Ontario's Long-Term Report on the Economy
Chapter II: Economic Trends and Projections

Introduction

Taking a long-range perspective on Ontario’s economic future is important for assessing the impact of government policy and fiscal sustainability. The inclusion of a long-term assessment within a government’s budgetary framework is recommended by the Organisation for Economic Co-operation and Development (OECD) and it has been adopted by a number of national governments. The long-term projections outlined in this chapter are based on a reasonable set of assumptions to produce an estimate for the future trend of Ontario’s potential economic output. The projection is broadly consistent with prevailing private-sector forecasts for Ontario. Cyclical fluctuations in the economy will likely occur over the forecast horizon but this projection does not attempt to predict them. Rather, it reflects growth averaged out over the long term.

The following key trends have been identified:

• Ontario economic growth is expected to be somewhat slower than in the past, similar to other advanced economies and primarily due to slower growth in the working-age population;
• Labour productivity growth is a key driver of Ontario’s prosperity and is projected to continue to grow at its long-term historical pace;
• The structure of the Ontario economy will continue to shift from goods-producing to service-producing sectors, albeit at a somewhat slower pace; and
• Ontario exporters face challenging global competition, but fast-growing emerging markets present new opportunities for growth.

The government is improving Ontario’s long-term economic prosperity and increasing business productivity by:

• Investing in a highly educated labour force to prepare workers for tomorrow’s economic opportunities through supports for young learners, investments to expand access to postsecondary education and implementation of the Highly Skilled Workforce Strategy;
• Encouraging innovation such as new and transformative technologies and implementing the Business Growth Initiative to help businesses take advantage of these opportunities and scale up for future growth;
• Investing in public infrastructure to support existing jobs, create new jobs and improve the movement of people and goods;
• Maintaining a competitive tax environment through business tax reforms that have included Corporate Income Tax rate cuts and the elimination of the Capital Tax;
• Developing a Going Global trade strategy to help businesses expand their exports and access new workers; and
• Investing cap-and-trade proceeds into incentives for business and industry to cut emissions through adoption of clean technologies and maintain competitiveness.

TABLE 2.1 Highlights of the Long-Term Projection: Base-Case Scenario
Average Growth (Per Cent)

	Actual (Average) 1982–2015	Projection (Average) 2016–20	Projection (Average) 2021–25	Projection (Average) 2026–30	Projection (Average) 2031–35	Projection (Average) 2036–40	Projection (Average) 2016–40
Nominal GDP	5.3	3.9	4.0	4.0	4.0	4.0	4.0
Real GDP	2.6	2.2	2.0	2.0	2.0	2.0	2.1
Labour Force	1.4	1.0	0.8	0.8	0.8	0.8	0.8
Employment	1.4	1.2	0.8	0.8	0.8	0.8	0.9
Labour Productivity	1.2	1.0	1.2	1.2	1.2	1.2	1.2
Consumer Price Index	2.9	2.0	2.0	2.0	2.0	2.0	2.0
Sources: Statistics Canada and Ontario Ministry of Finance.

The Global Economy and the External Environment

The Ontario economy is linked through trade and financial markets to other economies in the rest of Canada and North America, and across the globe. This section discusses the external factors affecting the demand for Ontario’s exports, including the performance of the global, U.S. and rest-of-Canada economies; oil prices; the Canada–U.S. exchange rate; and interest rates. Major changes in any of these factors could have a substantial impact on Ontario’s economy.

TABLE 2.2 Assumptions Overview: Key External Factors

Components	Assumptions
Global Economy	Global real GDP growth to average 3.1 per cent annually over the 2016–40 period.
U.S. Economy	Real GDP growth to average 2.0 per cent annually over the 2016–40 period.
Rest of Canada	Long-term real GDP growth to average 1.9 per cent annually over the 2016–40 period.
Oil Prices	Oil prices to climb to about $130 per barrel (nominal U.S. dollars) by 2040. Projection assumes modestly increasing long-term real prices.
Canadian Dollar	Canadian dollar to rise to about 90 cents US by 2040.
Interest Rates	Interest rates to begin to rise from recent lows in 2017 but do not return to the long-term averages seen before the 2008–09 global financial crisis.

World Economic Growth

Two main trends are projected to drive the global long-term macroeconomic outlook. The first is the continued rise of the Asia-Pacific region (primarily China and India) as a share of total global economic output.

The second trend is a significant decline in the pace of economic growth in many regions due to slower growth in the working-age population, with the notable exceptions of Africa and the Middle East. A substantial portion of global economic growth over the past several decades has been driven by population growth. Countries that are unable to supplement population growth with advances in labour productivity will likely face a significantly lower outlook.¹

TABLE 2.3 World Economic Outlook

Real GDP Growth	1997–2015	2016–2020	2021–2040
World	3.6	3.4	3.0
European Union	1.7	1.6	1.1
United States	2.3	2.0	2.0
Japan	0.7	0.6	0.2
China	9.4	6.0	4.2
India	6.9	6.9	5.3
Sources: Oxford Economics, Blue Chip Economic Indicators and U.S. Congressional Budget Office.

