Don Drummond: Growth won’t save Ontario this time
Ontario faces two huge challenges – economic and fiscal.
The province has already slid below the average of the rest of Canada in terms of output and income per capita. Beyond the next few years of recovery, Ontario can look forward to only modest annual growth of around 2 per cent, well below historical norms.
This reality frames the fiscal problem. The province can't simply adjust its fiscal parameters for a few years to eliminate a deficit caused by the recession and associated stimulus. Even with the restraint measures already taken, the provincial deficit would continue to rise in an environment of modest economic growth. The fiscal response must not only be strong and sustained, it must reform the way the government delivers virtually every service.
Last March's provincial budget established the Commission on the Reform of Ontario's Public Services to advise the government on how to return to a balanced budget no later than 2017-18 and how to get more value for taxpayers' money. Early in its work, the commission concluded that the deficit, $14-billion in 2010-11, was on track to rise to just over $30-billion by then.
Revenue growth at existing tax rates would be insufficient to cover program spending, where existing cost pressures would drive spending much higher. "Existing" is the operative word here; our mandate precluded us from recommending tax increases, so we focused on changing the existing trajectory for spending.
Without vigorous fiscal action, the government's debt-to-GDP ratio would rise from last year's 35 per cent to more than 50 per cent. The danger is obvious. High-debt governments are vulnerable to the demands of financial markets, forced eventually to take draconian measures to keep their lenders happy.
Governments got out of similar fiscal holes in the 1990s, notably the federal government and provinces such as Alberta, Saskatchewan and Ontario itself. But they had strong economic growth to lend a helping hand; that, and a period of spending restraint brought them back to balance in relatively short order. Ontario even managed this feat while cutting taxes.
Once budgets were balanced, however, spending took off again, partly because it could (revenue growth remained strong) and partly because governments had missed an opportunity for thorough reform, a chance to really change the way they delivered public services for the better. This was particularly evident in health care, where the brakes were slammed on previous rapid spending growth, but reforms were partial. After a few years of restraint and growing perceptions that quality of care had slipped, all jurisdictions simply turned on the money taps again.
So we have to keep in mind two things. First, economic growth will not be a huge help this time around, either in the next few years or further down the road. Everything must be done to bolster the economy, but we can't count on the type of growth to which Ontario has been so accustomed. Second, the government must focus on reforming programs, not on simple (even simple-minded) cost cutting.
Affordability and excellence of public services are not incompatible; they can be reconciled by delivering all programs more efficiently, which serves both the fiscal imperative and Ontarians' desire for better-run programs. The silos of the health system can be better integrated to save money and ensure people don't fall between the cracks. Universities and colleges could deliver better value for the money through greater differentiation and reducing their high, internal rates of cost escalation. Impressive results have been achieved in recent years in Ontario's education system, but non-core costs have risen sharply and must be reined in.
Inefficiencies and client confusion are sown in many service areas by overlapping responsibilities among the three levels of government. In all cases, great efficiency requires clear plans and objectives, continuous analysis of performance and a firm determination to reform or scrap underachievers.
The commission is recommending a degree of spending restraint that is almost certainly unprecedented in Canadian postwar history – annual growth in program spending of only 0.8 per cent over a seven-year period. We would limit health to increases of 2.5 per cent a year, postsecondary education to 1.5 per cent, education to 1 per cent and social services to 0.5 per cent; everything else would contract by 2.4 per cent a year.
There are no easy escape routes from this course of action. A one-year delay in the target date for budget balance would permit spending growth of 1 per cent annually. We already incorporate higher annual revenues from tax compliance and other measures not requiring tax rate hikes. Even higher taxes would offer little relief. Debate over eliminating the last scheduled corporate income tax cut largely misses the point; such a step would reduce the $30-billion deficit in 2017-18 by only $800-million. To allow 2-per-cent annual spending growth, for example, would require a three-percentage point increase in the HST to 16 per cent.
Almost all of the commission's nearly 400 recommendations could and should be implemented regardless of the fiscal situation, simply because they offer Ontarians better value for the taxes paid to provide public services. Our report is replete with examples of potential efficiency gains in everything the government does.
Few, if any, governments have succeeded at this in the past; few, if any, have even tried. But throwing money at problems is no longer an option. Things must be done differently.
We think the Ontario government can deliver the best public services in the world at a cost Ontario taxpayers can afford. It will not be easy, but we think this is feasible. And we ask: Why not?
Don Drummond, former chief economist at TD Bank, is chair of the Commission on the Reform of Ontario's Public Services.