With Doug Ford’s improbable march to the Ontario premier’s office now all but complete, a familiar echo grows louder with every footstep. It’s the echo of Mike Harris.
Separated by a generation (Mr. Harris was first elected premier 23 years ago yesterday), both are mavericks whose grassroots, anti-elite brand of conservatism appealed to voters, even if their grasp of the finer details was flimsy. Both were swept to power by a disillusioned electorate bent on not just turning away from the incumbent government but punishing it. Both brought the Progressive Conservative party out of the political wilderness by riding a two-pronged pledge: to end government waste and return money to taxpayers’ pockets.
And, like Mr. Harris, Mr. Ford’s economic legacy will be defined by his determination to clean house in the public sector.
If Mr. Ford is going to pay for his tax cuts – and other campaign promises that will lower the government’s revenue base – he will have to deliver on perhaps the biggest and most opaque pledge in his platform: to cut billions in spending by implementing “efficiencies” in the government’s operations. Faced with deepening provincial debt and the prospect of a slowing economy over both the short and longer terms, he either has to reduce the government’s financial footprint, renege on his tax-cutting promises or send the province into a reckless spiral of deficits and debt.
And the make-or-break moment for his economic plan may come early.
“When you find yourself in a hole, the first thing to do is to stop digging,” said Tony Clement, a Conservative MP who was a cabinet minister in the Harris government.
“My best advice would be to very quickly at least start to turn the taps off,” he said. “That process is not a months-and-years-long process, it’s a weeks-long process.”
Mr. Harris created the blueprint for what Mr. Ford looks poised to embark upon in his famous (or infamous, depending on your viewpoint) Common Sense Revolution platform, which remade Ontario’s public sector more than two decades ago. The reforms and cuts were controversial and often painful; anyone who lived in the province at the time remembers the anger and turmoil triggered by cuts to health and education spending and social assistance.
But the Harris government also turned $10-billion-plus budget deficits into small surpluses, while slashing corporate and personal taxes. And the provincial economy averaged a healthy 3-per-cent annual growth under his watch.
Over the past 15 years under the Liberals, there was a reversal of the trends the Conservatives had put in place – some would argue for the better, but a reversal nevertheless. Employment in the public service shrank by 12 per cent in eight years of Conservative government under Mr. Harris and his successor, Ernie Eves; since the Liberals came to power in 2003, it has grown by 22 per cent. Per-capita program spending inched up less than 4 per cent under the Tories, well below the rate of inflation; under the Liberals, it’s up 80 per cent.
But the most alarming issue – the one that will hang over virtually every fiscal move the Ford Conservatives make – is government debt.
The provincial net debt has almost doubled in the past decade, to $308-billion as of March 31, 2018. And it is on course to swell further, to $360-billion by 2021, according to projections in the departing Liberal government’s March budget.
The PCs said little during the campaign about how they plan to rein in the debt. Indeed, the party’s thin official platform, dubbed “The Plan for the People,” doesn’t even mention it. In the plan, the party asserts that “Ontario doesn’t have a revenue problem. It has a spending problem.”
But the debt will certainly loom over the new government’s capacity to implement its social and economic policies. Historically low interest rates have helped Ontario keep its debt-servicing costs under control, even as the total debt has swelled. The Liberals noted in their budget that about eight cents of every dollar of provincial revenue is going to pay interest on the debt, a 25-year low. But with interest rates set to rise and with the current economic cycle having almost certainly peaked, those costs look destined to rise.
And economists warn that with economic growth destined to slow as the labour force ages, slower growth in government revenues will make it harder to pay those rising debt costs.
“That has a huge implication for the fiscal side,” said Queen’s University economist Don Drummond, who penned an influential government-commissioned report on the province’s fiscal sustainability in 2012.
A recent report from the C.D. Howe Institute, a Toronto-based economic-policy think tank, warned that unless Ontario can reverse the upward trajectory of its debt, the costs of interest alone on the debt load will take an increasingly large bite out of the government’s budget and will reduce its ability to respond to economic downturns. “If debt costs take up a large share of total revenues, that will leave less for other needs,” the report said.
“The fiscal course that Ontario is on is unsustainable," report author Ben Dachis, associate director of research at C.D. Howe, said in an interview on Friday.
It’s within this fiscal straitjacket, as well as an economy that is more likely to decelerate than pick up over the new government’s mandate, that Mr. Ford will have to deliver on his promises. In particular, the business and economic community will expect the government to address their concerns about competitiveness, in light of this year’s U.S. corporate-tax reforms and the uncertainties surrounding Canada’s future access to the U.S. market.
Economists say Mr. Ford’s pledge to reduce the province’s corporate-tax rate by one percentage point, to 10.5 per cent, would provide some welcome relief. However, lower corporate taxes alone won’t be enough to encourage the business investment the province sorely needs to improve productivity and put it on a sustained growth path. Unfortunately, the provincial government has limited power, on its own, to do much on that front.
“The federal government sets the rules on the corporate income tax system. The rate that the provinces levy is pretty much their only tool to address competitiveness,” Mr. Dachis said.
But he suggested that the Ford government could leverage its planned trim to the corporate-tax rate – which is already the lowest in the country – to bring its provincial counterparts to the table and co-ordinate on corporate-tax reductions, while pushing for federal reforms on things such as depreciation allowances and research-and-development credits. “It should be part of a broader national strategy,” he said.
Meanwhile, the bond-rating agencies, which were already nervous about the Liberal government’s return to deficits in its spring budget and were hardly put at ease by Mr. Ford’s campaign promises, are watching with great interest.
Michael Yake, vice-president and senior credit analyst at Moody’s, suggested his agency will only have so much patience for the Ford government to explain how it can make its plan work without setting the province’s finances on an unwelcome path.
“We wouldn’t expect something within a week or two – sometimes it does take time to put together a budget that incorporates where the new government wants to go forward,” Mr. Yake said. “But some sort of policy guidelines within the two months would be useful.”