The government of Ontario is facing a financial challenge: the stuff provinces pay for (health care in particular) is going to get more expensive, and given the kind of money we’re collecting now, we won’t be able to keep up with the bills.
The federal parliamentary budget officer says that the combination of slowing population growth and increasing health-care costs means Ontario will have to either increase taxes or cut services to make the provincial budget sustainable over the long term. This week, the Mowat Centre, a Toronto-based think tank focused on provincial public policy, identified yet another problem: changes in technology and the global economy could erode the province’s tax base.
“The challenge for provinces is that we know that by 2040, a quarter of Ontarians will be 65-plus. That’s going to lead to significantly higher health-care expenditures,” says Sunil Johal, one of the report’s co-authors. “If automation and AI start chewing up middle-income jobs — well, robots don’t pay personal income taxes.”
If Ontario has to face burgeoning costs at exactly the same time the economy shifts in a way that destroys the province’s ability to cover them, that could spell disaster.
Johal was quick to acknowledge that this worst-case scenario is based on the assumption that new technologies and business practices will overwhelm the government’s ability to adapt to change.
And it’s true that the alleged rise of the “gig economy,” which sees people working as ride-sharing drivers or rushing around delivering food, may be entirely illusory: the United States Bureau of Labour Statistics released a report this summer showing that the rate of “alternative work” is shrinking, not growing.
But we don’t have to get hung up on specific cases to be worried about the overall trend.
“It’s not that jobs are simply going to disappear — new jobs will be created,” says Johal. “The question is, what’s the quality of those jobs? Will people be in lower-income, low-benefits jobs or jobs that pay better and come with benefits? I’d say it’s more likely the former than the latter.”
Then there’s the issue of global corporations moving their profits to low- or no-tax jurisdictions, something the OECD estimates is costing public treasuries between 4 and 10 per cent of their income. In Ontario’s case, that works out to $1.5 billion.
And that’s not even taking into account the problem of automation and the possibility that robots will automate away good-paying jobs (and the income and payroll taxes that they contribute to the public purse).
The Mowat Centre report does propose some ways the Ontario government could prepare for the possible threats to its tax base, including gathering better data, working with digital companies like Uber or Airbnb to improve tax collection, and working with the federal government to collect taxes on firms that do business in Canada but don’t have a physical presence here.
(Facebook and Google between them, for example, control nearly three-quarters of the digital-advertising business in Canada, but they pay no corporate or sales tax on related services. The federal government could change that through legislation.)
Those are worthwhile recommendations, but following through on them may still not be enough to protect Ontario’s ledgers. Johal notes that in any possible future we can now imagine, the federal government would have the soundest finances because it doesn’t have to shoulder the larger costs that the provinces do.
Canada, Johal says, should conduct a review of taxing and spending powers to make sure that the provinces have sufficient tax room to meet their obligations.
“Federal obligations, generally speaking, aren’t as expensive as provincial ones like social services and health care — and that pressure is just going to get more acute,” he says.
Provinces have faced real and structural financial crises before. During the Great Depression, provinces were overwhelmed by the cost of providing relief to the unemployed, but the Supreme Court declared that it was unconstitutional for the federal government to do it. In 1940, though, the constitution was amended to make unemployment insurance Ottawa’s job.
For now, such a move isn’t under discussion. But if Canadians aren’t willing to accept higher taxes at the provincial level — Johal, with a laugh, says the idea would spur “obviously a very difficult conversation” — then the provincial and federal governments need to figure out how to make sure that provinces will be in a position to pay their future bills.
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