgets between 2005–06 and 2010–11, for the first time since 1908.

SECTION B: 2007-08 INTERIM FISCAL PERFORMANCE

The government’s prudent approach to managing the Province’s finances continues to produce results. It has eliminated the $5.5 billion deficit it inherited in 2003–04 and is now on track to achieve its third consecutive surplus. A $0.6 billion surplus is forecasted for 2007–08, representing an in-year improvement of $1.0 billion from the 2007 Budget Plan.

The interim outlook indicates that revenue for 2007–08 is estimated to be $96.6 billion, a 5.5 per cent increase over the 2007 Budget forecast. Total expense is estimated to be $96.0 billion, 5.3 per cent higher than the 2007 Plan.

The 2007–08 interim results are based on the best information available as of early March 2008. Given the preliminary nature of these estimates, interim projections are subject to change when actual Provincial revenue and expense are finalized in the 2007–08 Public Accounts.

In-Year Revenue Performance

Total revenue in 2007–08 is estimated to be $96,563 million, $5,060 million higher than the 2007 Budget forecast. This is mainly due to stronger economic growth and higher revenues from processing past-year tax returns

Table 3
Summary of In-Year Changes to Revenue in 2007–08
($ millions)

		Interim 2007–08
Taxation Revenue
Corporations Tax	2,141
Personal Income Tax	1,381
Land Transfer Tax	235
Retail Sales Tax	198
Employer Health Tax	122
Ontario Health Premium	70
Tobacco Tax	(96)
Electricity Payments-in-Lieu of Taxes	(148)
All Other Taxes	100
		4,003
Government of Canada
Canada Health Transfer and Canada Social Transfer	473
All Other Government of Canada	285
		758
Income from Government Enterprises
Ontario Power Generation Inc. and Hydro One Inc.	90
All Other Government Business Enterprises	27
		117
Other Non-Tax Revenue		182
Total Revenue Change		5,060

Revenue Changes

• Corporations Tax (CT) revenues for 2007–08 are estimated to be $2,141 million above the 2007 Budget projection mainly due to stronger 2007 corporate profit growth, robust final tax remittance payments from the financial sector in December and stronger assessment payments related to prior years. The CT revenue change also reflects the impact of a number of tax measures since the 2007 Budget, including 2007 federal budget measures paralleled by Ontario, tax measures announced in the 2007 Economic Outlook and Fiscal Review, and proposed new measures as outlined in Chapter III: Tax Support for Families and Business.
• Personal Income Tax (PIT) revenues are estimated to be $1,381 million above forecast in 2007–08 mainly due to stronger 2007 wages and salaries growth and higher revenues from processing 2006 tax returns. Since the 2007 Budget, processing of 2006 and prior years’ tax returns has increased 2006–07 revenues above Budget estimates, raising the base upon which growth is applied in forecasting PIT revenues for 2007–08 and beyond. Higher revenues than estimated in the 2006–07 Public Accounts result in a one-time increase to PIT revenues of $517 million in 2007–08 as variances from past Public Accounts estimates are included in the current year. Personal Income Tax revenues in 2007–08 also include a $120 million payment from the federal government resulting from corrections to past years’ tax entitlements. Also included is the impact of tax measures announced in the 2007 federal budget that Ontario paralleled, tax measures announced in the 2007 Economic Outlook and Fiscal Review, and proposed new Ontario tax measures as outlined in Chapter III: Tax Support for Families and Business.
• Land Transfer Tax (LTT) revenues are estimated to be $235 million above forecast, reflecting a robust Ontario housing resale market that set new records in 2007. The LTT change captures the impact of tax measures announced in the 2007 Economic Outlook and Fiscal Review.
• Retail Sales Tax (RST) revenues are estimated to increase by $198 million due to stronger consumer spending in 2007. The RST change captures the impact of previously announced tax measures and new tax measures as outlined in Chapter III: Tax Support for Families and Business.
• Employer Health Tax revenues are estimated to be $122 million above the 2007 Budget projection due to stronger growth in employment and wages.
• Ontario Health Premium revenues are estimated to increase by $70 million above forecast, largely reflecting stronger growth in 2007 wages and salaries.
• Tobacco Tax revenue is estimated to be $96 million below forecast based on revenue performance to date. This reflects a combination of Ontarians’ healthier lifestyles and contraband activity in the cigarette market. Enforcement measures to combat illegal activity continue. For more details see Chapter III: Tax Support for Families and Business.
• Electricity Payments-In-Lieu of Taxes (PILs) are estimated to be $148 million below forecast, largely due to lower payments from Hydro One Inc. (HOI) and Ontario Power Generation Inc. (OPG). Lower HOI PILs reflect lower net income as a result of the Ontario Energy Board’s decision on HOI’s transmission rate application, including a lower allowed rate of return on equity for HOI’s transmission business. Lower OPG PILs are due to the corporation’s special December 2007 contribution to the nuclear used-fuel segregated fund, established in 2003 for the costs of long-term used-fuel disposal. The latter impact on PILs is offset by an equivalent increase in OPG net income.
• All Other Tax revenues are estimated to be $100 million above forecast, largely due to higher Mining Profits Tax revenues arising from robust metal prices. Partially offsetting this increase were lower-than- expected Gasoline Tax and Fuel Tax revenues, due respectively to higher gasoline pump prices and weaker manufacturing shipments.
• Canada Health Transfer (CHT) and Canada Social Transfer (CST) revenues are estimated to be $473 million above forecast mainly due to revised estimates of current- and past-year entitlements under these programs. Revised estimates of Ontario’s entitlements under CHT and CST are largely due to a lower estimated share of the Canada-wide tax base in 2006 boosting Ontario’s share of federal funding. This results in a $339 million increase in CHT and CST, including a one-time revenue increase of $239 million as variances from past Public Accounts estimates are reflected in the current year. In addition, 2007 federal budget changes to the calculation of entitlements under CHT and CST result in an additional $134 million in revenues.
• The $285 million increase above forecast in Other Government of Canada Transfers in 2007–08 is largely related to the 2007 federal budget announcement of funds for the patient wait-times guarantee and a program to provide the human papillomavirus (HPV) vaccine, as well as higher transfers for infrastructure projects and new federal transfers related to Ontario’s capital tax elimination.
• Hydro One Inc. and Ontario Power Generation’s combined net income is estimated to be $90 million above forecast largely from higher OPG net income due to the special contribution to the nuclear used-fuel segregated fund, the impact of which is offset by an equivalent decrease in OPG PILs. The increase in OPG’s net income more than offsets lower HOI net income related to the Ontario Energy Board’s decision noted above.
• All Other Government Business Enterprises net income increased due to higher net incomes from the Ontario Lottery and Gaming Corporation (OLG) and Liquor Control Board of Ontario (LCBO).
• Other Non-Tax Revenue is expected to be $182 million above forecast largely due to higher recoveries of prior-year expenditures, reimbursements from municipalities for Provincial spending, and consolidated sales and rentals.

