Governing by a thousand cuts: the leaner and meaner Doug Ford era

Excal.on.ca
January 11, 2019
Uzodinma Ukagwu

In October, the Ontario provincial government, led by Premier Doug Ford, announced that it was cancelling funding for three proposed university satellite campus projects, including York’s and Seneca’s proposed Markham campus, citing a $15- billion deficit. Ford’s government followed this up in November by cancelling plans to build Ontario’s first francophone university, sparking widespread outrage.

Construction was supposed to begin on York’s proposed Markham campus last month. The Markham campus was to open in September 2021, serving an estimated 4,200 students in over 20 degree programs. The future of this $253-million project is now in doubt, as the province was supposed to foot half of the bill. The university’s administration has, however, pledged to go on with the project.

Ford’s decision to scrap these projects, among other budget cuts, is an attempt to keep his campaign promise of finding “efficiencies” to lower the deficit, and eventually balance the Ontario budget. However, in regards to the mini-budget released in November, the Progressive Conservative (PC) government only managed to reduce the deficit from the $15 billion which they say the Liberals left behind, to $14.5 billion, a meagre 3 per cent drop.

Despite only modest cuts so far, every funding plan terminated, and every government program ended, has been met with loud and angry dissent from opposing parties and groups affected. This, perhaps, explains the slow pace of progress towards balancing the budget, and the daunting task facing the Ford government.

In the budget released in November, Ontario’s total debt now stands at $347 billion, reportedly the largest sub-national debt in the world, and amounting to $24,231 per person. The Ontario government has reported budget deficits for 24 of the past 29 years.

For 2018-19, the government estimates that it will service the debt with a whopping $12.5 billion.

Interest payment is the third-largest spending item on the budget after healthcare and education. This is despite a historically low interest rate at 3.5 per cent. For context, Ontario serviced its debt in 1995 at a 10 per cent interest rate.

Does Ontario’s fiscal situation, however, require a swift balancing of the books? Not necessarily. A stable, healthy, and growing economy, combined with a low interest rate, ensures that the debt is manageable for now. Ontario’s debt to GDP ratio (i.e. debt as a percentage of the economy) has trended downwards over the last few years and now stands at 37.1 per cent, not because of less borrowing, but as a result of a growing provincial economy.

This may however be the calm before the storm, as a few destabilizing factors on the horizon threaten to roil the global economy, including the US-China trade war, falling oil prices, and an increasingly volatile stock market. While there is no current crisis, the ideal time to put the Ontario fiscal house in order is now, so that we are ready to face any impending challenges.

Judging from public reaction to Ford’s government cuts that have reduced the deficit by $500 million so far, Ontarians will likely not take kindly to a harsher slash-and-burn approach, especially when it begins to target big-ticket items like healthcare and education. The Ford government seems to understand this, as they have maintained funding levels for both categories in the November mini budget.

How then should the government tackle the $14.5 billion deficit? If they cannot cut their way to a balanced budget, then the government must grow revenues to reduce reliance on borrowed funds, while capping growth in spending.

Revenue growth can come from two potential sources. Firstly, the government will earn larger revenue amounts from the growing economy. More importantly, however, new sources of revenue (i.e. new tax instruments) need to be created.

In the second aspect of revenue generation, the Ford government has largely shot itself in the foot, going in the opposite direction. Several government decisions have reduced the pool of revenue available to the province. This would mean that Ford’s cuts end up offsetting lost revenue, rather than significantly reducing the deficit.

One such action is the cancellation of Ontario’s carbon cap-and-trade system, a decision that Ontario’s Financial Accountability Officer, Peter Weltman, says will worsen the budget balance by $3 billion over the next four years.

The Ford government also enacted tax breaks that benefit low-income earners who make less than $30,000 a year. These tax breaks, which came into effect on January 1, are expected to cost the province $495 million a year in lost revenue.

The previous Liberal government had also put in place a surtax on high-income earners, but this has also been scrapped, costing Ontario another $275 million a year in lost revenue.

In total, the Ford government is forgoing $2.7 billion in revenue this fiscal year. If they had not given up this revenue, the entire $3.2 billion, which the government said it had saved by finding “efficiencies,” could have gone towards reducing the deficit, bringing it down to $11.8 billion, instead of the current $14.5 billion.

Ford and the PC government are determined to govern based on the modern conservative orthodoxy of lowering taxes and lowering regulations to boost economic growth, despite the reality of a very large deficit, and the need to grow revenues.

Given that creating new tax instruments is anathema to the PC government, and that marginal cuts will not balance the budget, as well as the public hostility to substantial cuts in major government programs like health care, it is apparent that the deficit will remain a fact of life for some time to come.

Ontario Finance Minister, Vic Fideli, seems to realize this, and has yet to commit to a timeline for balancing the budget, only suggesting that the government will move neither too quickly nor too slowly, and that they hope to do so “in as reasonable amount of time as possible.”

