How to save Ontario

The surprise victory of Doug Ford winning the leadership of Ontario’s Progressive Conservative party over the weekend had the unfortunate effect of distracting voters from another one of last week’s big announcements. The Wynne government signalled that it would be unveiling a spending spree on social programs in its March 28 budget. And the question Ontarians need to worry about is whether that splurge is even fiscally sustainable. The way things look now, it most certainly isn’t.

Ontario Finance Minister Charles Sousa announced l ast Wednesday that his government has decided to backtrack on its promise to balance its budgets, with plans for an irresponsible $8 billion deficit in the coming year.

This was the same week that the acting financial accountability officer warned that the province is heading into a financial crisis in the coming three decades. Ontario’s aging society will increase demands for public health care and long- term care support while taxes paid by a slow- growing working population won’t keep pace with the needs of the burgeoning retired population.

It isn’t just the Liberals who have yet to grasp the gravity of Ontario’s problems. Expect all three parties to make promises that are in complete denial of the grim reality. Ontario now not only faces serious fiscal problems, its growth is also stagnant, and will likely get worse now that the province is faced with a more competitive and protectionist U. S. economy. Consider these hard truths:

Ontario growth has been boosted recently from a sagging Canadian dollar, but it’s now slowing.

Since 2015, Ontario’s GDP has grown at 2.7 per cent annually but the finance ministry expects it to slow to roughly two per cent after 2017. Employment is growing about 1.1 per cent per year. However, productivity growth ( the increase in out- put per working hour) is expected to decline to less than a percentage point, consistent with historical trends. In the meantime, average household pre- tax income has barely grown si nce 2011, rising from $ 37,200 to $ 38,800 ( in 2017 dollars). This is simply appalling.

Ontario’s competitiveness is declining relative to the U.S.

The American economy, fuelled by business- friendly policies, is now on a tear. Tax reforms that reduce corporate and personal taxes are expected to boost U. S. productivity by encouraging the adoption of new technologies. Normally this would be good news for Ontario, where exports, almost entirely to the U. S., count for half of GDP. But investors aren’t nearly as interested in capitalizing on U.S. growth from Ontario, given the potential of NAFTA disappearing and the White House thickening its borders with tariffs and duties, when they would much rather invest in the U. S. instead. Ontario investment performance has already been weak over the past three years: investment in machinery has risen little more than one per cent year and non-residential construction has actually declined.

Ontario faces surging debt liabilities, despite having constrained program expenditures.

Program spending in Ontario has fallen from 17.6 per cent of GDP in 2011 to 16.6 per cent in 2017, as the province moved closer to a balanced budget ( even considering the accounting hanky- panky that snuck some debt off the province’s balance sheet to hide it inside Crown agencies). However, Ontario’s debt is still rising by over 10 per cent per year, faster than nominal GDP growth. As predicted by the interim financial accounting officer, the debt- to- GDP ratio is expected to rise from about 38 per cent today to over 60 per cent in three decades if nothing is done.

Add it all up, and Ontario’s prospects look very dim indeed: a future of rising debt and slowing growth. Whoever forms the next government will have to be realistic as to what they can do to reverse the situation. Here are two basic things the next government will need to do:

First, start getting serious again about economic growth. More growth means rising incomes for households, more tax revenues and fewer expenditures on social assistance. Deficits and debt become more manageable in growing economy. That doesn’t mean just more spending on education and infrastructure, which can arguably help growth in the long run. Ultimately it is the private sector that pays the bills. In recent years, the Ontario Liberals have shifted to the left and has sharply raised barriers to growth: Taxes have been rising on incomes, property and products; energy costs have soared from mismanaged climate policies; labour, housing and other regulatory costs have undermined business performance.

Ontario businesses have to compete against U.S. com- panies that are suddenly far, far more competitive. The province needs to start reversing its anti- growth policies now. Like the recently adopted American policy, any new regulation should only be adopted if it is yields positive economic gains and results in the removal of at least two other regulations. Ontario will need to bring in strategic tax cuts, like temporary accelerated write offs to encourage the adoption of new technologies. And it should un- reverse the legislated corporate tax rate cut from 2009 that it unwisely reversed. And there are currently tax and income-tested programs that result in marginal tax rates above 50 per cent. They have to go.

But none of these growth policies will matter if the province cannot control its deficits and debt. It is inevitable that someday there will be another recession: given the province’s current fiscal situation it would be a calamity. Spending needs to be reviewed to eliminate waste ( primarily poorly designed procurement policies and ineffective subsidy programs). Any surpluses can then be used to reduce debt and provide room for productivityenhancing program spending and tax reductions.

Maybe t hat all seems like a tall order. In fact, federal and provincial governments of all political stripes got themselves out of two decades of similar runaway tax, spending and deficit problems back in the mid1990s and made it back to fiscal health ( after which most began repeating the cycle again). Quebec’s Couillard government has lately been using better fiscal policies to reverse the trajectory of growing debt and slow growth.

Ontario voters should be demanding the same. That means being cautious of any party insisting there’s plenty of room to spend taxpayer dollars and running up deficits. If the denial and fiscal irresponsibility doesn’t stop very soon, the results for Ontario will be devastating.

THE PROSPECTS LOOK VERY DIM INDEED: A FUTURE OF RISING DEBT AND SLOWING GROWTH.