In-Year Expense Performance

Total expense in 2007–08 is currently projected to be $95,963 million, an increase of $4,810 million from the 2007 Budget forecast. This increase primarily reflects government investments that strengthen Ontario’s economic growth through its five-point economic plan.

Table 4
Summary of In-Year Expense Changes in 2007–08
($ millions)

	Interim 2007–08
Program Expense Changes:
Infrastructure and Transportation	1,923.4
Postsecondary Education and Training Sector	758.4
Strengthening Ontario’s Industries	516.2
Children’s and Social Services/Social Housing	493.4
Justice Sector	378.4
Aboriginal Affairs	207.3
Health Sector	178.2
Strengthening the Environment for Innovation	71.2
Northern Development and Natural Resources	64.9
Business and Economic Development	57.0
Greener Ontario	35.8
Other (net) Program Expense Changes	282.9
Total Program Expense Changes	4,967.2
Interest on Debt Savings	(157.0)
Total Expense Changes	4,810.2
Note: Numbers may not add due to rounding.

Expense Changes

Since the 2007 Budget forecast, total expense increased by $4,810.2 million, largely as a result of a $4,967.2 million increase in program expense, offset by $157.0 million in interest on debt savings. Highlights of key expense changes include the following:

• In 2007–08, infrastructure and transportation expense increased by a net $1,923.4 million. This includes $1,104.0 million for new municipal transit, including the funding announced in the 2007 Economic Outlook and Fiscal Review; $400.0 million for municipal roads and bridges, as announced in this Budget; $450.0 million in funding for the Municipal Infrastructure Investment Initiative; and an additional $32.4 million to assist municipalities in addressing immediate transportation infrastructure demands.
• The postsecondary education and training sector, including the net expense of Ontario’s colleges of applied arts and technology, increased by a net $758.4 million in 2007–08. This increase is primarily related to investments in Ontario’s colleges and universities, including $353.5 million to support energy-efficiency improvements and campus renewal projects at postsecondary institutions, and $289.4 million for strategic capital investments at colleges and universities.
• Investments to strengthen Ontario’s industries totalled $516.2 million in 2007–08 and include:
  • A net in-year expense increase of $335.1 million for the agriculture sector, which includes $150.0 million in funding to provide financial assistance to help cattle, hog and horticulture farmers manage the effects of current market conditions, as well as initiatives to strengthen competitiveness and $135.0 million in support for grain and oilseed farmers.
  • An expense increase of $102.2 million for culture and tourism. This change is largely related to investments in libraries as well as festivals and marketing initiatives that aim to attract new domestic and international visitors to communities and major attractions across the province.
  • Investments of an additional $78.9 million in the manufacturing sector. The funding includes $25 million to the Yves Landry Foundation for training programs to improve the productivity and adaptability of employees. Funding is also provided to help firms reduce costs and improve competitiveness.
• Children’s and social services expense increased by a net $493.4 million in 2007–08 largely to support the delivery of social assistance, developmental services and child care, and provide one-time funding to municipalities to rehabilitate their social housing stock.
• Justice sector expense increased by $378.4 million in 2007–08, primarily due to a one-time provision for the backlog of cases in the Criminal Injuries Compensation Board, capital investments, and various justice initiatives and community safety enhancements.
• In 2007–08, Aboriginal Affairs expense increased by a net $207.3 million. This change is primarily related to the Ontario First Nations Gaming Revenue Sharing Financial Agreement, which will provide a revenue source for Ontario First Nations to support health, education, community, economic and cultural development.
