AG: 2007 Ontario Economic Outlook and Fiscal Review

Introduction

The Ontario economy has proven remarkably strong and resilient in the face of an increasingly challenging global economic environment. Since 2002, higher oil prices, a high Canadian dollar and increased competition from newly industrializing countries have tested Ontario businesses’ ability to compete and thrive. More recently, businesses have felt further pressure due to a slowing U.S. economy.

Despite these adverse developments, Ontario has seen continued strong job creation and business investment. Incomes are on the rise and the standard of living is one of the highest in the world. Ontario’s economic growth continues to exceed expectations. Private-sector forecasts of Ontario’s 2007 real gross domestic product (GDP) growth now average 2.0 per cent, up from 1.7 per cent at the time of the 2007 Ontario Budget.

The clearest sign of the Ontario economy’s resilience has been its job creation record. Since October 2003, 417,900 net new jobs have been created. Over 95 per cent of these jobs were in occupations that paid on average over $19.50 per hour, including jobs in natural and applied sciences, management, social sciences, and education.

Still, challenges remain. This strong job creation has not occurred across all sectors of the economy, and many families and communities have been affected by job losses. While total service-sector jobs (private and broader public sectors) have expanded by 10.8 per cent since October 2003, employment in the goods-producing sector has contracted.

There are continued risks on the horizon. The weakened outlook for the U.S. economy, higher oil prices and the stronger Canadian dollar have reduced private-sector Ontario economic growth projections since the time of the 2007 Budget. This also means greater pressure on Ontario businesses over the next few years as they adapt to a much more challenging economic environment.
Investments for a Stronger Ontario

The Ontario Government is taking immediate action to further strengthen Ontario’s economic advantage and help the manufacturing, forestry, agriculture and tourism industries weather economic challenges. The government’s investment strategy builds on its five-point economic plan set out in the 2007 campaign platform, Moving Forward Together. In particular, the government is taking immediate action to keep taxes competitive, support innovation and accelerate its investment in infrastructure.

Measures announced in the 2007 Ontario Economic Outlook and Fiscal Review will boost Ontario’s ability to compete in the global economy by:

enhancing competitiveness through immediate tax reductions
investing in people and communities
investing in infrastructure.

In this document, the government is announcing more than $3 billion in new investments and tax reductions. These actions will boost Ontario employment by about 30,000 jobs over the next three years.
1. Enhancing Competitiveness through immediate tax reductions

The Province is proposing important new tax measures that support manufacturers and other sectors in Ontario challenged by current economic conditions. They would help Ontario manufacturers invest in their own businesses, creating and preserving jobs.

These new measures, totalling $1.1 billion in tax reductions over three years, include:

eliminating Capital Tax on January 1, 2008 for corporations primarily engaged in manufacturing and resource activities
providing a 21 per cent Capital Tax rate cut for all businesses retroactive to January 1, 2007, on the way to full elimination in 2010
increasing the small business deduction threshold to $500,000 from $400,000, retroactive to January 1, 2007.

The measures proposed would provide immediate tax relief for businesses, particularly for Ontario’s manufacturing and resource industries. This will help to further encourage business investment, strengthen manufacturing and enhance the province’s competitive position. See Annex II: Enhancing Ontario’s Tax Competitiveness for further details of these proposed tax cuts.

To assist manufacturers in acquiring new and advanced equipment and technologies, Ontario is paralleling the 2007 federal budget incentives related to accelerated capital cost allowances (CCA). A key incentive for manufacturers is the 50 per cent accelerated tax writeoff for investments in manufacturing and processing (M&P) machinery and equipment from March 19, 2007 until December 31, 2008. By paralleling the federal CCA measures, the Ontario Government will provide more than $400 million in tax relief over three years to manufacturers investing in the province. Ontario urges the federal government to quickly commit to extend this incentive for three more years to 2012.

The government has worked steadily to enhance the competitiveness of Ontario’s tax system. Since 2004, it has implemented or announced more than $2 billion a year in tax cuts for business when fully phased in. This support includes accelerating Capital Tax elimination to July 1, 2010 and reducing high Business Education Tax (BET) rates by $540 million when fully implemented in 2014.

Ontario’s current combined federal–provincial CIT rate for manufacturers and resource industries of 34.12 per cent is more than four percentage points below the average federal–state rate among its main trading partners, the U.S. Great Lakes States. Ontario’s rate is also lower than the current corporate tax rates in Japan, Germany and Italy.1 Once the proposed federal tax measures are fully implemented in 2012, Ontario’s combined CIT rate for manufacturers and resource industries will be even lower at 27 per cent.

