The Ontario government will incur a deficit of $14.1 billion in 2009-2010 as it invests $34 billion over two years and launches significant tax reform, Finance Minister Dwight Duncan announced on Thursday.

In the province’s 2009 budget, the government projects a deficit of $3.9 billion in 2008-09, and $14.1 billion next year, and warns that it will take time for the province to return to balanced budgets.

“The global crisis has reduced our government’s revenues significantly,” Duncan said in delivering the budget on Thursday. “Returning Ontario to a balanced budget will take time and require difficult decisions.”

The budget includes $10.6 billion in tax relief for Ontarians over three years. This includes a permanent personal income tax reduction worth $1.1 billion, giving Ontario the lowest provincial tax rate in Canada for the first tax bracket.

In addition, the budget includes plans to harmonize the province’s sales tax with the federal value-added general sales tax, to produce a single harmonized sales tax of 13%. The provincial portion of the sales tax will exclude books, diapers, children’s clothing and footwear, children’s car seats and car booster seats, and feminine hygiene products.

But investment industry players are concerned that the budget does not feature a sales tax exclusion for mutual funds. The Investment Funds Institute of Canada estimates that the sales tax facing Ontario mutual fund investors will increase by 160% under the new tax structure.

“We’re a little disappointed that there isn’t an exclusion for that,” said Greg Pollock, President and CEO of Advocis, the Financial Advisors Association of Canada. “We’ll certainly continue to voice our concerns to the Ontario government on that issue.”

The Investment Industry Association of Canada echoed these concerns. “Sales taxes on investment management fees, including those on mutual funds, will increase unless exemptions are put in place,” said Ian Russell, president and CEO of the association. “This will discourage savings and investment and undermine the competitiveness of the financial sector.”

To help individuals adjust to the new sales tax, the government will issue payments of $1,000 to eligible families with income of $160,000 or less. Eligible single people with an income of $80,000 will receive payments totalling $300.

In addition, the province will introduce more generous sales tax credits that will provide low- and middle-income Ontarians with a permanent refundable credit of up to $260 for each adult and child.

“This reform package provides significant tax relief for Ontarians right across the board,” said Duncan.

The budget also includes tax relief for businesses, representing $4.5 billion in tax cuts over three years. Once it’s implemented, the new tax structure will cut Ontario’s marginal effective tax rate on new business investment in half.

In particular, the government plans to cut the general corporate income tax rate from 14% to 12% by July 2010, then to 10% by 2013. The tax rate for small businesses would fall from 5.5% to 4.5% and businesses in manufacturing and processing would see taxes fall from 12% to 10%. In addition, the corporate minimum tax rate will fall from 4% to 2.7%.

“With our comprehensive tax reform, we’re making Ontario stronger and more competitive, and that will help our families and businesses when prosperity returns,” Duncan said.

As previously announced, the budget includes $32.5 billion over the next two years for new infrastructure that will generate more than 300,000 jobs. The government is also investing nearly $700 million in skills training over two years, which will fund new skills and literacy programs, as well as enhancements to existing programs.

Other areas of investment include increased children’s benefits, innovation in green technology, summer employment opportunities and social housing.

The government is also working to promote innovation and efficiency for Ontario businesses, and the financial sector in particular. Duncan announced that the government would aim to reduce the regulatory burden by 25% over the next two years, would continue to work towards a single securities regulator, and would promote the further development of Toronto as a global financial centre.

Advocis applauded the budget’s support for a single securities regulator. “We were pleased to see Ontario supporting a move to have a more consistent and harmonized system in the country for securities regulation,” said Pollock.

The budget also acknowledges the significant challenges facing pensions, and sets out plans to move forward with pension reform – another issue Advocis was pleased to see acknowledged. This includes plans to establish a Pension Reform Advisory Council to provide practical feedback on specific pension reform proposals, and to assist with the reform process.

@page_break@“Clearly as you look across the country, this is a very popular issue,” Pollock said.

The Ontario government expects the deficit to decline steadily in the years following 2009-2010, to return to a balanced budget by 2015-16. The budget lays out a plan to make this happen, which includes limiting growth in expenditures and delivering services more efficiently.

The government’s fiscal expectations are based on projections of a 2.5% decline in Ontario’s real GDP in 2009. Given the significant slowdown in economic growth, Duncan warned that government revenue would likely remain weak for some time.

“In the years ahead, even the most optimistic forecasts do not project revenue growth to resume at the pace it did from 2005 to 2008,” Duncan said.

IE