Ontario’s path to budget balance paved with privatization
Ontario is stuck on a deficit treadmill and mired in a debt time bomb. Hence Hydro One’s just-in-time privatization.

thestar.com
Nov. 27, 2015
By Martin Regg Cohn

Good news for Ontario: Most of the bad economic news is behind us.

But no amount of extolling, explicating and excusing by Queen’s Park can conceal the inconvenient truth that our economy refuses to perform as promised. Which means more deficits, bigger debt, more restraint, and ongoing pain for much of the province.

Ontario’s economy will grow by 1.9 per cent this year. Yes, that’s comfortably out of the recessionary zone of zero growth, allowing Finance Minister Charles Sousa to boast in his baritone best that the province’s economy is the fastest-growing in Canada.

But, sotto voce, it’s a lot less than the 2.7 per cent Sousa predicted a mere six months ago. Only by the dismal benchmarks of post-recession, post-petro-boom Canada can Ontario claim to be on the comeback trail.

For better or for worse, economic growth has traditionally rescued the provincial treasury from unexpected downturns and uncontrollable deficits. Politicians from all parties fell into the habit of borrowing a bit (or a lot), here and there, in bad times (and good), always banking on an economic upswing to bring better times.

Today, Ontario is stuck on a deficit treadmill and mired in a debt time bomb.

Budget surpluses recorded by the Liberals prior to the 2008 economic crisis are by now a distant memory, with successive deficits pushing the province’s total debt to nearly $300 billion.

Sousa wants credit for a deficit projected at $7.5 billion, merely because it’s $1 billion less than he’d anticipated in his spring budget - part of the perennial Liberal storyline that they under-promise, and then over-perform, on budgets. But the numbers tell a different story: Ontario’s economy is a chronic underperformer, and the government is an ongoing overspender.

Back in 2011, when the Liberals were trying to calm fears of fiscal mismanagement, their pre-election budget predicted growth would soar by 2.7 per cent in each of the next two years. Ontario achieved less than half that rate - a measly 1.3 per cent annually - during that period.

Liberals keep getting it from all sides - accused of overspending by the right, over-restraining by the left, and overestimating their progress. But Sousa and Premier Kathleen Wynne are adamant that they will fulfil their campaign promise to eliminate the deficit within the next two years. They view it more as a matter of political credibility than economic necessity.

Now, with Prime Minister Justin Trudeau rewarded for his platform of deficit-spending in the recent federal election, there is renewed pressure on Queen’s Park to ignore its own red ink in order to boost the economy. But Ontario manufacturers are already benefiting from the unexpected stimulus of a low Canadian dollar. And federal borrowing capacity, with its more diversified tax base and deeper fiscal levers, can’t compare to Ontario’s more limited options as a sub-sovereign borrower.

In fairness, much of Ontario’s borrowing is going toward investing in long-term infrastructure - $134 billion over 10 years - that pays a social and economic dividend. All the more reason, however, to get one’s fiscal house in order - trimming operating expenses so as to retain the province’s borrowing ability for future investments and unexpected downturns.

Caught short in the crunch, the Ontario Liberals made the controversial decision to partially privatize Hydro One’s transmission lines, a sell-off that is yielding a $1.1-billion payoff in the current fiscal year. Call it just-in-time privatization.

By 2017-18, the government will have also captured $1.6 billion from its new cap-and-trade program to reduce greenhouse gas emissions (and raise greenbacks). All those billions of dollars are earmarked for green investments such as transit, but they also reduce what government would otherwise have to borrow — narrowing the budget gap.

As any finance minister knows, past predictions are no assurance of future growth. Which is why Sousa is sussing out an escape hatch:

“Should slower-than-expected revenue growth occur, the government will need to consider other tools to ensure that (budget) balance is achieved.”

One way or another - carbon pricing, privatization or taxation - the government is loath to miss its target.