Successful economies rely on a competitive tax and regulatory climate that supports innovation and economic growth. Modern and flexible regulation that promotes public policy goals while reducing compliance burdens can unleash the growth potential of Ontario businesses of all sizes. Ontario will continue to bring forward ways to reduce the regulatory burden on businesses to help them thrive in today’s competitive global economy.

AG: Economic value added or EVA ®

Economic value added or EVA® is a measure of the true economic profit of a company. Although in a sense it is nothing more than the traditional, commonsense idea of “profit”, it makes a clear separation from dubious accounting adjustments that may occur (remember ENRON, which for a long period of time was reporting profits, while in fact was in the final approach to becoming insolvent).

EVA® is calculated as the difference between the Net Operating Profit After Tax and the opportunity cost of invested Capital. This opportunity cost is determined by the weighted average cost of Debt and Equity Capital (“WACC”) and the amount of Capital employed.

The term EVA® is a registered trademark by its developer, the consulting firm Stem Stewart & Company, since 1994. Still, another much older term for economic value added, the Residual Cash Flow, has been also used by companies for years. These measures have their foundation in the residual income and internal rate of return, concepts developed in the 1950s and 1960s. Residual income was originally developed and used by General Electric (GE) to measure performance, and was popularized by McKinsey & Company as economic profit (Carton, Hofer, 2006).

Unlike other measures, EVA® can be calculated at divisional level (i.e. Strategic Business Units), can be used for performance evaluation over time, as it is a flow, and it captures the period-by-period value creation or destruction of a given firm or investment and thus makes it easy to audit performance against management projections.

EVA® can also be used for corporate valuation and equity analysis, motivating the managers and setting organizational goals.

Even though it is a much appreciated indicator, it also has some limitations. EVA® overemphasizes the need to generate immediate results and therefore it doesn’t stimulate investments in innovative products or process technologies. Also, when calculated at the divisional level of a company, it does not control for size differences, and a larger plant or division will tend to have a higher value than its smaller counterparts.

Taking into consideration the usefulness of EVA® , many companies have adopted it as part of a comprehensive management and incentive system, which leads their decision processes.

AG: Changing our economic base – a long, slow process

Changing and expanding the Territory's economic base is a challenge. Canberra as the national capital was designed to have federal government business as its economic base. However, self-government in March 1989 brought with it an onus on the ACT Government to create and manage its own economy.
In terms of gross value added by various industry sectors, government administration and defence continue to be the largest industries in the ACT (contributing 31% of current price Gross State Product, above its long-term average of around 28%), followed by property and business services, ownership of dwellings and construction. Figure 1 demonstrates the relative contributions over a 10-year period.
Figure 1: ACT industry value added contribution to current price Gross State Product, 2006–07

Note: includes Agriculture, forestry and fishing, Mining, Manufacturing, Wholesale trade and Taxes less subsidies on products; Source: Australian Bureau of Statistics 2007c

The major non-government industries are all strongly related to property, construction and land development.

The 2005–06 review of the ACT public sector and services also acknowledged that continued above average public spending on the back of, among other things, proceeds of land sales, is not sustainable. The government's intention with the review was to achieve structural reform to reduce expenditure, accompanied by revenue measures, so that land-based revenues would be a decreasing proportion of the overall revenues in the future (ACT Government 2007a:17).

Land-related economic activity has consequences outside of economic growth, leading to loss of significant biodiversity (see Conserving biodiversity issue). However, Commonwealth and ACT legislation are in place to protect biodiversity.

A recent example is the proposed residential development in the Molonglo Valley. The Spatial Plan, adopted as part of the Canberra Plan in March 2004, identified land for future residential development in the short-, medium- and long-term. Propelled by demand, particularly in the latter part of the reporting period, the ACT Government made a concerted effort to release land for housing. As part of this program, development of the Molonglo Valley, identified initially in the Spatial Plan as a possible future urban area over the next 30 years, has been brought forward. While some of that proposed development will involve conversion to residential land of pine forest that had been burned in the January 2003 bushfire, other parts of it may affect threatened wildlife habitat unless a satisfactory resolution can be achieved. This reinforces the need for planning to be strategic, regionally focused and based on sustainability principles.

