A Wynning Ontario budget

Pity the new premier of Ontario, Kathleen Wynne, who faces a challenging budget in large part due to the mess that she inherited. Since 2005-06, Liberal governments have turned surpluses into large deficits, hiked taxes on Ontarians and let debt pile up. The province today has no visible economic plan to achieve balanced budgets and economic growth.

The proof of the pudding is in the numbers. As a share of Ontario’s GDP, program spending has jumped from 15.1% in 2005-6 to 17.5% in 2012-13 (excluding interest on debt), outpacing growth in the economy.

Total revenues as a share of GDP, including federal transfers, have virtually remained the same, only slightly rising from 16.8% to 17. 1%.

Net debt as a share of GDP has ballooned from 28.4% to 39.1% of GDP (this is on top of federal net debt that Ontario taxpayers must also cover with their hard-earned money). Interest expense on debt during these times of low interest rates is over $10-billion.

In other words, revenue no longer covers program spending, never mind debt-servicing costs. Debt will continue to rise unless a hatchet is taken to spending or taxes are substantially hiked. In this respect, the province is no different than France, the Netherlands and Spain with program spending in excess of revenues. Debt spirals out of control when this situation continues on a long-run basis.

Yet Ontario politicians seem to live in Wonderland. The premier proposes new infrastructure spending funded by “temporary” tax increases without taking the scalpel to wasteful expenditures such as green-energy subsidies, inefficient tax credits and mismanaged Crown corporations.

The NDP leader, Andrea Horvath, seeks to take Ontario to the Dark Ages with sharp increases in social spending and taxes on job creators, such as her proposed sales tax “reform” to fund infrastructure. Under the agreement with the federal government, the province is to fully harmonize the HST with the GST by removing restrictions on the input tax credits phased in after 2015.

The NDP argues that removing tax on business inputs is a “tax expenditure,” completely misunderstanding that a sales tax in principle applies to consumption, not to business costs. With HST on business inputs and the NDP’s proposed hike of corporate income taxes, the province is lurching backward, facing a grim prospect of slow growth and poor job creation.

The PC leader, Tim Hudak, is at least talking about major spending restraint, including wage freezes, feed-in tariff cancellations and pension reforms. But he is less clear as to how much spending must be cut

Pro-growth, smart spending policies needed as province faces fiscal mess

if the province were to get on track to balancing books and eventual debt reduction.

So what is the best course of action? The province not only faces a fiscal mess but slow economic growth. During the ramp-up of public spending in the past seven years, the province eked out positive economic growth of not much more than 1% of GDP. While prospects would improve with a growing U.S. economy, the province clearly should focus on fiscal policies that promote growth while achieving a more effective government that targets its spending intelligently.

Ontario has been making good strides to control health costs without impairing the quality of its services. It has cut back generic drug costs, intro- duced more competitive forces within the public health care system and enhanced primary care. Smart spending needs to be translated to other programs, and a hatchet taken to ineffective programs. The Drummond report, with its good basis for reforms, has helped the Liberal agenda. Nonetheless, the Drummond report should have recommended a much faster approach to balancing budgets. Instead of recommending expenditure restraint for years, it would have been better to cut spending harder in the first few years.

In the meantime, the province should avoid tax increases at this time. As Alberto Alesina has shown in his analysis of OECD countries, expenditure cuts with some reduction in taxes far better achieves growth than blowing up government with new spending. In this sense, Hudak is on the right track.

Any tax reductions should be aimed at reducing rates and broadening tax bases rather than the present approach, which is doing the opposite. The province could reduce corporate income taxes without a significant revenue cost (once accounting for companies shifting profits into Ontario) and rid itself of a host of tax incentives that are small (because few take them up) or because they are no longer necessary.

The small business deduction alone costs $1.5-billion and provides significant relief to households with more than $100,000 who can avoid or defer personal income taxes.

Ontario budget making is not an easy exercise for Wynne, who faces NDP demands to either spend or face an election. Rather than bowing down and paying her tribute, she should force an election by introducing a budget that will be voted down by the legislature. Then the ballot box will settle Ontario’s precarious finances.