This projection assumes that long-term global real gross domestic product (GDP) growth will average 3.4 per cent annually between 2016 and 2020, decreasing slightly to 3.0 per cent annually from 2021 to 2040.

Energy and Commodity Markets

Crude oil prices remained relatively stable, near $95 US per barrel between 2011 and 2014, before plunging to below $50 US per barrel, reflecting a considerable increase in North American supply from shale oil formations, weaker global demand and rising output from the Organization of the Petroleum Exporting Countries (OPEC). Oil prices have recently recovered somewhat, back to about $50 US per barrel.

Oil prices are assumed to rise modestly in real terms over the long term, consistent with the assumption that oil will continue to become more expensive to extract and emerging market demand will remain relatively strong. By 2040, oil prices are assumed to be about $130 US per barrel.

There are considerable risks around this forecast. Recent experience has shown that significantly more oil may be available globally at a lower price than previously thought. Moreover, growth in long-term oil demand will be tempered by an increasing focus on curbing greenhouse gas emissions.

Interest Rates

The rate of interest impacts the cost for people to borrow money for a new home or to start a business. It also affects the ability of individuals to save for retirement and the cost for governments to borrow to invest in infrastructure.

In response to the 2008–09 global financial crisis, central banks pushed short-term interest rates to all-time lows and kept them there for an extended period. However, interest rates were already trending down in the decades before the financial crisis. This long-term structural decline reflects a number of factors such as lower potential output and productivity growth, shifting demographics and a global “savings glut.” These developments suggest that the neutral rate of interest — that is, the rate consistent with stable long-term inflation — may have fallen permanently.²

Given all this, over the long term, the yields on 10-year Government of Canada bonds are projected to settle at 4.6 per cent, on average, and three-month Government of Canada Treasury bills are expected to average 3.5 per cent.

Canadian Dollar

The Canada–U.S. exchange rate is projected to recover somewhat from its recent lows before slowly trending higher over the long term, consistent with modestly rising real commodity prices.

The outlook for the Canadian dollar is relatively favourable for Ontario exporters compared to the 2006–14 period. However, improvements in relative competitiveness are set against a backdrop of increasing global competition and lower commodity prices that may somewhat temper the long-term benefits of a lower Canadian dollar for exports.³

Rest of Canada

The rest of Canada will continue to be an important destination for Ontario exports and is expected to continue to grow at a modest pace after recovering from the recent significant decline in oil prices.

Ontario’s Potential Economic Output

The most important determinants of long-run economic growth are the supply of workers and the growth in their productivity, which in turn are supported by innovation and growth in the capital stock.

Population and Labour Supply

One of the most important long-term challenges Ontario faces is slowing growth in its working-age population.

A declining overall labour force participation rate, combined with a slower growth rate in the core working-age population for most of the forecast horizon, means significantly slower projected labour force growth than Ontario has historically experienced. (Chapter I: Demographic Trends and Projections provides additional details on the underlying source projections used to build this labour force outlook.)

Productivity

The rate of productivity growth is key to determining Ontario’s long-term potential output. Particular importance is placed on this factor since growth in the working-age population is expected to decline over the forecast horizon.

This projection assumes that, between 2016 and 2040, Ontario’s productivity growth will average 1.2 per cent — the same as the long-term average from 1982 to 2015.

Details of the Ontario Economic Outlook

The Ministry of Finance is projecting long-term, average, annual real GDP growth of 2.1 per cent between 2016 and 2040 in Ontario, slower than the 2.6 per cent average growth from 1982 to 2015, as a result of slower projected labour force growth.

Real GDP per capita is expected to improve, reflecting continued growth in real GDP. Real GDP per capita rose 50 per cent from $32,000 in 1981 to $48,000 in 2015. The Ministry of Finance projects real GDP per capita will further increase by 29 per cent to $62,000 by 2040.

The total number of employed people in Ontario is projected to grow, on average, from about 6.8 million between 2010 and 2015 to about 8.5 million between 2036 and 2040. The unemployment rate is projected to decline, on average, from about 7.7 per cent between 2010 and 2015 to about 5.5 per cent between 2036 and 2040. Rising incomes and employment will support continued growth in household spending over the projection period.

Final consumption expenditure as a share of the economy is expected to decline slightly from recent highs but to remain above the long-term historical average.

Gross fixed capital formation is expected to grow slightly faster than overall GDP over the projection period. Growth in public and private investment is an important part of growth in potential output, particularly in light of slower growth in the working-age population. As outlined later in the chapter, the government has put measures in place to enhance growth in private-sector capital stock by significantly lowering the marginal effective tax rate on new capital investment. The Province has also committed to continue making significant public-sector investments.

External Trade and the Ontario Economy

Economic growth in the rest of Canada, the United States and globally will continue to support growth in Ontario exports.

