During last spring's Ontario provincial election, the two leading parties couldn't agree on anything, except this: The Liberal government's pre-election budget was all about more. More government, more programs, more spending. The truth was closer to the opposite, but the Progressive Conservatives and the Liberals both pretended otherwise. They had their reasons.
The Conservatives wanted to motivate their base by portraying the government as left-wing, big-spending and "progressive." The Liberal government of Premier Kathleen Wynne was more than happy to be called names – since the labels appeal to Liberal voters, and especially New Democrats. Both parties tried to play the same wedge issue; the Liberals ended up driving it to a solid majority government.
But though neither party wanted to acknowledge it, the Liberals' 2014 budget, their election blueprint, promised austerity. The rhetoric said more, more, more, but the numbers said less, less, less. Program spending is to be flatlined at $119.4-billion between 2014 and 2017. Taking inflation and population increases into account, that's a real cut of 3 per cent or so per year – four years running.
The challenge ahead was reinforced on Monday, with the release of Ontario's Fall Economic Statement. Economic growth in 2014 was expected to be modest, at 2.1 per cent; it's now been downgraded to 1.9 per cent. Growth has also been revised down slightly for the next three years. (Blame the global economy.) Lower economic growth will translate into $500-million less in expected revenues this year. All of which makes a promise to reduce the $12.5-billion deficit, and balance the budget by 2017, a little more difficult.
And now, a brief public service announcement about deficits. Public finance got so out of whack in the 1980s that, for many voters (and for all conservative parties), the line between deficit and balanced budget has become the defining line between good government and bad. It isn't. Government exists to govern and provide various services, and the Ontario Liberals won re-election largely because they promised to worry about maintaining and even improving those services – and not just about achieving budgetary balance. Governments can and should run deficits in times of recession, and Ontario did. But eventually, the province has to move back into balance.
Ontario is not facing a fiscal crisis. Not even close. There's constant talk about the fear of a debt downgrade from ratings agencies, but Ontario is currently able to borrow at historically low rates, and until the global economy picks up, that's not about to change.
Fiscal crisis, no. Fiscal problem? Yes. There's a stubborn gap between revenues and expenses. The box is all the tighter because Ontario is a low-tax province, with the lowest per-capita spending in Confederation. What's more, Ontario taxpayers pay billions more to Ottawa than they get back; now that Ontario is a less wealthy province, the long-standing discrimination hurts more than ever.
If growth picks up, tax receipts will rise and a lot of Ontario's fiscal problem will simply solve itself. But barring that, the government has some hard choices to make: It can abandon its deficit targets, find new revenue sources or make deeper spending cuts.
The first option – bigger deficits – might be the right choice in a recession. But that's not where Ontario's economy currently is.
The second option, more revenues, is something the province is clearly after. In the spring, the province raised income taxes on those earning over $150,000. And Finance Minister Charles Sousa has been careful to avoid swearing off any future tax increases. But it's clear that the government would like to avoid new taxes – it is, after all, in the business of getting elected.
But it's also desperately hunting for revenue. It appointed former TD Bank Group CEO Ed Clark to look at everything from selling provincial assets to squeezing more money out of the private beer monopoly. In a perfect world, the Beer Store monopoly would be blown up. But in a world where Queen's Park needs money but doesn't want to be seen raising taxes, there's genius in stealthily taxing the Beer Store. Political necessity is the mother of budgetary invention.
And then there's the last option: more spending cuts. Nearly half of Ontario's program spending, $50-billion a year, goes to health care. Education gets nearly $25-billion, Community and Social Services spends almost $10-billion; Training, Colleges and Universities gets just shy of $8-billion. The government is already bending the cost curve down – for example, the education budget grew by less than 1 per cent a year from 2011 to 2014. And Ontario is also already Canada's second-lowest per-capita spender on health care. But absent higher economic growth or new revenues, the province is going to have to find even more savings, especially in those big ministries. Ontario, the most cost-effective provincial government will have to figure out how to become more efficient yet. It won't be easy.