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Saturday, Feb. 4, 2006

What to do about Ontario's potential deficit

By MARK MULLINS
Globe and Mail
Tuesday, Sep. 23, 2003

By now, dear reader, you may have heard about the Fraser Institute report on Ontario's finances.

The report's basic conclusion: the Ontario provincial government is running a potential deficit of $4.5-billion this year, quite a distance away from budgetary balance. Worse, says the author, all of the political parties are campaigning on platforms that will only deepen the crisis.

In fact, the plans of the Liberal frontrunners -- or the Conservative party in power -- could see a cumulative debt increase of at least $23-billion between now and 2006. This comes about owing to unbalanced fiscal plans that see the Tories cutting taxes without sufficient expenditure control, and Liberals going on a spending spree armed with inadequate tax increases.

I have some considerable insight into the report. I am the author.

With that warning, and all that it entails about perceptions of bias, let me spell out some of the implications of the report.

First, the analysis is based on publicly available information. This is important, as the study is intended to provoke open debate on the state of the province's finances. To date, political leaders have not responded with a detailed critique of the numbers or analysis presented by the Fraser Institute. They are fully capable of such a response, as the report lays bare its assumptions and working data.

Instead, all three (including the lagging third place NDP, who were given at least a cursory examination in the study) continue to live in a land called complete denial. "The budget will remain balanced, our plan will balance the budget" say various party originated media releases — all the while, voters wait for answers to this pressing public issue. Contrary to the Kim Campbell dictum, elections are exactly the right time for a full discussion of important public matters.

Some people are dwelling on the political implications of the report, as if any one action or insight could alter the intentions of millions of voters. The only real political intention of the report is to hold politicians to account, to ask that they stand before the public with the courage of their convictions and a fully articulated policy stance. We are more than half way there today, with all three parties presenting well-written and reasonably detailed platforms. The rest of the journey will come from addressing the challenge of governing from a deficit position -- starting now.

What is the fiscal backdrop to this deficit?

The report's viewpoint is that spending has outpaced revenues — and this is not because tax cuts have weakened the provincial treasury. The real lurking menace is the health sector budget, now approaching almost half of all non-interest spending. When this sector rises by 7 per cent or 8 per cent a year -- and revenues rise only 4 per cent or 5 per cent -- you can see that we are in danger of harming our economic and fiscal health for the sake of well-meaning intentions. We fundamentally need to reform the health system, not throw more cash at it. Besides, the larder is bare.

The other fiscal starting points are all-time highs on spending per capita and a Tax Freedom Day in Ontario (another Fraser Institute innovation) that is the second latest date ever. In other words, our spending and taxes are at the highest levels ever. We do not need more.

As a suggestion, how about balancing the budget by cutting taxes and reducing unproductive spending by even more? The OECD, among others cited in the report, say that would boost our economic growth rate. It would also raise our standard of living and hold politicians to account by demanding a priority ranking for spending. But is it politically tenable? Let the voters decide.

Mark Mullins is an economic consultant and financial markets analyst. He is also Director of Ontario Policy Studies at the Fraser Institute. Any views expressed here are strictly his own and not necessarily those of the Fraser Institute.



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