Ontario’s international trade in goods, which was negatively impacted by the slowdown in the U.S. and global economies as a result of the 2008–09 financial crisis, has almost recovered to its pre-recession high. Over the last 10 years, growth in Ontario’s international exports in services has surged ahead by 46 per cent.

The United States remains Ontario’s primary destination for international merchandise exports, representing 80.5 per cent of the total in 2015. An increasing share of goods and services exports is integrated into the production of other products and Ontario is an important contributor to these global value chains.

Canada is also a major destination for American exports. According to the U.S. Census Bureau, 35 states have Canada as their largest export partner, with many of these states having Ontario as their number one export market.

While the United States remains Ontario’s primary international trading partner, over the past 10 years Ontario has been diversifying its exports to other markets abroad. For example, Ontario’s share of its merchandise exports to the fast-growing Chinese market doubled between 2005 and 2015. In addition, Ontario’s share of its exports destined for the European Union, Mexico and Hong Kong has continued to expand.

The rest of Canada also continues to be an important destination for Ontario goods and services, representing 34 per cent of total Ontario exports in 2015. Real interprovincial service exports, in particular, have about doubled over the last 20 years.

The volume of exports and imports can be quite volatile from year to year. The Province has taken steps to help increase exports through its Going Global trade strategy. Net trade is expected to contribute modestly to real GDP growth over the long term.

Sectoral Evolution of the Economy

As service-based exports have grown in importance, Ontario’s economy has evolved from goods-producing to service-producing industries. The share of Ontario service industry employment as a per cent of total employment increased from 73.6 per cent in 1996 to almost 80 per cent by 2016.

A closer look at the structure of the Ontario economy shows that the decline in manufacturing’s share of employment has been offset by gains in a wide variety of private and public service sectors. These trends are expected to continue over the long term, albeit at a somewhat slower pace.

TABLE 2.4 Employment Share of Major Ontario Sectors
(Per Cent)

Sector	1996	2006	2016
Goods-Producing Sector (includes items 1 to 2 below)	26.4	24.6	20.3
1. Manufacturing	17.5	15.4	10.7
2. Other Goods-Producing Industries	8.9	9.1	9.5
Private Services-Producing Sector (includes items 1 to 10 below)	51.7	53.8	55.5
1. Wholesale and Retail Trade	15.0	15.7	14.8
2. Transportation and Warehousing	4.7	4.6	4.7
3. Information and Cultural	2.7	2.7	2.1
4. Financial Services	5.2	5.4	5.8
5. Real Estate and Rental and Leasing	2.0	1.9	2.1
6. Professional, Scientific and Technical Services	6.1	7.0	8.5
7. Management, Administrative and Support	3.4	4.5	4.7
8. Arts, Entertainment and Recreation	1.8	2.2	2.4
9. Accommodation and Food Services	6.0	5.8	6.5
10. Other Services	4.7	4.0	3.9
Public-Sector Services (includes items 1 to 3 below)	21.9	21.6	24.2
1. Education	6.6	6.9	7.2
2. Health Care and Social Assistance	9.7	9.8	12.0
3. Public Administration	5.6	4.8	5.0
Note: Other goods-producing industries include agriculture, fishing, forestry, mining, utilities and construction.
Source: Statistics Canada, Labour Force Survey.

Alternative Productivity Scenarios

This section describes alternative scenarios for economic growth, based on alternative paths for productivity. It provides an explanation of why productivity growth might be higher or lower than has been assumed in the base-case economic projection. Details of the high and low economic growth scenarios are provided in the Appendix.

High-Growth Scenario

In the high-growth scenario, a path of higher investment, greater payoffs from technological progress and increasingly diversified trade to faster-growing emerging market economies leads to productivity growth that is, on average, 0.3 per cent per year higher than in the base case over the 2016–40 projection period.

Low-Growth Scenario

In the low-growth scenario, Ontario is less successful in encouraging businesses to invest and in diversifying its trade in the face of growing international competition. In this scenario, labour productivity is assumed to grow at an average annual pace of 0.3 per cent more slowly than in the reference case.

Impact of Alternative Productivity Growth Assumptions

By the end of the forecast horizon, Ontario real GDP is projected to be $1,105 billion (2007 prices). Under the high-productivity scenario, real GDP is expected to grow to $1,253 billion in 2040, while under the low-productivity scenario, real GDP would grow to $992 billion. These alternative scenarios illustrate that small changes in the annual growth rate of productivity can result in considerable differences in the size of the economy over the long term.

Risks to the Outlook

An important risk to Ontario’s aims of increasing and diversifying global exports is the recent trend towards increased trade protectionism across the globe, such as the United Kingdom’s vote to leave the European Union and the protectionist sentiments expressed by the new administration in the United States. These potential trade barriers are particularly worrisome in light of the continued weak global growth outlook.

