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murphy and veldhuis

Robert Murphy is a senior fellow and Niels Veldhuis is president of the Fraser Institute, which has just released an economic and fiscal comparative report of Ontario and the Rust Belt states, available at www.fraserinstitute.org.

Despite the talk of painful austerity, Ontario continues to bleed red ink. Finance Minister Charles Sousa projects a deficit this year of $8.5-billion and doesn't predict a balancing of the books until the 2017-18 fiscal year.

Yet Ontario policy-makers have no excuse for such timidity, especially as Mr. Sousa's rosy projections assume continued economic recovery. Ontario has enjoyed much stronger economic growth than the U.S. Rust Belt states, yet has run up much more government debt.

In a new Fraser Institute study, we and our co-authors chose the Rust Belt states for comparison because they, too, have struggled with a reliance on manufacturing, yet they, unlike Ontario, have managed to get their fiscal houses in order.

The Rust Belt states are Indiana, Michigan, Ohio, Pennsylvania and Illinois. (The term was popularized when the American Steel Belt region, once known for its industrial strength, entered a period of economic decline.) The selection of this peer group controls for the regional reliance on manufacturing; during our period of analysis, several of the Rust Belt states had higher concentrations of manufacturing than did Ontario or Quebec, another province that we included in our comparisons.

From 1999 to 2013, both Ontario and Quebec had markedly worse financial performance than the Rust Belt states, even though they enjoyed much stronger economies. Ontario's real GDP grew at a compound annual rate of 1.9 per cent, and Quebec's was close behind at 1.8 per cent. In contrast, the fastest-growing Rust Belt economy was Indiana's, at 1.3 per cent, while the dismal Michigan economy actually shrank slightly in real terms.

Similarly, Ontario outperformed all of the Rust Belt states in pri­vate-sector employment growth from 1999 to 2013. Ontario recorded an annual average rate of 1.2-per-cent private-sector job growth, second only to Quebec's 1.4-per-cent annual average. Among the Rust Belt states, Pennsylvania recorded the highest annual average private-sector job growth over this period – 0.6 per cent, half the Ontario rate. Illinois (-0.1 per cent), Ohio (-0.2 per cent) and Michigan (-0.7 per cent) all recorded contractions in private-sector employment over this period.

Yet despite Ontario's and Quebec's comparative economic strength, both performed quite poorly on measures of government finances. For instance, both have accumulated far more government debt than the Rust Belt states. Specifically, as of 2011-12, Quebec had a net provincial government debt of 49 per cent of GDP – five percentage points higher than it had been in 1998-99 – while Ontario had a net debt of 36 per­ cent, an increase of six percentage points. In total contrast, the Rust Belt states all ended the period with 5 per cent or less in net debt as a share of GDP.

Even more disturbing, by 2012-13 the Rust Belt states had all restored healthy budget surpluses (according to a broad measure, which includes the market value of state-administered employee pension funds), while Ontario and Quebec continued to run large deficits. Despite enjoying higher aggregate economic growth, the provinces are in a much deeper debt hole – and they keep digging deeper.

Ontario policy-makers cannot justify the persistent deficits that have given the province one of the largest sub-sovereign debt loads in North America. The Rust Belt states have experienced the same struggles as manufacturing shifts overseas, and they also went through the painful recession. Yet they managed to adjust spending to revenues, while Ontario's Finance Minister expects to rack up $13.3-billion in additional debt over the next two years.

To walk back from the abyss, Ontario must become much more aggressive in its spending reductions, bringing provincial finances in line with the rest of the industrialized world.

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