• A net in-year expense change of $178.2 million in the health sector is primarily due to the introduction of the new $39.2 million voluntary human papillomavirus (HPV) vaccination program, a $14.1 million investment in 10 residential hospices to provide end-of-life care in a home-like environment, $9.0 million in funding for the development of the new expanded Toronto’s Ronald McDonald House, as well as investments to accommodate pressures related to the Ontario Health Insurance Plan (OHIP) program and the Long-Term Care Homes sector.
• To strengthen the environment for innovation, government expense increased by a net $71.2 million in 2007–08. This change includes strategic investments in research, innovation and commercialization initiatives, including the Ontario Institute for Cancer Research, the Institute for Quantum Computing and the Windsor Institute for Diagnostic Imaging.
• Support for northern development and natural resources increased by a net $64.9 million in 2007–08, largely to fund additional forest fire-fighting due to the above-average number of fires this year; address associated renewal and legal obligations under the Crown Forest Sustainability Act; and fund the startup of the Molecular Medicine Research Centre in Thunder Bay.
• Business and economic development expense has increased by $57.0 million in 2007–08. This increase is primarily the result of one-time support for the University of Toronto – Rotman School of Management’s new Prosperity Institute. The Institute will develop capacity for interdisciplinary research on the creation of jurisdictional economic advantage. Support is also provided for communities facing significant challenges, and for a new Global Expansion Program to assist companies reach export markets.
• In 2007–08, expense related to promoting a greener Ontario increased by $35.8 million. This net in-year increase is largely supporting the Go Green climate change plan and the development of drinking water source protection plans.
• Other program expense changes amount to a net increase of $282.9 million in 2007–08, reflecting the balance of changes in program expense. Highlights of additional spending captured in this change include investments in government information technology, international disaster relief and the Ontario Education Collaborative Marketplace program.
• Interest on Debt, at $8,966.0 million, is $157.0 million lower than the 2007 Budget Plan. This amount reflects the impact of lower interest rates and the cost-effective management of the borrowing program, partially offset by the preliminary allowance of $100 million for asset-backed commercial paper as reported in the 2007 Economic Outlook and Fiscal Review.

SECTION C: ONTARIO’S ECONOMIC OUTLOOK

Outlook for Strengthening Ontario Economic Growth

This section outlines Ontario’s current macroeconomic outlook, which is the basis for the fiscal plan. The Ministry of Finance is projecting real GDP growth of 1.1 per cent in 2008, 2.1 per cent in 2009 and 2.7 per cent in 2010.

Ontario real GDP rose by an estimated 2.1 per cent in 2007, 0.5 percentage points above the Ministry’s 2007 Budget forecast. Stronger-than-expected growth occurred despite a significantly more challenging external environment, including a stronger Canadian dollar, higher oil prices, weakening U.S. growth and financial market disruptions resulting from rising sub-prime mortgage defaults in the United States.

Table 5
Ontario Economic Outlook
(Per Cent)

	2003	2004	2005	2006	2007	2008p	2009p	2010p
Real GDP Growth	1.4	2.5	2.9	2.1	2.1e	1.1	2.1	2.7
Nominal GDP Growth	3.2	4.8	3.9	3.9	5.1e	2.8	3.9	4.6
Employment Growth	3.0	1.7	1.3	1.5	1.6	1.0	1.1	1.3
CPI Inflation	2.7	1.9	2.2	1.8	1.8	1.4	1.9	2.0
e = estimate; p = Ministry of Finance planning projection. Sources: Statistics Canada and Ontario Ministry of Finance.

Private-Sector Forecasts Call for Continued Growth

Economic projections are a key building block for the government’s fiscal plan. To ensure reasonable and accountable economic projections, the Ministry of Finance consults with private-sector forecasters.
The Ontario Economic Forecast Council¹ provides expert advice on the macroeconomic forecasts and assumptions used to develop the Budget. The Minister of Finance met with Council members and other private-sector forecasters twice over the last year, in the process of preparing the 2007 Economic Outlook and Fiscal Review and the 2008 Budget. Council members reviewed the economic assumptions underlying the 2008 Budget to verify that the forecast was a reasonable basis for planning.