Another key risk to Ontario’s long-term growth and export prospects arises from lowered U.S. potential economic growth projections. A number of U.S. forecasters, including the Congressional Budget Office (CBO), have recently lowered their long-term projections of U.S. potential economic growth. In particular, the CBO has lowered its long-term projections for both labour force and productivity growth.

Recent advancements in the field of artificial intelligence have the potential to automate some of the work traditionally done by human labour. This emerging technology could result in huge economic benefits but could also potentially disrupt the livelihoods of many Ontarians. This risk is discussed further in Chapter lll: Employment Trends.

Other Perspectives on Long-Term Growth

Currently, only two private-sector forecasters produce long-term projections for the Ontario economy — the Conference Board of Canada and the Institute for Policy Analysis at the University of Toronto.

TABLE 2.5 Comparison of Ministry of Finance Projections to Other Forecasts, 2016 to 2040, Average Annual Growth
(Per Cent)

Ontario Forecasts	Real GDP	Employment	Output/ Employee	Source Population
Conference Board of Canada	2.0	0.8	1.1	0.9
Institute for Policy Analysis at the University of Toronto	2.1	1.0	1.2	1.1
Ontario Ministry of Finance	2.1	0.9	1.2	1.1

Although the details of the two forecasts differ slightly, the Ministry of Finance’s projections are largely consistent with these views of the long-term growth of the Ontario economy.

Enhancing Productivity Growth

Productivity growth is a critical driver of economic prosperity and living standards. Productivity growth in Ontario’s economy is important because it is linked to more rapid wage increases in real terms, lower prices for consumers, higher profits for businesses and increased tax revenues to support key public services.

The Province continues to take action to improve Ontario’s long-term economic prosperity and increase productivity growth in the business sector.

Highly Skilled Workforce

A highly educated labour force, equipped with the knowledge and skills needed to compete successfully in the global economy, is vital for boosting Ontario’s productivity and increasing its standard of living. The talents and skills of Ontario’s workers are consistently identified as one of the province’s greatest strengths in continuing to attract economic investments and growth. Ontario has made significant investments in education and skills training, from full-day kindergarten to postsecondary education. These investments are crucial to maintain the advantage Ontario derives from its highly educated workforce. In 2016, the Province had a higher postsecondary education attainment rate (68 per cent) than all OECD countries, including Canada.

Ensuring Early Learning Success

The government has implemented full-day kindergarten for every four- and
five-year-old in the province and will be increasing licensed child care spaces to help ensure that Ontario’s youngest learners get the best start in life and have future learning success.

The government’s strategy for education, “Achieving Excellence: A Renewed Vision for Education in Ontario,” places the focus on achieving excellence, ensuring equity and promoting well-being, as well as on 21st century teaching and learning skills, for primary and secondary school students. To achieve these goals, the Province has initiated several programs, such as the Innovation, Creativity and Entrepreneurship (ICE) element of the Specialist High Skills Major (SHSM) program, which provides students the opportunity to focus on a specific economic sector while acquiring a high school diploma. The ICE training in SHSM programs will allow students to understand the world from the perspectives of others and to generate new ideas, while giving them the confidence to develop strategies to implement and sustain their ideas while considering the impacts and consequences that their innovations have on the world around them.

Investing in Postsecondary Education

In addition to increasing productivity, educational attainment has a strong association with income for individual workers. Core-aged (25–64) workers with a university degree earn an average of $1,310 a week, 51 per cent more than those with only a high school diploma (see Chart 2.19).

The Province is continuing to invest in postsecondary education to prepare today’s students for well-paying jobs in the future knowledge economy. In the 2016 Budget, the government announced its commitment to invest $3 billion over the next 10 years to improve postsecondary education infrastructure and expand access to high-quality college and university education. Ontario has also collaborated with the federal government and with colleges and universities to implement the Post-Secondary Institutions Strategic Investment Fund. This initiative will lead to shared investments of more than $1.9 billion in research, innovation and training infrastructure at Ontario’s postsecondary institutions.

Assisting Students with Education Costs

Ontario also continues to expand and guarantee access to higher education and help students with postsecondary education costs, so that every qualified student wishing to attend college or university can afford to. The government is continuing to modernize the Ontario Student Assistance Program (OSAP) by introducing an integrated application process in 2018, which will let students apply for college or university and for OSAP at the same time. As well, it will allow them to receive their net tuition estimate at the same time as their offer of admission.

Investing in Ontario’s Workforce

Recognizing the strategic importance of continuing to invest in Ontario’s workforce to ensure that people are prepared for jobs that are increasingly technology-driven and knowledge-based, the government set up the Premier’s Highly Skilled Workforce Expert Panel. The panel’s final report in June 2016 made several recommendations to help Ontario’s workforce adapt to the demands of the knowledge economy.

The government and its partners are now implementing a Highly Skilled Workforce Strategy to better align education, training and skills development with the demands of a changing global economy and the opportunities for innovation discussed below. This strategy is focused on making progress in key areas, including improving access to labour market information, expanding experiential learning and boosting investment in workers’ skills.

