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Unpredictability the only certainty of Ontario budget

The only certainty is that Ontario’s finances are utterly unpredictable - and laughable. Quebec, by contrast, is getting serious. There’s a way out.
March 9, 2015
By Martin Regg Cohn

With a spring budget looming, it is the best of economic times. It is the worst of budgetary times.
That’s not Dickens - it’s the dismal science of economics talking.

By one account, Ontario’s economy is bouncing back this year and destined to outpace the country through 2016: Exports are surging, the economy is growing, unemployment is dropping.

But by another analysis, the province risks blowing the budget between now and 2017-18: The debt has topped $300 billion, tax revenues are down $500 million, and the deficit is still stubbornly high at $12.5 billion.

The only certainty is that Ontario’s finances are utterly unpredictable - and laughable. The latest report from the usually humourless Moody’s credit rating agency almost lampoons Ontario’s budgetary outlook.

Moody’s mockery? It compares historically rock solid Ontario to traditionally quaky Quebec and concludes that the budgetary reliability of Queen’s Park is falling behind its once-shakier neighbour.

While both provinces hold the same middling Aa2 credit rating, Ontario “faces greater fiscal challenges than Quebec,” Moody’s taunts. That’s why it still gets a formal, finger-wagging “negative” outlook from Moody’s, while Quebec is deemed “stable.”

After piling on massively more debt, Ontario is imperiled by “execution risk” - the danger that politicians won’t fulfil promises of a balanced budget by 2017-18 because they keep postponing the year of reckoning.

The province’s “tendency to delay the most significant attempts at expenditure restraint to the latter years ... increases the risk that the province will be unable to achieve its goals.”

The kicker, apropos our neighbouring province: “Quebec, in contrast, has managed its deficits while keeping its debt burden relatively unchanged.” Efforts at tax reform “demonstrate the government’s commitment to achieving its budget targets.”

Good for Quebec. No longer labouring under the spectre of separatism, its savoir faire is winning praise.

Bad for Ontario. No longer humming as the economic engine of Canada, its fiscal credibility is taking a beating.

That said, anytime a credit rating agency is quoted, there should be a mandatory disclaimer reminding readers (and investors) that their research reports are merely a more expensive form of journalism - with an equally spotty track record. They missed the 2008 economic downturn, and are more of a lagging indicator than a leading light.

Happily for Ontario, there is countervailing good news from the independent Conference Board of Canada, which says falling oil prices and a declining dollar will boost Ontario exports and ultimately raise provincial revenues. Growth will surge to a robust 2.9 per cent this year, making it “Ontario’s time to lead.”

But belated growth can’t be counted on as a cure-all. Queen’s Park is relying on constraint - the new restraint - to curb expenditure growth to a record low 0.8 per cent growth a year until the budget is balanced.

Deb Matthews, the de facto Minister of Constraint, is once again calling for a “transformation” of government operations. But the Liberals have come to rely on public sector wage freezes in the public service like a drug - first in 2011-12, and again this year as contracts are renewed.

How much longer can Queen’s Park demand that public servants alone must sacrifice for the sake of public finances? Rather than solely constraining workers, what about raising revenues? Economist Don Drummond, hired to review the government’s finances in 2011-12, fretted that Ontario’s revenues remained weak - and cautioned against excessive reliance on wage freezes.

Why not boost the corporate tax rates that the Liberals foolishly started lowering in 2010 from 14 per cent to 11.5 per cent (now among the lowest in North America)? Back then, the Liberals were worried about losing corporate headquarters to Calgary’s booming low-tax locale. But with Alberta’s economy tumbling, those calculations are outdated.

Today in Ontario, “with stronger profitability, private investment is expected to improve in the near term,” the Conference Board notes. Perfect timing.

If this is indeed the worst of budgetary times, but the best of economic times, what better time for a corporate tax that stands the test of time?