Table 6
Private-Sector Forecasts for Ontario Real GDP Growth
(Per Cent)

	2008	2009	2010
Conference Board of Canada (February)	2.1	2.9	3.4
Global Insight (February)	1.4	1.9	2.3
Centre for Spatial Economics (January)	1.3	2.0	2.4
University of Toronto (February)	0.4	2.5	3.2
RBC Financial Group (February)	0.9	2.2	–
Scotiabank Group (February)	1.4	1.7	–
TD Bank Financial Group (January)	1.5	2.5	–
BMO Capital Markets (February)	0.9	2.4	–
CIBC World Markets (February)	1.3	–	–
Private-Sector Survey Average	1.2	2.3	2.8
Ontario’s Planning Assumption	1.1	2.1	2.7
Sources: Ontario Ministry of Finance and Ontario Ministry of Finance Survey of Forecasts (February 29, 2008).

Challenging External Economic Environment

Ontario’s Resilience in the Face of Global Economic Challenges

The short-term Ontario economic outlook is heavily influenced by external factors such as oil prices, the Canadian dollar exchange rate, interest rates and U.S. economic growth. The following table shows the typical range for the first- and second-year impacts of these external factors on Ontario real GDP growth. These estimates are based on historical relationships and illustrate the upper and lower limits for the average response. They show the implications of changes in key assumptions in isolation from changes to other external factors. The combination of changing circumstances can also have a substantial bearing on the actual outcome.

Table 7
Impacts of Changes in Key Assumptions on Ontario Real GDP Growth¹
(Percentage Point Increase)

	First Year	Second Year
Canadian Dollar Depreciates by Five Cents US	0.1 to 0.8	0.5 to 1.2
World Crude Oil Prices Decrease by $10 US per Barrel	0.1 to 0.5	0.1 to 0.5
U.S. Real GDP Growth Increases by One Percentage Point	0.3 to 0.7	0.4 to 0.8
Canadian Interest Rates Decrease by One Percentage Point	0.1 to 0.5	0.2 to 0.6
1 Impacts based on changes being sustained. Source: Ontario Ministry of Finance.

U.S. Growth Set to Strengthen in the Second Half of 2008

The state of the U.S. economy is important to Ontario. In 2007, almost 84 per cent of the province’s international merchandise exports went to the United States. A decline in U.S. residential investment, slower consumer spending and weaker business investment, as well as financial market challenges arising from increasing mortgage defaults, caused U.S. real GDP growth to slow to 2.2 per cent in 2007.

Most economists expect the weakness in the U.S. economy to be short-lived. The U.S. Federal Reserve has cut its key interest rate by 225 basis points since September 2007 to help stimulate the economy and stem the slump in housing. Lower interest rates combined with a large fiscal stimulus, including tax rebates, are expected to boost consumer spending. Private-sector forecasters, on average, expect U.S. real GDP to grow by 1.7 per cent in 2008, with growth expected to be soft in the first half of 2008 and to rebound solidly in the second half of the year. Growth in the United States is projected to rebound to 2.6 per cent in 2009 and 2.8 per cent in 2010.

Oil Prices Expected to Remain High

Ontario imports virtually all the crude oil it consumes, and higher prices for this key commodity raise costs for businesses and consumers. However, elevated oil prices do not pose the same risk as they did in the past — the Ontario economy is over 50 per cent more energy efficient than it was during the oil shocks in the 1970s.

Oil prices averaged $72.30 US per barrel in 2007, rising for the sixth consecutive year. Oil prices climbed from less than $50 US in mid-January 2007 to over $110 US in early March 2008.

Oil prices have increased and are expected to remain elevated over the forecast horizon due to restrained supply growth and strong global demand. Ongoing geopolitical risks in key oil-producing regions, continued production restraint by OPEC (Organization of the Petroleum Exporting Countries) and slow growth of non-OPEC capacity will limit global supply. Rising global demand, particularly from rapidly emerging economies such as China and India, will keep oil markets tight and vulnerable to a major supply disruption.

The average private-sector forecast for oil prices is $84 US per barrel in 2008, $77 US per barrel in 2009 and $79 US per barrel in 2010 (annual averages). Ministry of Finance planning projections (see chart above) are prudent compared to the average private-sector forecast. Significant uncertainty persists in oil markets and analysts’ projections for the annual average in 2008 range from less than $77 US per barrel to more than $92 US per barrel.

The Canadian-U.S. Exchange Rate Around Parity

The Canadian dollar has increased in value since 2002 due primarily to higher oil and commodity prices and more recently due to weakness in the U.S. economy. The high dollar has created challenges for Ontario’s export-oriented manufacturing, agriculture, forestry and tourism sectors.

The higher dollar benefits Ontario businesses importing goods and services, including lowering the cost of imported machinery and equipment goods.

The Canadian dollar averaged 93.1 cents US in 2007, rising for the fifth straight year. Forecasters on average call for a Canadian dollar of 98.7 cents US in 2008, 96.2 cents US in 2009 and 97.9 cents US in 2010. Ministry of Finance planning projections (see chart above) are prudent compared to the average private-sector forecast. Forecasts for the Canadian dollar in 2008 range from a low of 96 cents US to a high of 103 cents US.

Ontario’s Exports to Overcome Short-Term Challenges

Along with weaker U.S. demand and growing competition from newly industrialized countries, exporters have been faced with the competitive challenge of the strong Canadian dollar. Exporters have responded by shifting to higher value-added products, entering new international markets and trading more with the rest of Canada.