Can government funding priorities like health care and education escape unscathed in what Fideli describes as the “moral imperative” to balance the budget? Probably not. Indeed, as previously stated, the first casualties in the education sector--the satellite campuses and francophone university (though these were only still at developmental stages), have already occurred.

Other education cuts so far include a $25 million high-school skills and support programs defunding, and an ending of a $100 million fund for school infrastructure, which would have been funded by the cap-and-trade revenue.

Combined, health care and education make up about 56 per cent of the current budget, and it is hard to imagine making significant progress on the deficit while leaving both categories untouched.

Health care, though, has remained the only sacred cow for now, with its funding growing in Ford’s November budget from $61.3 billion to $61.7 billion. Short term funding of $90 million was announced for more beds in October, and the Ford government has reiterated its commitment to building 6,000 new long-term care beds in Ontario.

There is, however, concern in health-care circles that the current PC government will end up proliferating private health care across the province as a way to cut cost, and that this will lead to reduction in the quality of care.

Another area in which the Ford government is already taking action is social assistance. Over 960,000 people in Ontario receive some form of social assistance under the Ontario Works and Ontario Disability Support Program, costing the government about $10 billion a year.

On the last day of July, after announcing the cancellation of the basic income pilot project of the previous government that had served 4,000 low-income earners in select cities across the province, Lisa McLeod, Ontario’s minister for Children, Community and Social Services, announced changes to social assistance in November.

The changes revealed included halving a planned increase of social assistance payments, from three per cent to 1.5 per cent, redefining the term ‘disability’ to raise the threshold for qualification for social assistance, and allowing people on social assistance to earn more income before benefit reduction sets in.

These changes reinforce that the government’s priority is to reduce reliance on social assistance payments, and to get people on disability payments working more, so that the government can ultimately bring down the cost of its social-assistance programs. It is not yet clear, though, how much in actual dollars, the program changes will save.

Other cuts include scrapping the former Liberal government’s pledge to fund free child-care spaces to the tune of $2.2 billion, defunding the Ontario College of Midwives ($750,000), decreasing the Ontario Arts Council budget by $5 million, decreasing the Indigenous culture fund from $5 million to $2.75 million, scrapping indigenous education training for teachers, and ending Indigenous-focused curriculum writing sessions.

The Ford government has also consolidated a few offices to cut costs, including the much vilified decision to close the Child Advocate’s Office in charge of protecting foster kids, moving its responsibilities to an expanded Ombudsman’s Office. Another was the merging of the Indigenous Affairs ministerial file with the Energy, Mines, and Northern Development file, viewed in some quarters as potentially generating conflicts of interest when managing resource projects.

Some political commentators and the parliamentary opposition have framed the current government’s cost cutting measures as targeting vulnerable groups such as women, children and youth, Franco-Ontarians, and indigenous people, because they have less institutional power to fight the changes.

The opposition, in particular, have panned the changes by saying that the government is failing to invest in communities and fight poverty, and is rolling back progress that has already been made.

Greg Chiykowski, professor of finance at the Schulich Business School says that, though it is not necessary to balance the budget every year: “Collectively, over a period of time,” the budget “should probably have been brought closer to a balance than it has been in the past.” He further states: “many experts will say running a small deficit is not a major issue if needed to make investments in a growing economy,” However, Ontario’s deficit is “very large,” and given that “we have been in prosperous times over the last five, seven years,” he expected “more would have been done to bring it closer to a balance.”

The general signal from the Ford government, however, is that spending will not grow, but that rather, government spending will become leaner and meaner, as more efficiencies are found to reduce the deficit.

Projects like York’s Markham campus will, thus, have to be put on the back burner for now, or be funded through alternative sources, as the government prioritizes balancing the budget.

The university management is already considering all its options to continue ahead with the project, including more private donor money and funding from the municipalities. Municipality funding is probably a long shot in the Ford era, as they also primarily rely on the province for funding, and are likely to also feel the squeeze in the push to balance the budget.

York is also considering taking on more debt to finance the project, breaking down construction into smaller phases, and using rented space until the project is complete.

Overall, there is no realistic path to balancing Ontario’s budget that relies solely on cutting government spending. Reducing government spending must be combined with growing government revenues through new tax instruments. The faster the Ford-led Ontario government realizes this, the faster they can eliminate the current $14.5 billion budget deficit.

Perhaps this will turn out to be a cautionary tale for future governments, so that they limit deficit spending to one-time investments in capital projects, as well as to rebound from recessionary gaps.

Using deficit spending to fund recurring budgetary items is not healthy, as it traps a government in a recurring deficit spiral that piles on more debt, and leads to higher interest payments, money which could have been used to fund other priorities.

In the meantime, we must all brace ourselves, and adjust to the changes around us as government programs are increasingly scaled back. Hopefully, the government does this in a highly sensitive manner, so that the vulnerable in society do not suffer.