The ACT private sector is characterised by large numbers of small and micro business (Small Business Commissioner 2006, see About the data). The Australian Bureau of Statistics estimates at the time suggested small and micro-sized firms in Canberra accounted for around one-third of the Territory's total workforce, and represented over 96% of all private sector firms.

The Chief Minister's annual Export Awards highlight successful business ventures in the ACT (see www.business.act.gov.au). In January 2007 the ACT Government released a new business prospectus, Investing in Australia's Capital, designed to assist business development and investment in the ACT.

Actions to support private business, such as the Canberra Commercialisation Council, the ACT Exporters' Network and the 'Live in Canberra' campaign, have received strong support from the Canberra Business Council. In its annual report for 2005–06, the council acknowledged the benefits of the ACT Exporters' Network in establishing links with other strategic groups such as Austrade, the Australian Institute of Export and Australian Business Limited to harness opportunities to grow the Territory's export community.

The Canberra Business Council also strongly promotes the interdependence between the Territory and its neighbours in the Australian Capital Region as a way forward.

AG:The Relationship Economy: Value Creation Factors

Most intangible asset measurements have been top-down: Investors theorize a contributing factor and then try to figure out how to measure it. Studies have been performed using different approaches to determine such value.

What has been developed is now known as EVA, or economic value added.

Some perceived value drivers translate into market value; others do not.

It suggests that in the connected economy, connections matter. Alliances are incredibly, even decisively, important.

HERE’S WHAT DRIVES VALUE (IN RANK ORDER):

Studies have shown a set of value drivers for Internet companies, because in no other industry are accounting values less relevant in explaining market capitalization. These drivers were culled from a stand-alone studies Forbes did on e-commerce firms. Here’s their list, in order of importance:

(1) alliances, (2) innovation, (3) eyeballs (usage traffic), (4) brand investment, (5) stickiness (minutes spent on Web pages).

Three categories had substantial effects on e-commerce market values. The most important was the number of alliances and alliance partners. Investments in innovation (captured by research and development and capital expenditures) ranked close behind. Perhaps the most widely discussed driver of e-commerce value—the number of “eyeballs” viewing a Web site—was measured by using data on a site’s visitors, reach, or market share, and the number of hyperlinks to other sites.

Forbes found that a high visitor count also was strongly associated with market values, supporting the push by e-commerce companies to drive traffic through their sites at almost any cost. Taken together, these three category relations indicate that the strength of an e-commerce company’s network—both in connections to its customers and alliances within its economic web of suppliers and other partners—has a profound effect on a firm’s value.

By contrast, investment in building brand awareness has no statistical association with market values. So much for those millions spent on Super Bowl ads. Big marketing campaigns may boost the egos of company executives, but the research suggests they do little to raise a firm’s value. Equally surprising, “stickiness”—vaunted as the next competitive step after eyeballs—proved only a minor contributor to value. This analysis was completed in the year 2000[i]

So what does this all mean to us as individuals? For individuals involved in the networked economy, it provides a set of levers that, if effectively applied, can prepare you for individual performance and increase in market value.Consider what we do with the medium of social networking and the related emergence of adoption. What are the attributes of participation within adult and business communities leveraging social networks as the medium? It appears obvious that the attributes closely match the drivers of value defined in the older study by Forbes. These include:

alliances with others for both personal and professional gains

innovation, our collective communities repeatedly fine news ways to leverage the medium

eyeballs, Have you noticed the craze for expanding ones quantity and quality of connections and viewers to your blog post?
brand investment, whether our businesses or us as individuals we investing time to build our brand for future opportunities
stickiness- time spent on our profiles and in our communities reviewing our content

As time goes by, a model will evolve to identify new value-creation drivers, while maintaining enough flexibility to adapt to the constantly changing nature of the companies and individuals that are producing value in the connected economy, The Relationship Economy. Our individual strategies should be aimed at thinking through what value we can create and exchange with other individuals and communities as a whole.

The definition of ones value is the critical answer which facilitates the five drivers of value previously mentioned. When you define your value offering and how it can be leveraged through the medium of social networks you have defined a new means for wealth creation.

Today developers and networking platform operators are capturing the economic values. Tomorrow, when individuals define their value and unite with a purpose, the economic gains will be afforded to the users who leverage the five drivers of value creation. The shift will create The Relationship Economy and it will disrupt markets globally.