Over the past five years, the value of Ontario’s merchandise exports to the United States has declined by 12.3 per cent, while exports to other countries have more than doubled. Last year, the value of Ontario’s merchandise exports fell by 0.2 per cent as exports to the United States declined by 3.6 per cent, while exports to the rest of the world increased by 21.6 per cent.

Imports have increased rapidly over the last five years, reflecting a strengthening Canadian dollar that has reduced the relative cost of imported goods and services; greater investment in productivity-enhancing machinery and equipment, most of which is imported; and buoyant household demand.

With U.S. demand slipping and a strong Canadian dollar, the real value of Ontario’s exports is expected to be flat this year. The opening of the new Toyota plant in Woodstock, scheduled to begin production in the fall of 2008, will give exports a lift. Stronger U.S. domestic demand in 2009 should increase exports of autos and durable goods. Robust growth in Western Canada will continue to boost Ontario interprovincial exports. Ontario real exports are projected to increase by 2.5 per cent in 2009 and 2.9 per cent in 2010.

Interest Rates Lower in 2008

The current outlook is for interest rates to decline in 2008 and rise moderately afterwards. The Bank of Canada cut its benchmark rate by 100 basis points between December and the beginning of March, dropping the Canadian overnight lending rate to 3.50 per cent. Further cuts are expected. According to the Bank of Canada, domestic demand in Canada remains firm, but the Bank acknowledges that further monetary stimulus will likely be required in the near term.

Heightened risk aversion in financial markets, combined with slower economic growth, has led to lower yields on secure government assets including treasury bills and government bonds. The fall in interest rates for government debt has not been matched by declines in interest rates for private-sector debt. As of early March, the Canadian three-month treasury bill rate declined by around 220 basis points since August 2007 while the three-month commercial paper rate declined by about 120 basis points. Private-sector forecasters project Canadian three-month treasury bill rates will average 3.3 per cent in 2008, down from 4.2 per cent in 2007. Once economic and credit conditions improve, interest rates are projected to rise but remain well below historical averages. Forecasters expect three-month treasury bill rates to rise to 3.8 per cent in 2009 and 4.5 per cent in 2010. Ten-year Government of Canada bond yields are forecast to average 3.9 per cent in 2008, 4.5 per cent in 2009 and 5.2 per cent in 2010. Ministry of Finance planning projections (see table above) are consistent with the average private-sector forecast.

Inflation Expected to Drop in 2008

Ontario’s consumer price index (CPI) inflation rate has been low and stable in recent years, averaging 1.8 per cent in both 2006 and 2007.

Inflation is expected to remain low over the forecast horizon. Ontario’s CPI inflation rate is expected to fall to a 10-year low of 1.4 per cent in 2008, largely reflecting the impact of the one percentage point cut in the federal Goods and Services Tax (GST). Once the 2008 GST cut no longer affects year-to-year price changes, Ontario’s CPI inflation rate is expected to average 1.9 per cent in 2009 and 2.0 per cent in 2010.

Continued Strong and Resilient Domestic Economy

Strong Investment to Lead Growth

Business investment remained strong in 2007 and is expected to be a leading contributor to growth in the Ontario economy in coming years. Real investment in commercial and industrial structures expanded 4.6 per cent, while real investment in machinery and equipment grew 8.4 per cent.

Healthy corporate balance sheets and the rising Canadian dollar have encouraged business investment. Corporate profits rose by an average of 4.7 per cent annually since 2003, and are projected to grow by an average of 4.4 per cent annually from 2008 through 2010. Growth in corporate profits should continue to provide a healthy financial environment for business investment in Ontario. Interest rates are projected to decline this year, lowering borrowing costs for business expansion and upgrading machinery and equipment.

The higher Canadian dollar lowers the costs of imported machinery and equipment, making it more attractive for business to invest in leading-edge technologies. Real investment in machinery and equipment is projected to rise by 6.0 per cent in 2008 and by an average of 4.3 per cent a year in 2009 and 2010. Commercial and industrial construction is also expected to remain strong. Real spending on business construction is expected to rise by 2.5 per cent in 2008 and by an average of 2.4 per cent a year in 2009 and 2010.

Employment Growth to Continue

Since October 2003, the Ontario economy has created 456,800 net new jobs — 383,500, or 84 per cent, have been full time. There has been strong employment growth in sectors paying above-average wages, including finance (47,800), education (93,500), health care and social assistance (71,100), construction (71,400), and professional services (62,000).

The Ontario economy created 101,100 net new jobs in 2007, a gain of 1.6 per cent — the largest increase since 2004. Private-sector forecasters expect continued job growth. The Ministry of Finance is projecting employment will increase by 1.0 per cent this year, 1.1 per cent in 2009 and 1.3 per cent in 2010, which translates into a total gain of 230,000 net new jobs over this three-year period. The annual unemployment rate is projected to fall to 6.3 per cent by 2010.

