Ontario spending itself into economic crisis

Ontario Premier Kathleen Wynne has a new advisor: former TD Bank CEO Ed Clark, according to The Globe and Mail. Clark will apparently advise the government on a host of issues, including finding new revenue sources to balance the provincial budget.

We hope Clark, a well-respected business leader, does not believe the popular myth that Ontario policymakers are blameless for the massive debt accumulated by the province. As the myth goes, the province’s annual deficits and mushrooming debt are driven by forces outside of anyone’s control. Rectifying the problem is simple: the government needs to find more revenue.

In 2010, Clark favoured hiking the GST to combat the federal deficit, a recommendation that showed a surprising lack of understanding about the real source of the federal deficit.

The recession depleted federal revenues significantly in 2009/10, but the decline was short-lived and revenues rebounded within two years.

Despite the rebound, the federal government will only balance the budget this coming fiscal year.

The real problem was the massive ramp-up in spending that was supposed to be “temporary” but wasn’t.

Ontario is currently running a $10.9 billion deficit. Many think it’s the result of a lack of revenue. That’s why the Ontario Liberals have been desperately seeking new revenues and recruited Clark to help.

But the current deficit is not driven by a lack of revenue. Ontario has a spending problem.

Over the past 10 years, the Ontario government has increased spending at an average rate of 4.6% a year, well beyond what was needed to compensate for population growth and cost increases, and well beyond the rate of economic growth.

Had spending increases been held to the rate of economic growth (averaging 3.1% annually), Ontario would currently be spending $104 billion a year instead of the nearly $119 billion it plans to spend this year.

That’s a difference of $15 billion, more than the current $10.9 billion provincial deficit. Had spending increased more prudently, Ontario would have a $4 billion surplus today.

Spending into crisis
Ontario’s coffers remain in the red because it has not managed its spending.

Of course, the narrative at Queen’s Park is completely different. Policymakers say they have been hamstrung by the global restructuring in manufacturing and other external factors, implying that the government is not to blame for its ballooning debt.
If that were true, other jurisdictions such as the Rust Belt states of Pennsylvania, Ohio, Indiana, Michigan and Illinois would be in similar situations. But they’re not.

In fact, many Rust Belt states are more reliant on manufacturing than Ontario, and they’re more sensitive to the global restructuring.

Ontario’s economy has actually grown faster than its Rust Belt counterparts and yet these states have been much more fiscally responsible. From 2000/01 to 2012/13 (a period of both good and bad economic times), Ontario’s annual deficit averaged 4.2% of its annual budget. Ohio and Indiana ran surpluses while Michigan and Illinois ran small deficits.

As a result, Ontario’s net debt was 36% of GDP in 2011/12, the last year of comparable provincial-state data. Every Rust Belt state had government debt of 5% of GDP or less.

Ontario’s red ink stems from poor fiscal policy, not external forces. To solve the problem, the government needs to strike at its root, which is irresponsible spending. This is the message Clark, a man who no doubt understands the need for families, businesses and governments to be prudent, should bring to the premier.

Niels Veldhuis is president at the Fraser Institute. Co-author Ben Eisen is a senior policy analyst. This column is distributed by Troy Media.