As recommended by the Highly Skilled Workforce Expert Panel’s report, governments, employers, labour, and education and training institutions must work together to increase workplace training opportunities. Studies show that employers in Canada invest less per capita in workplace training than international competitors such as the United States. According to the Conference Board of Canada, Canadian employers’ spending on per-employee learning and development decreased from $1,249 in 1993 to $800 in 2015, although there has been a slight upward trend in recent years.⁴

Strengthening Innovation

Innovation is defined by the OECD as the implementation of a new or significantly improved product, process, marketing method or organizational method.⁵ Innovation and technological change are important to an economy as the key long-term drivers of economic growth and prosperity.

Discussions of innovation often distinguish between gradual improvements to technologies and transformative technologies, which create new markets or disrupt existing activities. Modern examples of transformative technologies include the personal computer and the Internet, which have reshaped productive activities in the economy, as well as people’s personal lives.

Over the coming decades, transformative technologies could have a disruptive impact on Ontario’s economy, affecting existing occupations and reshaping Ontario’s labour market (as discussed in Chapter III: Employment Trends). Some of these technologies could include:

• Artificial intelligence;
• Quantum computing;
• Continued advances in mobile telecommunications;
• Regenerative and personalized medicine;
• Smart technologies that enable linkages between objects, computers and communication devices (the “Internet of Things”); and
• Clean technologies that improve the production of existing goods, create new goods or generate sustainable sources of energy.

Ontario has a long history of developing pioneering technologies, such as insulin, the pacemaker and the telephone. This track record has been supported by the province’s world-class research institutions and an attractive business environment that encourages research and development (R&D) and entrepreneurial activity. As a result, Ontario’s economy is well positioned to benefit from the development, adoption and diffusion of transformative technologies.

Despite this potential, opportunities presented by transformative technologies and other forms of innovation are hindered by challenges in Ontario’s innovation ecosystem. These challenges include weak business R&D spending, underinvestment in information and communications technologies, weak multifactor productivity growth relative to other advanced economies such as the United States and weak intellectual property protection.

To better position Ontario to realize opportunities presented by transformative technologies, the Province continues to support innovation across all sectors of the economy. Between 2003 and 2013, the government spent almost $5.5 billion to support R&D activities across the province — 80 per cent of which was spent on R&D in universities, colleges and research hospitals.⁶ This investment is in addition to tax credits for R&D provided by the Province to support Ontario businesses.

Business Growth Initiative

To foster a more dynamic business environment, Ontario is also implementing the Business Growth Initiative, a five-year, $400 million plan to support the development and adoption of innovation and advanced technologies across the economy and help entrepreneurial firms scale up into medium-sized and large businesses.

A number of programs have been launched as part of the Business Growth Initiative, including:

• The ScaleUP Ventures Fund, which is targeting a final fund size of $75 million, including a $25 million commitment from the Province, to support a venture capital fund that also provides mentorship to Ontario-based startups and entrepreneurs;
• The $32.4 million Scale-Up Voucher Program, to be used by companies to fund activities such as specialized talent development and recruitment, as well as intellectual property protection services;
• The $28.8 million Small Business Innovation Challenge pilot program to help participating small and medium-sized enterprises (SMEs) develop and demonstrate innovative technology solutions; and
• The Red Tape Challenge, which engages businesses, stakeholders and the public in identifying regulatory improvements and lessening compliance burdens for business.

Jobs and Prosperity Fund

Ontario continues to work with businesses through the Jobs and Prosperity Fund, a 10-year, $2.7 billion fund created to support strategic economic investments for Ontario companies and sectors. Increasing innovation and enhancing productivity growth are two of the program’s key criteria. The fund has leveraged significant investments across Ontario in sectors such as advanced manufacturing, information and communications technology, and life sciences.

Infrastructure Investment

Modern and reliable public infrastructure offers long-term benefits to Ontario’s economy. It promotes growth, helps increase private-sector productivity and positions Ontario as a global competitor. Infrastructure also enhances Ontarians’ quality of life by providing access to improved schools and hospitals, moving people and goods, and connecting communities.

Ontario is served by a vast portfolio of public infrastructure — including bridges, hospitals, government buildings and colleges — with a replacement value of close to $550 billion. The government owns approximately 40 per cent of these assets either directly or through broader public-sector organizations, such as hospitals, schools and community colleges. Many of these assets are aging, with the average Ontario hospital being 45 years old and the average school 38 years old. Continued improvement of asset management planning is required to ensure that existing infrastructure is adequately maintained and new assets are built as required.

Sufficient investment in infrastructure renewal is an important component of a highly functioning economy. Well-maintained infrastructure, such as roads, highways and bridges, lasts longer, saving taxpayer dollars in the long run. Beyond renewing the Province’s existing infrastructure, further investments will be required to meet future demographic and economic needs. Important planned investments include increasing child care spaces, investing in health care and postsecondary education, and further integrating the province’s transportation network.