Household Income and Spending to Increase

The healthy labour market has resulted in solid wage gains. Since 2003, the average hourly wage rate has increased by 12.7 per cent. Steady employment gains and rising wages led to a 4.9 per cent increase in labour income in 2007. Labour income is forecast to increase by 3.4 per cent in 2008 and to pick up over the medium term, averaging 4.0 per cent in 2009 and 2010.

Rising incomes will support growing household spending. Real consumer spending grew by 3.4 per cent in 2007 and is expected to average 2.6 per cent growth a year between 2008 and 2010, in line with after-tax income growth.

Healthy Housing Market Conditions

The healthy pace of activity in the Ontario housing market continued in 2007. Home resales hit a record high in 2007, climbing 9.5 per cent. Robust activity in the resale market supported strong price gains, with the average resale price rising 7.6 per cent to $299,500 in 2007. Last year, housing starts moderated to 68,100 units, from 73,400 units in 2006.

Population growth is projected to result in the creation of 67,700 net new Ontario households a year from 2008 to 2010, supporting demand for housing. Housing starts are expected to average 64,300 per year over the 2008 to 2010 period.

Resales are projected to ease slightly in 2008 and 2009 before rising in 2010. The level of home resales over the 2008 to 2010 period is expected to remain almost four per cent higher than the average from 2003 to 2007. The average Ontario home resale price is projected to increase from $311,400 in 2008 to $328,900 in 2010. Housing affordability is projected to remain steady in 2008 as lower interest rates and rising incomes are expected to offset rising home prices.

Details of the Ontario Economic Outlook

The following table shows key details of the Ministry of Finance’s economic outlook for the 2008 to 2010 period.

Table 9
The Ontario Economy, 2005 to 2010
(Per Cent Change)

	Actual			Projected
	2005	2006	2007	2008	2009	2010
Real Gross Domestic Product	2.9	2.1	2.1e	1.1	2.1	2.7
Personal Consumption	3.6	3.5	3.4e	2.5	2.6	2.6
Residential Construction	1.8	1.1	0.6e	(0.5)	1.3	2.5
Non-residential Construction	3.6	10.4	4.6e	2.5	2.0	2.9
Machinery and Equipment	9.1	11.2	8.4e	6.0	4.1	4.6
Exports	2.2	(0.2)	1.4e	0.0	2.5	2.9
Imports	3.9	2.7	3.8e	2.2	2.7	3.0
Nominal Gross Domestic Product	3.9	3.9	5.1e	2.8	3.9	4.6
Other Economic Indicators
Retail Sales	4.8	4.1	4.0	3.4	3.7	4.1
Housing Starts (000s)	78.8	73.4	68.1	64.0	63.0	66.0
Personal Income	4.5	4.8	5.0e	3.1	4.0	4.4
Labour Income	5.0	4.5	4.9e	3.4	3.9	4.1
Corporate Profits	(2.7)	3.2	8.5e	4.0	4.9	4.5
Consumer Price Index	2.2	1.8	1.8	1.4	1.9	2.0
Labour Market
Employment	1.3	1.5	1.6	1.0	1.1	1.3
Job Creation (000s)	81	95	101	68	76	87
Unemployment Rate (per cent)	6.6	6.3	6.4	6.6	6.5	6.3
e = estimate.
Sources: Statistics Canada, Canada Mortgage and Housing Corporation and Ontario Ministry of Finance.

Table 10
Changes in Key Economic Forecast Assumptions,
2007 Budget Compared to 2008 Budget (Per Cent Change)

	2007		2008		2009
	2007 Budget	Actual	2007 Budget	2008 Budget	2007 Budget	2008 Budget
Real Gross Domestic Product	1.6	2.1e	2.8	1.1	3.1	2.1
Nominal Gross Domestic Product	3.1	5.1e	4.7	2.8	4.7	3.9
Retail Sales	3.6	4.0	4.6	3.4	4.6	3.7
Housing Starts (000s)	68.0	68.1	67.0	64.0	68.0	63.0
Personal Income	3.9	5.0e	4.7	3.1	4.9	4.0
Labour Income	3.9	4.9e	4.8	3.4	4.9	3.9
Corporate Profits	1.1	8.5e	2.4	4.0	2.5	4.9
Employment	1.1	1.6	1.4	1.0	1.6	1.1
Job Creation (000s)	71	101	90	68	109	76
Key External Variables
Crude Oil ($ US per Barrel)	61.0	72.3	61.0	85.0	61.0	80.0
U.S. Real Gross Domestic Product	2.7	2.2	3.0	1.7	3.1	2.6
Canadian Dollar (Cents US)	86.0	93.1	87.5	100.0	88.0	98.0
3-month Treasury Bill Rate	4.1	4.2	4.3	3.3	4.5	3.8
10-year Government Bond Rate	4.2	4.3	4.7	3.9	5.1	4.5
e = estimate.
Sources: Statistics Canada, Canada Mortgage and Housing Corporation, Bank of Canada, New York Mercantile Exchange, U.S. Bureau of Economic Analysis, Blue Chip Economic Indicators and Ontario Ministry of Finance.

