Ontario vs. U.S. Rust Belt: No Excuse for Deficits
Despite the talk of painful austerity, Ontario’s recent budget continues to bleed red ink. Finance Minister Charles Sousa projects a deficit this year of $8.5 billion, and doesn’t predict an actual balancing of the books until 2017-18 fiscal year.
Yet Ontario policymakers have no excuse for such timidity, especially as Sousa’s rosy projections assume continued economic recovery. In a new Fraser Institute study, along with our co-authors, we document that Ontario has enjoyed much stronger economic growth compared to the U.S. Rust Belt states, yet has run up much more government debt. We chose the Rust Belt states as comparators because they too have struggled with a reliance on manufacturing, and yet they—unlike Ontario—managed to get their fiscal houses in order.
The “Rust Belt” states include Indiana, Michigan, Ohio, Pennsylvania and Illinois. (The term is a cynical play on the original “Steel Belt,” as the 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 1999-2013, both Ontario and Quebec had markedly worse financial performances 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 with Quebec 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 on pri¬vate-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 rate of Ontario. 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 Ontario and Quebec 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 percent of GDP, a level that was 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 five 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 policymakers have no excuse for 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 struggle as manufacturing shifts overseas, and they too 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 policymakers must become much more aggressive in their spending reductions, bringing provincial finances in line with the rest of the industrialized world.
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