How not to balance a budget

The Ontario budget, we are told, is finally balanced. Sure, it was balanced two years later than originally planned, relies on some pretty questionable accounting, and doesn’t actually do much to solve Ontario’s fiscal problems (as Ben Eisen and Charles Lammam noted recently in FP Comment). But at least it is balanced. So how came the Ontario budget finally into balance?

The answer is: the wrong way. According to the latest research from Alberto Alesina, a Harvard economist and top fiscal-policy expert, the correct way to eliminate a deficit is not through raising taxes, as the Ontario Liberals did, but through cuts to government spending and transfers. Trying to tax your way out of deficit instead is far more damaging to the economy. This fact, write Alesina and his co-authors, has been “consistently confirmed by a number of recent papers.”

Trying to reduce the deficit through higher taxes (as opposed to less spending) is “significantly more recessionary,” according to Alesina’s research, and has a “permanent effect on output growth.” One of the drivers behind this result is the deleterious effects of tax hikes on investment. Which is where the Ontario Liberals come in.

In 2012, then premier Dalton McGuinty introduced a so-called “temporary Deficit-Fighting High-Income Tax Bracket,” which was expanded in 2014 when his successor, Kathleen Wynne, both increased the tax rate and lowered the income threshold at which this higher rate would apply. Other taxes were also raised, with the budget three years sooner than the Ontario Liberals did, and did it without raising taxes. Federal government revenues were 14.4 per cent of GDP when the deficits began in 2008–09, and actually fell to 14.2 per cent when the budget was balanced in 2014– 15. The Conservatives were not the ideal model of fiscal prudence, but their approach was far better than that of the Ontario Liberals.

The Conservatives were also far better than the current federal Liberal government, to power two years ago, the NDP eliminated the low single-rate income tax, calling it “wrong-headed, grossly regressive, and unfair” and raised corporate taxes because they said businesses were being “undercharged.” This year, they introduced a carbon tax on top of it all.

Despite the tax hikes, earlier this year Rachel Notley delivered her second consecutive deficit topping $10 billion. She publicly scoffed at Saskatchewan Premier Brad Wall’s decision to cut spending (albeit modestly) in the face of a deficit. If the NDP are to be believed, there is no room to cut spending in Alberta (an excellent prebudget submission from the Canadian Taxpayers Federation showed otherwise), although the government seems always able to come up with more money for green energy subsidies.

Alberta’s NDP have offered no real plan to get back to balance in the foreseeable future, but it will be copying all the most economically damaging elements of Ontario’s fiscal strategy in the meantime, by raising taxes instead of shrinking spending. The only advantage Albertans have going for them now is that they don’t have to copy Ontario voters by keeping reckless fiscal managers in power for 14 years.