Why provincial, federal budgets are destined to be billions apart
While most other provinces are facing economic malaise, Ontario is going gangbusters by comparison.

thestar.com
Feb. 25, 2016
By Martin Regg Cohn

If you take the treasurer at his word, and believe his numbers, this is Charles Sousa’s final deficit budget.

Barring an economic cataclysm, Ontario’s governing Liberals vow to bring in a balanced budget next year.

As promised in the last provincial campaign.

Unlike the federal Liberal government, which plans a hefty deficit in its own budget next month.

As promised in the last federal election.

Both are Liberal governments - they speak the same language and talk to each other all the time.

Why, then, are their budgets destined to be so many billions apart?

What motivates Premier Kathleen Wynne to eliminate the provincial deficit by next year - it’s pegged at $4.3 billion for 2016-17 - amid so much economic doom and gloom?

After all, Prime Minister Justin Trudeau’s sunny ways will transform Ottawa’s finances from a projected balanced budget he inherited to a deficit in the range of $30 billion.

Why the Canadian deficit disconnect?

As they say in U.S. politics: It’s the economy, stupid.

The difference here isn’t ideological, it’s geographical. While most other provinces are facing economic malaise, Ontario is thriving by comparison.

When the country is hurting there are good reasons for fiscal stimulus bankrolled by deficit financing. But there is little reason to do it here now, beyond what Queen’s Park is already doing.

Ontario’s economy grew by a robust 2.5 per cent in 2015 (more than double the national average) and will keep growing faster than most provinces. The provincial unemployment rate has declined from 7.6 per cent in 2013 to 6.6 per cent this year, trending down to 6.1 per cent by 2019 (below the Canadian level).

That’s the good news, but the budget news is that Ontario is weighed down by years of borrowing and a burgeoning debt. All the more reason to eliminate the deficit sooner rather than later.

Having promised on the campaign trail to do so, Wynne is keen to maintain her political credibility, and Sousa is mindful of Ontario’s precarious credit rating. But there are other good reasons for fiscal prudence.

Provinces lack the economic levers and fiscal capacity that the federal government possesses to get the biggest bang for those borrowed bucks. With the Conservatives displaced by the Trudeau Liberals, Ottawa is better placed to shore up any stimulus that may or may not be needed.

Ontario’s Liberal government is giving free tuition to university and college students from low-income families - and taking more from motorists and homeowners through costlier gasoline and natural gas.

Moreover, Ontario is already overextended. Its debt has doubled over the past decade to nearly $300 billion, costing us more than $11 billion a year in interest alone. That burden adds up to nearly 40 per cent of Ontario’s total economic activity - the highest debt to GDP ratio in decades.

Ontario has allocated $137 billion over the next decade for transit, roads, hospitals, and schools - investments that promise an economic multiplier with a social dividend. That’s good as far as it goes.

But you can have too much of a good thing. If anyone wonders why Ontario doesn’t go deeper into debt, the answer is it already has, for a long time.

That fiscal reality didn’t stop some members of Wynne’s government from fighting an internal battle for more deficit spending this month, notably on health care. But Wynne, backed by Environment Minister Glen Murray at the cabinet table, concluded they could achieve their social goals - in health, education, welfare and shelter - without going further into debt.

One reason for Murray’s reticence was the knowledge that his ministry had laid the groundwork for an additional $1.9 billion a year in annual revenue - a sin tax levied by stealth on companies for their carbon emissions in the fight against global warming.

Under a cap-and-trade system that “makes polluters pay,” higher corporate costs will be passed on to consumers at the gas pump and on their natural gas bills. A tax by any name, cap and trade will be controversial, but is unavoidable after years of inaction.

The government is also counting on a $2-billion injection from higher tax revenues and the partial privatization of Hydro One to reach its deficit target. But a balanced budget is not an end in itself; it also requires a political balancing act that weighs competing interests, not just interest rates.

While waste may be as rife at Queen’s Park as in other governments, wage hikes have been constrained more than most. Since mid-2012, public sector pay raises in Ontario averaged 0.6 per cent, compared to 1.8 per cent municipally, 1.9 per cent in the private sector, and 1.7 per cent federally.

Public sector unions routinely call for increased salaries as a way to stimulate the economy. But the record shows that wage restraint did not stand in the way of Ontario’s recovery. Instead, we are benefiting from a strengthening U.S. recovery and a weakening Canadian dollar (worth just under 74 cents), which have together stimulated manufacturing exports far more than any government policy.

All the more reason for Ontario to focus on getting its finances in order, conserving cash in good times. So that it can be ready when bad times inevitably return.