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Saturday, Feb. 4, 2006

Liberal, Tory budget plans don't hold water

Globe and Mail
Friday, Sep. 26, 2003

Typically, a political party can count on getting through an entire election campaign before it is forced to discard its financial projections for the government it wants to run.But with less than a week to go before Ontario votes, the Liberals' fiscal plan is just as dead as the Progressive Conservative budget it is designed to replace.

And already, the Liberal Leader is backing away from some of the promises that are part of the financial package. He's a bit short on detail, but he has implicitly acknowledged that the plan just isn't doable.

Indeed, neither the Liberals nor the governing Tories, who -- if recent poll results hold up -- are destined to lose power next Thursday, have presented Ontarians with budget plans that can survive their own internal contradictions and the Ontario economy's sudden slowdown.

The Conservatives' March budget figures have been trashed by every outsider who has taken even a cursory look at them. Indeed, the only people who seem to regard the numbers as valid are Premier Ernie Eves and Finance Minister Janet Ecker. The Tories promised a balanced budget for the current fiscal year, which began April 1, though because it includes a $1-billion reserve, there was an implicit surplus built into the numbers.

Early on, though, various credit-rating agencies took issue with those numbers, saying that a deficit is almost certain and could range from $1.2-billion (Standard & Poor's estimate) to $1.9-billion (Dominion Bond Rating Service). When the election was called last month, Toronto-Dominion Bank chief economist Don Drummond figured the province is "at risk" of a $3-billion deficit.

The most telling blow to Ms. Ecker's budget, though, came this week from economist Mark Mullins of the Fraser Institute, an architect of the Common Sense Revolution platform that propelled the Conservatives to power in 1995 under Mike Harris.

In an unusually detailed analysis, Mr. Mullins said the deficit this year could reach $4.5-billion. That's probably high, since it assumes that every bit of forthcoming economic and budget news will be bad, but he put the cost to the treasury of the weaker-than-expected economy at $854-million, a substantial number that others had not yet factored in.

This is bad news not just for the Tories but the Liberals, as well. The jumping-off point for the Tory and the Liberal plans is this year's budget, with its $71.6-billion in revenue and $70.6-billion in planned spending, with a $1-billion reserve fund as a buffer.

The Tories haven't offered revenue and spending projections beyond this year, but the Liberals included in their platform a fiscal summary of their program to 2006-07 that begins with a balanced budget this year. They have since acknowledged that they might inherit a deficit of $2-billion.

But if the 2003-04 fiscal year turns out to be a bust, all budget projections made by all parties are toast, as well. In other words, if the starting point is not zero -- a balanced budget this year -- or even minus $2-billion, as the Liberals assume, but minus $3-billion or $4.5-billion, then a new government will first have to dig itself out of that hole before moving forward.

Little wonder that Liberal Leader Dalton McGuinty concedes -- as he did Wednesday -- that some of his promised spending might have to be delayed.

Still, election pledges on spending and revenues rarely reflect the reality that later unfolds. In their 1995 winning campaign, for example, the Conservatives made detailed fiscal projections that turned out to be wildly off the mark. In his first term, Mr. Harris promised a 2-per-cent revenue gain combined with a 14-per-cent cut in spending on programs. What Ontario got by 1999 were increases of 21 per cent in revenues and one per cent in spending.

In the end, governments usually do as much of what they want to do as economic conditions will allow. The problem for whichever party wins next week is that the economic outlook is worse now than it was when they crafted their promises.

In March, Ms. Ecker assumed that the economy would grow by 3 per cent this year and 3.6 per cent in 2004, a shade below the consensus of private-sector economists.

Soon after, forecasters began marking down their predictions substantially. The SARS outbreak, the effects of trade bans on Canadian beef products after one case of mad-cow disease was found in Alberta and the soaring Canadian dollar all dampened Ontario's growth prospects.

Yesterday, Bank of Nova Scotia, which has consistently been more pessimistic than most about Ontario's outlook, turned even gloomier. In a forecast, it said the Ontario economy will expand by only 1.7 per cent this year and 2.6 per cent in 2004, less than the country as a whole. Ontario's showing will be Canada's second-worst this year, beating only British Columbia, according to Scotiabank economists.

An increasingly desperate Mr. Eves this week suggested that if the Liberals win, their first budget will be followed by "an abrupt downturn" that leaves millions unemployed. Those are extravagantly big numbers for a province whose labour force now numbers 6.7-million people, with 478,000 unemployed, for a jobless rate of 7.1 per cent.

The Tories argue that their steady succession of tax cuts has been the source of Ontario's growth in recent years and if those cuts cease, the economy will be in trouble.

Although economists would agree that tax cuts do generate growth, most rank other factors higher as key to the provincial economy -- such as the performance of the U.S. economy, interest rates and the Canadian dollar, things which no provincial government can influence.

In the past two decades, Ontario's growth has been closely correlated with that of the United States, with the provincial economy rising and falling in tandem with its biggest trading partner.

The U.S. economy is bouncing back from its latest woes and most forecasters look for relatively strong growth there in 2004. With Ontario so heavily leveraged to U.S. growth, that's a plus. Application Error

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