In the 2016 Ontario Economic Outlook and Fiscal Review, the government committed to continue making public infrastructure investments of more than $160 billion over 12 years, starting in 2014–15. In the short term, these investments will support jobs in businesses that build, maintain and service assets and provide related services. In the medium term, the economy will benefit from improved roads and public transit, moving goods to market faster, helping manage congestion and reducing commute times. In the long term, these investments will support a more productive economy, stimulating competitiveness and attracting the business investment and talent needed for economic prosperity.

Recognizing the importance of strategic infrastructure investments, the government enacted the Infrastructure for Jobs and Prosperity Act, 2015, which calls for a strong focus on the needs of existing assets and their management. As the Act requires, the Province is developing a Long-Term Infrastructure Plan over the next year. Its main objectives include:

• Broadly defining Ontario’s infrastructure needs and priorities and the government’s strategy to address these needs;
• Demonstrating excellence in Ontario’s asset management and infrastructure planning;
• Incorporating opportunities for innovation into a robust, evidence-based process for infrastructure planning; and
• Setting the stage for technical analysis of asset management plans.

In January 2017, the Province released an “Infrastructure Update,” which serves as a first step to delivering on the next long-term infrastructure plan. This document was complemented by the release of an interactive website that currently includes a sample of more than 500 key projects already underway in Ontario.

Infrastructure decisions also need to take into account a number of far-reaching trends such as technology. In the health care sector, this means using the most modern technologies in hospitals, such as the new Humber River Hospital — Ontario’s first fully digital hospital. In the education sector, broadband internet connections can allow students in remote areas to take courses online that are not offered locally. Further broadband access allows all students access to up-to-date resources and worldwide connections to others/experts, and increases equity for students with special education needs who require technology for learning.

Climate change is another important factor that needs to be taken into account in infrastructure decisions. Ontario’s Climate Change Strategy encourages integrating climate change considerations, such as environmental impacts and resiliency, into infrastructure planning and decisions. Incorporating climate resilience into infrastructure planning can yield significant cost savings in the long term, and infrastructure investments can help mitigate climate change by reducing greenhouse gas (GHG) emissions, with greater use of green infrastructure emerging as a cost-effective way to achieve this.

Tax Competitiveness

The Ontario government is committed to lowering the costs of doing business by maintaining a competitive tax environment. The following business tax reforms have cut taxes and lowered compliance costs, significantly enhancing Ontario’s tax competitiveness and business investment climate:

• Moving to the Harmonized Sales Tax (HST), along with reducing Corporate Income Tax (CIT) rates and eliminating the Capital Tax, is providing businesses with about $9.6 billion of tax relief per year;
• Significant cuts to high Business Education Tax (BET) rates are resulting in ongoing savings of over $200 million per year for Ontario businesses; and
• The HST and streamlined CIT administration are reducing business compliance costs by more than $635 million per year.

Ontario’s general CIT rate was reduced in stages from 14 per cent in 2009 to 11.5 per cent in 2011 and is now the second lowest in Canada. With a provincial general CIT rate of 11.5 per cent and a combined federal–provincial general CIT rate of 26.5 per cent, Ontario’s general CIT rate is competitive within Canada and internationally.

To assess the impact of business taxes on capital investment, it is also important to consider other elements of the tax system.

The marginal effective tax rate (METR) provides a comprehensive measure of the tax burden on new business investment. It takes into account federal and provincial/state CIT, capital taxes and sales taxes.

Ontario and federal CIT reductions to date, along with the move to the HST and elimination of the Capital Tax, have cut Ontario’s METR on new business investment substantially since 2009.

Ontario’s METR of 33.0 per cent in 2009 fell to 16.9 per cent in 2016 and will fall further as input tax credit restrictions are phased out. Ontario’s METR is lower than the average U.S. METR of 34.0 per cent and is one of the lowest in the G7.

This significant improvement in Ontario’s tax competitiveness for new business investment will encourage businesses to locate or expand operations in the province, leading to more jobs and higher incomes for Ontarians.

The government also supports Ontario businesses through various corporate tax credits related to training, R&D, manufacturing and processing, small businesses and cultural industries (such as film and television and interactive digital media).

Expanding International Exports

Ontario faces a dramatically changing global economic and political environment. The U.S economy is rebounding, there is a shifting geopolitical landscape, an increased level of uncertainty exists in Europe and the United States, and uneven performances are evident in emerging markets. Recognizing these challenges and potential new opportunities, the Ministry of International Trade was established in 2016 as a standalone ministry to help Ontario businesses increase and diversify exports. In addition, efforts will be made to coordinate linkages and explore opportunities to establish and enhance Ontario’s position in global trade networks through increased trade missions and marketing activities.

The Province will also develop a Global Trade Strategy focused on helping Ontario businesses, including SMEs, to start or expand exporting and become more productive. It will achieve this by providing a range of advisory services and programs for new and existing exporters; delivering strategic international trade missions; connecting SMEs to potential buyers, partners and distributors; and collaborating with strategic stakeholders, including industry associations and the federal government.