Ontario’s real GDP grew by 2.1 per cent in 2007 — 0.5 percentage points higher than the Ministry’s 2007 Budget forecast despite a more challenging economic environment, including weaker U.S. growth, the stronger dollar, higher oil prices and credit tightening. The labour market was healthy, with employment increasing by 1.6 per cent — 0.5 percentage points above the Budget forecast and resulting in 30,000 more jobs than expected. Income growth was 5.0 per cent in 2007, 1.1 percentage points higher than the Budget forecast. Corporate profits were much healthier, rising by 8.5 per cent, significantly stronger than the prudent Budget projection of 1.1 per cent growth. Nominal GDP rose by 5.1 per cent, two percentage points above the Budget projection.

Forecasts for growth in 2008 and 2009 are lower than projected at the time of the 2007 Budget, reflecting significantly weaker U.S. growth, the higher Canadian dollar and higher oil prices. Real GDP growth has been revised down 1.7 percentage points in 2008 and 1.0 percentage point in 2009 since the 2007 Budget. Similarly, nominal GDP has been lowered 1.9 percentage points in 2008 and 0.8 percentage points in 2009. The growth of wages and salaries along with retail sales, both key revenue drivers, are projected to be lower than projected in the 2007 Budget, but corporate profits, also an important revenue driver, are forecast to grow at a stronger pace than projected in the 2007 Budget.

SECTION D: ONTARIO’S REVENUE OUTLOOK

The medium-term revenue forecast reflects the Ministry of Finance economic outlook for Ontario and estimated impacts of government policy decisions. Total revenues are projected to increase by $6.9 billion between 2008–09 and 2010–11, or 3.5 per cent a year on average.

Table 11
Summary of Medium-Term Outlook
($ billions)

Revenue	Interim 2007–08	Plan 2008–09	Outlook
			2009–10	2010–11
Taxation Revenue	68.3	69.0	71.9	74.5
Personal Income Tax	24.7	25.2	26.6	28.1
Retail Sales Tax	16.9	17.2	18.1	19.0
Ontario Health Premium	2.7	2.8	2.9	3.1
Corporations Tax	12.7	12.3	12.5	12.3
All Other Taxes	11.3	11.5	11.8	12.0
Government of Canada	16.9	16.5	17.0	17.7
Income from Government Enterprises	4.1	4.1	4.3	4.6
Other Non-Tax Revenue	7.3	7.4	7.3	7.0
Total Revenue	96.6	96.9	100.6	103.8
Note: Numbers may not add due to rounding.
Source: Ontario Ministry of Finance.

The Personal Income Tax (PIT) revenue forecast is consistent with the economic outlook for wages and salaries growth. Personal Income Tax revenues are boosted in 2007–08 by a one-time adjustment of $0.5 billion due to underestimation of 2006–07 PIT revenues in the Public Accounts and a further $0.1 billion due to a payment from the federal government relating primarily to a correction to Ontario’s 2005 tax entitlements. The PIT revenue forecast reflects previously announced tax measures and measures proposed in this Budget as discussed in Chapter III: Tax Support for Families and Business. The PIT revenue base tends to grow at a faster rate than incomes due to the progressive structure of the tax system.

Table 12
Personal Income Tax Revenue Outlook
($ billions)

	Interim 2007–08	Plan 2008–09	Outlook
			2009–10	2010–11
Total Projected Revenue	24.7	25.2	26.6	28.1
Measures Included in Total1	–	(0.1)	(0.1)	(0.2)
Adjustments for Prior Years	0.5	–	–	–
Other One-Time Revenue	0.1	–	–	–
Base Revenue2	24.0	25.2	26.7	28.3
Base Revenue Growth (Per Cent)	5.7	5.1	5.8	5.9
Wages and Salaries Growth (Per Cent)	4.8	3.4	3.9	4.1
1 Represents the incremental revenue impact of all tax measures, announced previously and in this fiscal update, relative to their impact on revenue in 2007–08. 2 "Total projected revenue" less the impact of tax measures or other one-time factors such as prior-year adjustments. Base revenue reflects the impact of underlying macroeconomic factors. Note: Numbers may not add due to rounding.

Retail Sales Tax (RST) revenue growth is based on the forecast for increased spending by households and businesses. The RST outlook reflects the estimated impact of previously announced tax measures and measures proposed in this Budget as discussed in Chapter III: Tax Support for Families and Business.

The Ontario Health Premium forecast is based on the outlook for rising employment and personal incomes.

The Corporations Tax (CT) revenue outlook largely reflects the outlook for pre-tax corporate profits. Corporations Tax revenues in 2007–08 include $0.6 billion in one-time revenue largely due to strong tax assessment payments related to past years. The CT revenue outlook also reflects previously announced tax measures and measures proposed in this Budget as discussed in Chapter III: Tax Support for Families and Business.

