What do Ontarians expect after a recession hammered the province, its manufacturing base eroded and a provincial government let spending rip and cut taxes?
You don’t need a degree in advanced math to know the result of these four hammer blows: a large deficit, an increased provincial debt, a higher debt-to-GDP ratio, and looming credit-ratings agency downgrades – in short, a fiscal mess.
Now the Dalton McGuinty Liberal government that’s partly responsible for the mess (it obviously can’t be blamed for the recession and world factors eroding manufacturing) will try to preside over its improvement. That is, if the Conservatives and New Democrats will let the government, which is likely but not certain in a minority legislature.
They, after all, were as culpable as the Liberals in refusing to talk seriously about Ontario’s fiscal mess during the last election campaign, but that won’t stop them from offering bromides instead of serious reflections on Tuesday’s budget.
Five years from now, the Liberals insist that today’s Ontario’s deficit of $15.3-billion will be gone – if the province is very, very lucky. A rise of just 1 percentage point in interest rates – a certainty in the next five years – means an extra $467-million in annual borrowing costs. A jump in health-care spending of 1 point above the anticipated 2.1 per cent a year – again, an almost certain outcome – would mean another $480-million. Anything above a wage freeze for public-sector employees will cost plenty. And so on.
The government says it will cut spending by $4 for every $1 raised in new revenue. This ratio is precisely why it will take another five years to balance the books, if all goes according to plan.
Given Ontario’s serious problem, it would have been better to put a surtax on high-income earners and copy Quebec’s courage: Raise the sales tax by one point a year over two years, with offsets for low-income earners. After all, as the government itself said, taxes have been cut by $12-billion over the past three years, so there was and is room to raise them to climb out of this deficit hole more quickly.
But Mr. McGuinty, perhaps afraid of being accused by Conservatives of being “tax-and-spend” Liberals, ruled out tax increases, which makes the achievement of a balanced budget more difficult and elongated the time to achieve it. Nor would be give up really bad public policies that were all about politics but cost a bundle: the 10-per-cent reduction in hydro rates for residential consumers and the 30-per-cent rebate for most university students.
Mr. McGuinty spent every year since his first election being exceptionally generous to all those who earn their living on public money, and now, suddenly, he has to be tough with the very same people on whose support and affection he counted. He is likely to find them less than grateful for his past largesse, gratitude being the most temporary of all political sentiments.
It won’t be easy to achieve labour restraint, as NDP premier Bob Rae discovered in the early 1990s when the province got hit by another recession that wrecked the budget. He tried to negotiate with the public-sector unions, offered them reasonable deals as a part of a Social Contract, and got stiffed.
Unless the big public-sector unions have changed – and judging by their leaders’ comments, most of them haven’t – Mr. McGuinty will find himself in prolonged and nasty battles over wages, pensions and other benefits that were enshrined in collective bargaining agreements that the province’s beleaguered fiscal situation can’t easily support.
In half a generation, Ontario has gone from being a big contributor to equalization payments to being a recipient, and from having a growth rate above the national average to one below it. Nothing suggests these factors will change – which represents the most fundamental shift of economic strength within Canada since oil was discovered in Alberta.
It wouldn’t much matter which party formed the Ontario government: The dilemmas of this shift would slap any premier in the face. Ontario’s parties have tried to run from the fiscal consequences of this shift, but they can no longer hide from it, as Tuesday’s budget made apparent.