The Province continues to work with the federal government to negotiate and implement important trade agreements to ensure that Ontario has a competitive edge and access to global markets. Expanding international trade supports Ontario’s long-term prosperity by creating high-quality jobs and wages in exporting industries. The Province will continue to expand exports by tapping into emerging economic markets while maintaining the United States as its key export market.

Low-Carbon Economy

The economy of the future will be characterized by the evolution and adoption of low-carbon ways of producing goods and services. Supported by proactive policies and innovative technologies, the shift towards a low-carbon economy will build on Ontario’s current strengths in manufacturing and knowledge-based industries to ensure future economic prosperity and address the diverse challenges of climate change. Policy actions outlined under the Climate Change Action Plan put Ontario in a leading position to capitalize on the global shift towards a
high-productivity, low-carbon economy. Achieving Ontario’s long-term vision for advanced manufacturing and services, driven by the creation and use of low-carbon goods and services, will help ensure a sustainable and prosperous economic future for the province.

In May 2016, Ontario passed the Climate Change Mitigation and Low-carbon Economy Act, 2016, laying the foundation for its cap-and-trade program. This was followed by a new cap-and-trade regulation that took effect on July 1, 2016, which outlined detailed requirements for businesses participating in the program. In June 2016, the government released its Climate Change Action Plan, identifying the important actions the Province will take to combat climate change and cut GHG pollution, while contributing to economic growth and creating well-paying jobs.

With the first compliance period of Ontario’s cap-and-trade program effective January 1, 2017, the Province will hold its first auction of emissions allowances for cap-and-trade program participants in March 2017. Continuing its collaborative approach to developing the cap-and-trade program, Ontario will consult with stakeholders as it shapes the design of the program beyond 2020.

By putting a price on carbon, Ontario has provided an incentive to invest in and adopt clean technologies and help Ontarians transition to an efficient and sustainable low-carbon economy. The Province’s commitment to cost-effective emissions reduction will drive innovation by promoting the development and adoption of clean technologies. This also positions Ontario to boost its economy by taking advantage of the opportunities of a growing global clean technology industry (clean tech). Ontario has the highest concentration of environmental and clean tech companies in Canada. These companies are highly varied, from renewable energy to water technologies, and are spread out geographically.

Building on Ontario’s Culture Strategy

Ontario launched its first Culture Strategy in 2016, setting out a vision, goals and more than 40 specific actions to fuel the creative economy and build on its economic impact in communities across the province. The Culture Strategy will also promote cultural engagement and inclusion, as well as strengthen culture across Ontario communities.

The Culture Strategy supports Ontario’s long-term growth and prosperity by creating jobs and fostering a dynamic business environment. It focuses on maximizing the contribution of culture and creativity to a strong and competitive knowledge economy, building on the success of key growth sectors, fostering innovation, helping scale up companies in the arts and cultural industries, growing cultural tourism, and promoting the talents and skills of the cultural workforce. Ontario’s culture sector adds more than $25 billion to the province’s economy, supporting approximately 280,000 jobs across key industries such as film and television production, interactive digital media, book and magazine publishing, music recording and performance, and the arts.

The government’s first-ever Culture Strategy embraces Ontario’s diversity and builds on cultural initiatives already taking place in the province. Cultural engagement is a catalyst for creative thinking and innovation, which are essential in the knowledge economy.

TABLE 2.6 Ontario Key Economic Variables (Base Case)
Average Growth (Per Cent)

	History 1982–2015	Projection 2016–2020	Projection 2021–2025	Projection 2026–2030	Projection 2031–2035	Projection 2036–2040	Projection 2016–2040
Real Gross Domestic Product	2.6	2.2	2.0	2.0	2.0	2.0	2.1
Final Consumption Expenditure	2.6	2.0	1.9	1.9	1.9	1.9	1.9
Gross Fixed Capital Formation	3.2	2.8	2.3	2.4	2.1	2.1	2.4
Exports	3.4	2.4	2.2	2.1	2.0	2.2	2.2
Imports	4.0	2.2	2.2	2.0	1.8	2.0	2.1
Nominal Gross Domestic Product	5.3	3.9	4.0	4.0	4.0	4.0	4.0
Other Economic Indicators - Housing Starts (000s)	66.0	70.3	72.7	72.2	72.2	69.3	71.3
Other Economic Indicators - Primary Household Income	5.0	4.1	4.2	3.8	3.7	3.8	3.9
Labour Market - Participation Rate	67.3	64.8	64.0	63.0	62.3	61.7	63.2
Labour Market - Labour Force	1.4	1.0	0.8	0.8	0.8	0.8	0.8
Labour Market - Employment	1.4	1.2	0.8	0.8	0.8	0.8	0.9
Labour Market - Unemployment Rate	7.7	6.3	6.0	5.7	5.6	5.5	5.8
Productivity - Real GDP per Hour	1.2	1.0	1.2	1.2	1.2	1.2	1.2
Prices - Consumer Price Index	2.9	2.0	2.0	2.0	2.0	2.0	2.0

