In his budget speech, Ontario Finance Minister Dwight Duncan asserted – without explanation – that the role of government in Canadian society is “evolving.” But evolution is a slow process; you can’t always tell where it’s taking you. As analyzed by Worthwhile Canadian Initiative, the economics blog with the ironic name, Mr. Duncan’s budget suggests only that the provincial government will slow its spending for the next five years, without any expectation of permanent mutation.
How much will Ontario decelerate spending? After making allowance for inflation (say, 2 per cent) and the increase in population (say, 1.4 per cent), real-dollar per capita spending in the province will decline by $1,000 in the next five years – taken together, a 12-per-cent decrease. In this calculation, the government decreases spending from $8,500 per capita in 2012 to $7,500 in 2017 – at which point, spending converges with revenue. Yet, real-dollar per capita spending remains higher than Ontario’s historic norm.
From the early 1990s through the early 2000s, before the first Dalton McGuinty government in 2003, real-dollar provincial spending ran at roughly $6,000 per capita: $24,000 for every hypothetical family of four. Last year, at $8,500, it reached $34,000 for every hypothetical family of four. This increase, more than 40 per cent in eight years, was responsible for the inevitable deficits of the McGuinty years – leading to an accumulation of debt as reckless as it was relentless.
It’s now ironic that Ontario’s status as a “have not” ward of the federal government will help the province decelerate with an absolute minimum of discomfort. Ontario got its first equalization payment in 2009-2010: a mere $347-million. But these payments have increased with the province’s debt – rising more than 500 per cent in three years. In 2010-2011, Ontario got $972-million in equalization payments; in 2011-2012, $2.2-billion; and in 2012-2013, $3.2-billion. For this deeply indebted province, “have not” is a misnomer. For Ontario, have not is have a lot.
Ontario’s real-dollar GDP (expressed in 2002 dollars) is now $532.4-billion – 0.4 per cent less than it was before the recession hit in 2008. The province, in other words, has fully recovered. (Ontario’s GDP fell by $26.7-billion in 2008 and 2009; it has recovered $26.3-billion.) In these circumstances, Ontario’s equalization payments are a windfall that more than compensates for hard times.
Look at the hypothetical family of four again. With a population of 13 million, Ontario has 3.3 million of them. And the province collects $3.3-billion in equalization payments this year alone. Divide the number of families by the equalization payments. By this calculation, every hypothetical family of four receives a one-year welfare cheque of $1,000 – the very sum, in one year, that Mr. Duncan’s budget requires each family to sacrifice in five years. On this basis (assuming nothing else changes), each hypothetical family makes no statistical sacrifice whatsoever. (In real life, of course, there will obviously be winners and losers.)
Equalization payments are crucial to Mr. Duncan’s budget. The Finance Minister anticipates economic growth of 2 per cent next year – perhaps $10-billion. But GDP is an abstraction that produces revenue only when it gets taxed. Equalization payments, on the other hand, are 100-per-cent revenue. Indeed, an equalization payment of $3.3-billion probably equals the revenue that an extra $10-billion in GDP produces. In other words, it transforms a 2-per-cent increase in GDP into a 4-per-cent increase in revenue.
This legerdemain aside, Mr. Duncan’s budget does envisage an eventual convergence of spending and revenue. It’s hard to believe anyone could object to such minimal fiscal prudence. But the province’s spending will rise (by 7.9 per cent) in the next five years, revenue will soar (by 24.3 per cent) and debt will explode (through the $300-billion barrier). And “revenues,” as everyone knows, are the funds supplied by taxation of one kind or another. To a modest degree, Ontario will begin to pay for public services it has long considered free.
In his budget speech, Mr. Duncan noted the irony of it all. Interest payments on Ontario’s debt now equal the third-largest expense in the provincial government – exceeding, for example, the money the province spends on colleges and universities. This is evidence of gorging in the past, of excessive consumption at the risk of eventual starvation. This is proof of a beast with an enormous appetite – and, all its risk-taking aside, remarkable survival genes.