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Jeffrey Simpson (Brigitte Bouvier For The Globe and Mail)

Jeffrey Simpson

(Brigitte Bouvier For The Globe and Mail)

JEFFREY SIMPSON

Wynne’s Ontario can no longer afford to ignore fiscal reality Add to ...

Well, that didn’t take long. Moody’s Investors Service has changed its outlook for Ontario’s fiscal situation to “negative” and warned of a forthcoming downgrade of debt. Standard & Poor’s is likely to follow very shortly.

Can you blame the ratings agencies? They studied the Ontario budget presented by the governing Liberals. They witnessed the party’s majority election triumph. They heard pledges, repeated in Thursday’s Speech from the Throne, to push ahead with that budget and its $12.5-billion deficit. And they witnessed Premier Kathleen Wynne’s refusal thus far to take a hard decision about anything.

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That the ratings agencies would do what Moody’s has now begun was evident before the election. In this space May 31, it was written that “ratings agencies already smell a rat. Get ready for a downgrading of Ontario’s standing if the Liberals win and actually try to implement this budget.” The only question was when, not if, reality would smack the Liberals in the face.

Now, having systematically fled from reality before and during the election, and having been rewarded handsomely for this evasion, Ms. Wynne and her government face the difficult task of beginning to tell the truth. This volte-face is always hard for a government that lives and dies by what pollsters tell politicians that voters want to hear, rather than by what they need to hear.

Squaring the circle of Ontario’s deteriorating fiscal situation with the expansionist Liberal budget will require spending restraint of a kind for which the party did not prepare the electorate, because the spending restraint will have to be tighter than anything the Liberals imagined. Moreover, the tax increase on people earning more than $150,000 a year, while progressive in a manner of speaking, will raise only a small amount of money, far below what the deficit requires.

Already, rumblings have begun at Queen’s Park about further tax increases. But on what, and how? If taxes are indeed boosted beyond the additional levy on those earning more than $150,000, what would that do for stronger economic growth, on which the Liberals have pinned an inordinate amount of hope?

Perhaps – but this is mere speculation – the Liberals will do a Quebec and appoint a commission to investigate the province’s tax code to see if it can find the right balance of promoting fairness and efficiency. After all, the previous Liberal government asked economist Don Drummond and his colleague to examine only the spending side of the ledger. His mandate explicitly ruled out examining revenues, a restriction he ruefully lamented. Governments in doubt, as Ms. Wynne’s evidently is, often seek delay and help through commissions. Why not, therefore Drummond II?

Of course, Ms. Wynne will whinge about how unfairly Ontario is being treated by federal transfer policies, a complaint recently given modest support by the Parliamentary Budget Office. But even if treatment were improved, Ontario would still face obstacles of its own making, and, more important, of shifts in the world and North American economies, and of an aging population, that will render governing choices much harder than anything the Premier spoke about before and during the campaign.

The most likely scenario, now that reality is smacking Ms. Wynne in the face, is that she will do a Jean Chrétien. Here was a prime minister who waltzed into office with a big smile in 1993 saying trust me and everything will be okay. He dawdled through 1994 and then, with finance minister Paul Martin helping hugely, got serious about attacking the federal fiscal situation with a tough budget in 1995 – for which the party was rewarded by public opinion.

It helped the Chrétien-Martin duo to find courage when outside observers – including ratings agencies – started sending disquieting signals about the country’s inattention to its fiscal challenge. The knock-knock coming from the ratings agencies for Ontario might therefore help concentrate previously scattered minds.

The Chrétien-Martin effort was easier in one sense than what confronts Ontario. Ottawa could cut transfers to the provinces as part of its assault on the deficit, an option obviously not available to a provincial government.

The only glimmer of hope is that a majority government and external messages of disquiet will encourage the Ontario Liberals to govern with a seriousness of purpose almost completely lacking in their election campaign.

 

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