The weekend papers were full of reports that Finance Minister Jim Flaherty was considering cuts to the provincial sales tax, which currently sits at 8% and is projected to bring in $13.4 billion this year.

"I think all our taxes are too high, quite frankly. We're committed to reducing taxes," said the Minister. He went on to note "we're reviewing all options as we prepare the budget." Well, so far so good.

But Minister Flaherty will have to exercise great discipline and caution with this year's budget, his first as Finance Minister. Most observers have come to the conclusion that Ontario was caught off guard and is extremely vulnerable in the current climate of an economic downturn. Past forecasts were made assuming that the "boom" would continue well into the future.

For the past five years a robust U.S. economy, solid consumer demand for automobiles and a burgeoning provincial high-tech sector ensured that Ontario's revenue take continued to rise. As well, a credible argument can be made that the 35% provincial income tax cut also buoyed overall consumer spending.

However, that was then and this is now. Current in-year spending is a full $1.3 billion above the original plan with the government still committed to further ramp up health and education spending to keep its 1999 election commitments.

Program expenditures across the government have increased by almost 16% over the past four years (well above inflation and population growth) and health care spending per capita (which accounts for population growth) has jumped almost 18% in the last three years.

Not only are these expenditure trends unsustainable over the medium-term, they will further squeeze other areas such as transportation or capital plans for schools and hospitals. Compound this reality with the province's still overly optimistic revised 2.8% growth forecast (down from 3.1%) and you don't have to be an economist to realize that something has to give.

Making matters worse, Ontario still has no credible plan for reducing its $112 billion debt. Interest charges alone on this beast chew up $9.43 billion ($1 billion higher than 1995 when the NDP was booted from office) or almost 15 cents out of each tax dollar sent to Queen's Park. This is the environment in which Mr. Flaherty must fashion a budget.

The province has followed a consistent track on income tax cuts, but recent federal moves (read: last October's mini-budget) mean that the current provincial rate (now set as tax on income as opposed to the old tax on tax) is actually higher in the new system than it would have been if it stayed as the old provincial tax on federal tax payable. In other words, the current Ontario 2001 tax rates are clawing back Paul Martin's federal tax cuts that took effect on January 1st. You're not seeing the full effect of federal tax cuts on your paycheque.

New and much lower rates must be set this May to correct this tax grab. As well, moves to accelerate the small business tax reduction schedule and corporate income tax reductions must be added to the mix.

Taxes encourage or discourage behaviour. Given the choice, we should tax consumption before taxing effort, production or wealth creation. To be fair, we are not blind to the fact the effects from a sales tax cut, especially in the current downturn, would be more immediate as opposed to the six to nine-month fiscal lag usually associated with income tax cuts.

Yet, the priorities for Budget 2001must be to curtail spending, end the provincial poaching of federal tax cuts, establish a long-term debt reduction schedule and make industry more competitive through further small business and corporate tax cuts.