TABLE 2.7 Ontario Key Economic Assumptions (Base-Case Projections)

	Projection (Average) 2016–2020	Projection (Average) 2021–2025	Projection (Average) 2026–2030	Projection (Average) 2031–2035	Projection (Average) 2036–2040	Projection (Average) 2016–2040
Rest-of-Canada Real GDP (Per Cent Change)	1.7	2.0	2.0	2.0	2.0	1.9
Rest-of-Canada GDP Deflator (Per Cent Change)	2.0	2.0	2.0	2.0	2.0	2.0
U.S. Real GDP (Per Cent Change)	2.0	2.0	2.0	2.0	2.0	2.0
U.S. GDP Deflator (Per Cent Change)	1.9	2.0	2.0	2.0	2.0	2.0
Exchange Rate (Cents per US$)	79.7	85.4	86.3	87.2	88.1	85.3
90-Day Treasury Bill Rate (%)	1.1	3.2	3.5	3.5	3.5	3.0
10-Year Government of Canada Bond Rate (%)	2.1	4.3	4.6	4.6	4.6	4.0
U.S. 90-Day Treasury Bill Rate (%)	1.5	3.3	3.4	3.4	3.4	3.0
10-Year U.S. Government Bond Rate (%)	2.6	4.4	4.5	4.5	4.5	4.1
U.S. WTI Oil Price (US$ per Barrel)	57.2	73.9	87.7	104.2	123.7	89.4

TABLE 2.8 Ontario Key Economic Variables (High Productivity)
Average Growth (Per Cent)

	History 1982–2015	Projection 2016–2020	Projection 2021–2025	Projection 2026–2030	Projection 2031–2035	Projection 2036–2040	Projection 2016–2040
Real Gross Domestic Product	2.6	2.3	2.4	2.7	2.6	2.7	2.6
Final Consumption Expenditure	2.6	2.0	2.1	2.3	2.1	2.2	2.1
Gross Fixed Capital Formation	3.2	3.4	2.9	3.6	2.9	3.1	3.2
Exports	3.4	2.5	2.7	2.8	2.7	2.9	2.7
Imports	4.0	2.4	2.4	2.4	2.0	2.3	2.3
Nominal Gross Domestic Product	5.3	4.1	4.6	4.7	4.6	4.7	4.5
Other Economic Indicators - Housing Starts (000s)	66.0	70.5	77.2	78.8	80.3	78.8	77.1
Other Economic Indicators - Primary Household Income	5.0	4.3	4.7	4.5	4.1	4.4	4.4
Labour Market - Participation Rate	67.3	64.8	64.0	63.2	62.6	62.2	63.4
Labour Market - Labour Force	1.4	1.0	0.9	0.9	1.0	0.9	1.0
Labour Market - Employment	1.4	1.2	0.8	1.1	0.9	1.0	1.0
Labour Market - Unemployment Rate	7.7	6.3	5.8	5.7	5.6	5.4	5.8
Productivity - Real GDP per Hour	1.2	1.0	1.5	1.6	1.7	1.7	1.5
Prices - Consumer Price Index	2.9	2.0	2.2	2.0	2.0	2.0	2.0

TABLE 2.9 Ontario Key Economic Variables (Low Productivity)
Average Growth (Per Cent)

	History 1982–2015	Projection 2016–2020	Projection 2021–2025	Projection 2026–2030	Projection 2031–2035	Projection 2036–2040	Projection 2016–2040
Real Gross Domestic Product	2.6	2.0	1.6	1.4	1.5	1.5	1.6
Final Consumption Expenditure	2.6	1.9	1.7	1.5	1.7	1.6	1.7
Gross Fixed Capital Formation	3.2	2.4	1.7	1.5	1.5	1.4	1.7
Exports	3.4	2.3	1.8	1.5	1.4	1.6	1.7
Imports	4.0	2.1	2.1	1.7	1.7	1.8	1.9
Nominal Gross Domestic Product	5.3	3.7	3.4	3.5	3.6	3.5	3.5
Other Economic Indicators - Housing Starts (000s)	66.0	70.2	68.6	65.9	64.3	60.3	65.9
Other Economic Indicators - Primary Household Income	5.0	3.9	3.8	3.2	3.3	3.3	3.5
Labour Market - Participation Rate	67.3	64.8	63.9	62.8	62.0	61.4	63.0
Labour Market - Labour Force	1.4	1.0	0.6	0.6	0.7	0.6	0.7
Labour Market - Employment	1.4	1.1	0.8	0.5	0.7	0.7	0.8
Labour Market - Unemployment Rate	7.7	6.4	6.0	5.7	5.6	5.6	5.8
Productivity - Real GDP per Hour	1.2	0.9	0.8	0.9	0.8	0.8	0.9
Prices - Consumer Price Index	2.9	2.0	1.9	2.0	2.1	2.1	2.0