TORONTO - Ontario and British Columbia will lead a countrywide recovery from last year's downturn despite the impact of a controversial new tax regime being introduced in both provinces, the Conference Board of Canada predicts in a new report.
Both will see their economies grow by 3.8 per cent in 2010 despite the fact they are also introducing the harmonized sales tax on July 1 — moves expected to raise consumer prices and temporarily dampen spending, the private-sector economic forecaster said in its Provincial Outlook report published Monday.
Overall, Canada's real gross domestic product is expected to be up 3.2 per cent compared with last year, which began with one of the deepest recessions in decades following the financial crisis that erupted in the final months of 2008.
The Conference Board expects growth to be even stronger in 2011, advancing to 3.3 per cent, as increasing private capital investment and improving trade with the United States offset subsiding federal and provincial government spending.
"We have a positive growing picture for the country as a whole...this year being the sort of front-end load," said Sabrina Browarski, a Conference Board economist.
Recovery in key trade sectors — manufacturing and autos in Ontario and forestry and construction in B.C. — will drive strong economic performances that will outlast a temporary drop in consumer spending when provincial sales taxes are added to goods and services that were previously exempt, Browarski said.
She added that new fiscal stimulus spending in B.C. and Ontario will help offset higher consumer prices when the HST kicks in.
"Money's being given back to households in droves in 2010 and onward to offset for the implementation of harmonization," said Browarski.
Ontario will garner an extra $2.3 billion in revenues from the HST by the end of 2014, but it has also set aside $1.7 billion to $2.5 billion in increased transfers to households and $1.3 billion in annual tax cuts. And B.C. has added an extra $300 million in total rebates to taxpayers over the period, she added.
Last year was especially hard on Ontario because of problems in the auto industry — including the temporary closures of virtually all North American factories owned by General Motors and Chrysler — and the broader manufacturing sector.
But employment has risen since the second half of 2009 and recovery in the labour market will bolster consumer spending on big-ticket items in the province, the report said.
In B.C., economic growth will be driven by the impact of the Vancouver Olympics earlier this year and a vast improvement in the forestry, manufacturing, and construction sectors, the report said.
Jon Kesselman, a professor of public policy at Simon Fraser University and the Canada research chair in public finance, said the HST will raise the cost of living in Ontario and B.C. by only seven-tenths of a percentage point.
"That, in itself, is not enough to disrupt economic growth that is coming from a variety of sources, including recovery from a recession, provincial spending, the U.S. economy at least showing some recovery, and world markets generally."
Kesselman added that the tax is actually designed to shore up investment in those provinces by relieving some of the tax burden on businesses.
"It's hard to say whether it will offset the slight dampening effect on consumers in 2010, but over the longer term, it will be substantial and will give stimulus to economic growth in those two provinces," he said.
The introduction of the single tax system in Ontario and B.C., which is used in Quebec and the Atlantic provinces, will bring more unity across jurisdictions, making the country more business friendly, said Andrew Dunn, managing partner for tax at Deloitte Canada.
"As we look at making Canada a more attractive jurisdiction for large multinationals, the fact that we now have two more provinces that are lining up their sales tax systems, it's good for Canada," he said.
"Ultimately, the Canadian economy is going to be better off if large multinationals want to operate in Canada."
Meanwhile, the Conference Board predicts only Alberta and Saskatchewan will join Ontario and B.C. with better than three per cent growth rates.
Alberta will benefit from a revival in drilling activity and stronger capital investment in the oilsands, but continued weakness in job creation will limit economic growth to 3.3 per cent this year, the report says.
Saskatchewan’s economy is expected to grow by 3.5 per cent this year. The potash industry is slowly recuperating as global demand for fertilizers strengthens, while the agricultural sector as a whole is also expected to fare better this year, the Conference Board said.
The board said the rebound from last year's downturn will be more gradual for most other provinces, with growth forecast at above two per cent.
New Brunswick will have the smallest gain in 2010, with its gross domestic product expected to grow by only 1.8 per cent over last year, it said.