Table 13
Corporations Tax Revenue Outlook
($ billions)

	Interim 2007–08	Plan 2008–09	Outlook
			2009–10	2010–11
Total Projected Revenue	12.7	12.3	12.5	12.3
Measures Included in Total1	(0.2)	(0.4)	(0.6)	(1.2)
Adjustments for Prior Years	0.6	–	–	–
Other One-Time Revenue	–	–	–	–
Base Revenue2	12. 3	12.7	13.1	13.5
Base Revenue Growth (Per Cent)	6.2	3.0	3.2	3.1
Corporate Profit Growth (Per Cent)	8.5	4.0	4.9	4.5
1 Represents the incremental revenue impact of all tax measures, announced previously and in this fiscal update, relative to their impact on revenue in 2007–08. 2 "Total projected revenue" less the impact of tax measures or other one-time factors such as prior-year adjustments. Base revenue reflects the impact of underlying macroeconomic factors. Note: Numbers may not add due to rounding.

The forecast for All Other Taxes is based on the economic growth outlook outlined in Section C: Ontario’s Economic Outlook. All Other Taxes include, for example, the Employer Health Tax, Gasoline and Fuel Taxes, and the Land Transfer Tax. The forecast is developed on an item-by-item basis. For example, the forecast for Employer Health Tax revenues is based on the outlook for wages and salaries growth. The forecast for all other taxes takes into account the estimated impact of previously announced tax measures and measures proposed in this Budget as discussed in Chapter III: Tax Support for Families and Business.

The forecast for Government of Canada transfers is based on the assumption that existing federal transfer agreements are renewed. The outlook includes the 2007 federal budget announcement of funding for the patient wait-times guarantee trust and an immunization program to provide the human papillomavirus (HPV) vaccine as well as 2008 federal budget funding for community development and public transit. The outlook also assumes that the federal government will continue to fund previously announced time-limited transfers at 2008–09 levels. These revenues help fund the expenditures projected in this Budget.

The outlook for Net Income from Government Business Enterprises is based on information enterprises provide. Total net income is projected to grow by an annual average rate of 5.1 per cent between 2008–09 and 2010–11. Net income from the Ontario Lottery and Gaming Corporation (OLG) is impacted by the strength of the Canadian dollar and cross-border competition. Net Income of the Liquor Control Board of Ontario (LCBO) is projected to grow steadily based on increasing sales. Net incomes from OPG and Hydro One are projected to increase as their returns on equity are expected to improve and as new generation, transmission and distribution investments come into service.

The forecast for Other Non-Tax Revenue is based on information that government ministries and provincial agencies provide. Between 2008–09 and 2010–11, other non-tax revenues are forecast to decrease by $0.3 billion. This is mainly due to the government’s decision to upload the municipal share of ODSP and ODB costs.

Uncertainty in Forecasting Corporations Tax Revenue

Variances from revenue projections arise due to the inherent uncertainties of predicting the future and lags in information flows. These pose particular challenges in forecasting Corporations Tax revenues that are clearly demonstrated by the experience of Canadian jurisdictions in 2006–07, summarized in Chart 9. On average, other provinces’ Corporations Tax revenues varied by 24.2 per cent from forecast. Ontario’s variance was significantly lower at +10.2 per cent.

The Corporations Tax payments system operates with a considerable lag between changes in the underlying tax entitlements and the tax payments, so it can take a great deal of time before current revenue performance is fully understood. For example, most of the financial sector’s final tax remittances arrive at the end of December, and most of the non-financial sector’s remittances arrive in late February, resulting in considerable revenue uncertainty late in the fiscal year. Uncertainty remains due to amounts to be received after the government’s fiscal year-end, such as payments on filing 2007 tax returns (largely between April and June) and subsequent tax assessment payments and refunds arising from processing those tax returns (largely between July and December). This uncertainty is one of the principal reasons for the proposed Investing in Ontario Act, 2008, which would allow a portion of any positive variance between interim and actual 2007–08 revenues to be devoted to priority investments as outlined in Section G: Accountability, Transparency and Fiscal Management.

Sources of Medium-Term Revenue Change Since 2007 Ontario Budget

Table 14
Summary of Medium-Term Revenue Change Since 2007 Budget
($ billions)

	Interim 2007–08	2008–09	2009–10	2010–11
Key Revenue Changes Since 2007 Ontario Budget
Prior-Year Tax Return Processing — Ongoing	1.7	1.9	2.0	2.0
Prior-Year Tax Return Processing — One Time	1.4
Stronger 2007 Economic Growth	2.2	2.4	2.5	2.7
Slower Economic Growth in 2008 and 2009	0.0	(1.1)	(1.5)	(2.0)
Tax Policy Measures	(0.9)	(1.1)	(0.8)	(0.7)
Government of Canada Transfers (2007 and 2008 Federal Budgets)	0.3	0.3	0.4	0.2
Other	0.3	(0.2)	0.3	0.5
Total Revenue Changes	5.1	2.2	2.8	2.7
Note: Numbers may not add due to rounding.

The medium-term forecast for total revenues is higher in each year compared to the 2007 Budget.

Since the 2007 Bud