The calculations underlying Ontario Progressive Conservative Leader Tim Hudak’s plan to create a million jobs is drawing heavy flak from economists. The Tories contend that if they form the next provincial government, their nine-point economic platform would create 500,000 of those jobs, while another 500,000 jobs are assumed to occur anyway. But that assumption may be overly optimistic.
Ontario’s economic prospects have plummeted over the past decade. The once-powerful engine of the Canadian economy has fallen to “have-not” status, receiving a $3.2-billion federal equalization payment in 2013-2014. Anemic growth in gross domestic product, high youth unemployment, and stagnant business investment herald a provincial economy in trouble. Private-sector job growth has fallen to one-third of the rest of Canada and personal GDP is now $3,000 less than the provincial average.
Statistics Canada reports that more than 250,000 Ontario manufacturing jobs have been lost over the past decade as power rates, once among the lowest in North America, have risen to among the highest. Worse, these rates are expected to increase by another 40 per cent to 50 per cent to pay for costs incurred under the previous McGuinty government’s disastrous Green Energy Act. A 2013 Fraser Institute report calculated that manufacturing investment returns in Ontario will drop 29 per cent as those rate increases are phased in.
These are all sobering numbers, but there’s another danger lurking that could make even this feeble economic performance seem like the good old days. Persistent deficits over the past decade have doubled Ontario’s debt, to more than $268-billion.
And Ontario Liberal Leader Kathleen Wynne’s budget/election platform projects a $12.5-billion deficit this year, en route to a $300-billion debt by 2016. Interest payments on the provincial debt are approaching $11-billion, more than 9 per cent of total revenues, and this in a period when bond rates are the lowest in 75 years.
If the average interest rate on the provincial debt were to rise to the level that bond rates were at only five years ago, debt servicing costs would more than double, eating up 20 per cent of revenues. And that is assuming Ontario’s debt rating doesn’t change. Moody’s Investors Service downgraded Ontario’s rating in 2012, citing the province’s growing debt burden and its “subdued” outlook for growth, along with “ambitious” spending targets. Last month, Moody’s issued a warning that several Canadian provinces risked further downgrades if deficits aren’t brought under control. Ontario was no doubt top of mind in its announcement.
After the 2008 financial crisis, more than a dozen American states teetered on the brink of financial ruin. California, with a debt more than twice that of any other state, became the poster child for fiscal mismanagement because of its inability to control spending. Yet a Fraser Institute study found that Ontario’s debt of $268-billion at the end of the 2012-2013 fiscal year was 70 per cent higher than California’s $145-billion (U.S.).
Given California’s much larger economy and population, those debt loads translate into 8 per cent of GDP for California compared with 40 per cent of GDP for Ontario, or five times higher for the province. The $20,000 per-capita government debt burden of Ontarians is also more than five times higher than that of Californians. Finally, California’s debt servicing costs consume only 3 per cent of government revenues, compared with 9 per cent for Ontario.
Ontario has been infected by a Keynesian disease, the idea that deficit spending must continue until economic recovery improves. But is low economic growth the new realty for Ontario? And are unsustainable debt and deficits actually discouraging private-sector investment, preventing the recovery that deficit spending is supposed to stimulate?
If the answer to these questions is yes, then each new deficit is another step closer to the fiscal cliff. Rather than arguing about how many jobs could be created, Ontarians would be wise to focus on how many would be lost if their province falls over that cliff.
Gwyn Morgan is a retired Canadian business leader who has been a director of five global corporations.