The ongoing public battle between federal Finance Minister Jim Flaherty and Ontario Premier Dalton McGuinty put today’s Ontario budget in the spotlight, but political posturing aside the budget itself doesn’t offer much for investors to get excited about.

Today’s budget was highly anticipated and a vital “crunch-time” test for the McGuinty government, as the Ontario economy struggles with the high Canadian dollar, rising oil prices and weak demand from the United States.

“We have a plan to cope with the challenges currently facing Ontario,” said Dwight Duncan, the province’s finance minister, in his budget speech. “But we could get better results, faster, in partnership with the federal government.”

To address the beleaguered manufacturing sector, the budget will back date the capital tax elimination to January 1, 2007, one year earlier than was announced in last year’s Economic Outlook and Fiscal Review. This tax break will apply to companies involved in manufacturing or resource activities and means about $190 million in support for the sector.

As well, the government proposes to extend the capital cost allowance (CCA) rate for manufacturing equipment and machinery investments made before 2012. The Ontario government looks to parallel CCA measures put forward by the federal government in its recent budget, which would allow eligible assets bought before 2009 to depreciate on a 50% straight-line basis and those acquired in 2010 or 2011 on a declining balance basis.

“Ontario’s ongoing industrial restructuring will require the province to focus on overall competitiveness for its broadly diversified economic base,” wrote Mary Webb, senior economist at Bank of Nova Scotia, in a pre-budget submission to the Ontario Standing Committee on Finance and Economic Affairs. Webb noted that the combination of the federal and provincial CCA measures and capital tax elimination (then retroactive only to January 2008) “represents a significant increase in Ontario’s attractiveness.”

In terms of innovation, today’s budget includes a 10-year Ontario income tax exemption for new corporations that bring to market intellectual property developed by qualifying Canadian universities, colleges or research institutes. This exemption is aimed primarily at clean technologies, health technologies, telecommunications and digital innovations. The provincial government, despite continued inter-governmental ill will, is looking to the feds to match this tax exemption.

Last year, the province announced plans to bring the business education tax (BET) down to 1.6%, and this year’s budget proposes to accelerate that process for businesses in northern Ontario. For companies in areas such as Sudbury, Thunder Bay and Algoma, the BET reductions will be in full force by 2010, four years earlier than originally planned.

The centerpiece of the budget is a $1.5 billion Skills to Jobs Action plan, a three-year spending program which includes aid for transitioning the unemployed to new careers, apprenticeship training and tax support for skills training, including postsecondary student aid.

As previously announced, Ontario will spend $1 billion on infrastructure in the 2007-08 fiscal year, nearly half of which is dedicated to roads and bridges outside Toronto and another half for transit projects in the Greater Toronto Area and Hamilton.

The government expects the money will create 10,000 jobs during construction.

On the individual taxation front, changes are limited. Ontario Progressive Conservative Party leader John Tory’s response to this essentially echoed Flaherty’s. “Mr. McGuinty simply doesn’t believe in letting Ontario families and businesses keep a bit more of their own money,” said Tory, at a Toronto news conference. “He thinks they might do something silly with it, like buy an Ontario product or invest it to create jobs in this province.”

For seniors, the budget includes a senior homeowners property tax grant of up to $500 per year for the elderly with low and moderate incomes who own their homes. An initial grant of $250 will be available in 2009 and will be increased to $500 beginning in 2010. The maximum benefit would go to seniors with a property tax burden of $500 and income below $35,000 and benefits will decrease from there depending on income and property tax categories.

As well, this budget will increase the income threshold for senior couples that receive Ontario property and sales tax credits. According to the budget, the new threshold will be set once the federal government finalizes the 2008 amounts for Old Age Security (OAS) and Guaranteed Income Supplement (GIS).

In addition, the province will extend to any remaining old LIFs or LRIFs the annual withdrawal and 25% unlocking features of the new life income fund (LIF) that was introduced in last year’s budget.

@page_break@As with other provincial budgets, Ontario has harmonized its rules to allow for the implementation of the Tax-Free Savings Account introduced by the federal government in its recent budget. The program allows investors to put up to $5,000 into the account, and while the initial deposit is not tax-deductible investment earnings grow tax-free.

On the financial services front, the government plans to appoint a committee to review the Ontario Securities Act and proposes as yet unnamed changes to regulations for securities dealers and advisors and investment fund managers. The government also said it plans to complete the streamlining of the Credit Union and Caisses Populaires Act.

The province is forecasting a $600 million surplus this year and is expecting real GDP growth of 1.1% in 2008, rising to 2.1% in 2009 and 2.7% for 2010. Spending is expected to rise 3.3%, to 102.6 billion, by 2010-11 and revenue is projected to rise 3.5%, to 103.8 billion, in the same period.

Meanwhile economists at Toronto-Dominion Bank recently lowered their GDP growth forecast for Ontario to just 0.5%, Scotiabank’s February forecast stood at 1.4% and the Conference Board of Canada is looking for a more substantial growth rate of 2.1% for this year.

In his speech at Queen’s Park today, Duncan noted that the slowing economy in the U.S., rising oil prices and the strong loonie are putting pressure on growth in the province. “With an uncertain economic outlook, it is important that our budget maintain our record of prudent fiscal planning and careful management,” he said. “We know that certain sectors, some communities and too many families are not sharing in Ontario’s prosperity.”

While some observers are concerned that efforts have not been made to reduce the corporate tax burden across the country, TD Bank’s chief economist Don Drummond says recent moves from both the feds and the provinces will improve the tax burden on business investment “dramatically” by 2012. “While we agree that Ontario will need to bring down its general corporate income tax rate over time, we should not pretend this will have an immediate impact of insulating the provincial economy and its manufacturers from the U.S. downturn and the effects of the strong Canadian dollar,” wrote TD economists in a March 20 commentary. “Many of the province’s manufacturers are not currently in a profit position and hence not paying tax, regardless of the rate.”

“We have never said that reductions in business costs are the wrong policy; we say they are one part of a comprehensive policy,” Duncan told reporters in Toronto. “I would not spend all of our year-end money on corporate tax cuts.”

Finally, in response to Flaherty’s recent assertion that Ontario is heading down a dangerous economic path, Duncan said his government’s approach is “prudent, pragmatic and balanced” in the context of “everything going on in the economy.”

“One of the reasons I wore old shoes today is because I’m comfortable in my shoes and I’m comfortable in the shoes of this government,” he said. “I believe very strongly that governments should partner with other governments.”