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Jeffrey Simpson (Brigitte Bouvier For The Globe and Mail)

Jeffrey Simpson

(Brigitte Bouvier For The Globe and Mail)

JEFFREY SIMPSON

Ontario can no longer hide from taxes, restraint Add to ...

“There are only hard answers and difficult solutions.” So said Don Drummond and his three fellow commissioners about reforming Ontario’s health-care system. They could have used the same words for the entire government of Ontario.

Ontario’s problem is not that it has big government, per se. If you want to see that, on a per capita basis, head to Alberta or Quebec. As the commission correctly noted, “Ontario runs one of the lowest-cost provincial governments in Canada relative to its GDP and has done so for decades.”

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Ontario is at or near the bottom in funding universities. The health-care system is not the most expensive in Canada; the welfare rates are not the most generous. It doesn’t offer $7-a-day daycare, as in Quebec.

No, Ontario’s problem is that the size of its government doesn’t fit its revenues, and hasn’t for a long time. Those revenues have been hit by the slow, steady erosion of Ontario’s competitive position, in the face of which governments kept adding spending for which there were insufficient revenues.

As a result, like the frog in boiling water, the province’s fiscal situation slowly weakened. Over the past quarter of a century, Ontario’s debt ratio more than doubled to 35 per cent from 14 per cent. Ontario now finds itself lumped in with the three Maritime provinces; unless it changes course, it will find itself level with Quebec’s 50-per-cent ratio.

For most of the past decade, Ontario’s growth rate lagged behind the rest of Canada. From being an economic motor for the country, capable of sharing its surplus, Ontario became a drag, incapable of sharing but still required to do so by the perversity of various federal-provincial programs.

Worse, Canada entered into a form of the dreaded “Dutch disease,” whereby the currency soars on the back of high commodity prices, thereby diluting the economy’s competitive position. Ontario has suffered from the Canadian version of “Dutch disease”: High oil prices and large oil exports keep the currency high, causing competitive problems elsewhere.

Ontario has itself to blame, too. Its companies, like many across Canada, didn’t innovate enough; its wage rates in too many industries were uncompetitive; and – to come to the nub of the Drummond report – its public sector was too flabby for the revenue base on which it rested.

The largely unionized providers in all major public services – health, K-12, universities, courts, policing – essentially took new moneys the provincial government poured into their institutions and turned them into wage gains rather than productivity improvements.

Since about half of the provincial budget is taken up by wages and benefits for the million or so public-sector employees, higher remuneration coupled with no productivity gains spelled trouble. Under Premier Dalton McGuinty, these wage gains bought labour peace but no corresponding improvement in output, a politically satisfying but economically deadening outcome.

Governments, especially the McGuinty government, refused to tell the truth to the electorate. They kept assuming, and hoping, that the robust economic times of yesteryear would return. And they did two things simultaneously: They refused to raise taxes, and they kept on adding new spending programs or letting existing ones expand. In the last election campaign, none of the parties came remotely close to levelling with the voters.

The NDP answered every challenge with a call for higher corporate taxes, as if that alone would make difficulties vanish. A more puerile, populist response could scarcely be imagined, except for those proposed by the other parties.

The flight from reality that has characterized Ontario’s political culture has been completely challenged by the Drummond report. There’s no longer any place to hide – although, if one exists, we can expect the politicians at Queen’s Park to discover it.

Mr. Drummond’s mandate precluded any study of tax hikes. Ontario will need them (a rise in the sales tax and personal income tax surtax on the affluent), along with serious spending restraints, to climb out of the fiscal hole so accurately and painstakingly described by Mr. Drummond’s team.

 
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