Spendthrift McGuinty; Ontario Premier is bottom of the list on fiscal sanity

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Appeared in the Financial Post
If recent polls are any indication, Ontario Premier Dalton McGuinty and his Liberal government face a steep uphill battle as they prime themselves for an October election in 2011. Currently, three out of every four Ontarians feel it's time for Premier McGuinty to go.

Can you blame them?

Since being elected in 2003, McGuinty has been nothing short of a disaster at managing Ontario's finances and pursuing sound long-term economic policies. Thanks in large part to his policies, Ontarians have suffered through seven years of dismal economic performance.

Regardless of what actually happens in next year's Ontario election, one thing is certain: The status quo in Ontario is simply not sustainable. Ontarians need a serious plan to return fiscal sanity to the province.

Our study, Measuring the Fiscal Performance of Canada's Premiers, highlights just how poorly McGuinty has done. The study measures key aspects of fiscal policy for the duration of the premiers' time in office. McGuinty performed the worst among the premiers, with a score of 29.7 out of a possible 100.

For starters, McGuinty was completely unable to control government spending. During his first term, he ramped up program spending from $70-billion in 2003-04 to $94-billion in 2007-08, a 34% increase. Since then, spending has been ramped up another 16% to $109-billion in 2009-10. All told, spending is up an incredible 55% since 2003-04.

McGuinty's spendthrift approach is best illustrated by comparing average spending increases with economic growth. Since 2003-04, McGuinty has increased spending by more than three times the rate of economic growth. Specifically, program spending increased by an annual average of 7.7%, compared with average economic growth of 2.4%. As a result, the size of Ontario's government (provincial government spending as a percentage of the economy) increased to 20.8% of GDP in 2009-10 from 16.2% in 2003-04.

Other more prudent premiers, such as B.C.'s Gordon Campbell (ranked best for fiscal management) and former Manitoba premier Gary Doer (ranked second), both kept spending increases roughly in line with economic growth.

Since government spending ultimately drives taxation, it's no surprise that McGuinty has relied on a combination of tax increases and deficits (future taxes) to finance his spendthrift ways.

From 2003-04 to 2009-10, McGuinty accumulated nearly $32-billion in deficits, with plenty more to come. While McGuinty and his colleagues are quick to blame the economy for the deficit, in reality Ontario's current deficit woes primarily result from the Liberal government's wild spending spree during its first term in office.

As a result, Ontarians can expect another $77-billion in deficits over the next five years. Under the current fiscal plan, the accumulated deficit will reach $187-billion by 2012-13, up $63-billion since McGuinty became premier in 2003-04.

McGuinty also implemented a number of damaging tax increases to help pay for his spending spree (i. e. the then-new Ontario Health Premium, cancellation of the planned elimination of the personal income surtax, and corporate income tax increases). In contrast, while Ontario increased personal and corporate income taxes, governments of all ideological stripes in Western Canada were busy improving the incentives for hard work, savings, investment and entrepreneurship by pursuing pro-growth personal and corporate tax reductions.

For example, Conservative-led Alberta decreased its corporate income tax rate (12.5% to 10%), as did Liberal-led British Columbia (13.5% to 10%) and Saskatchewan's NDP and now Conservative governments (17% to 12%). In other words, while McGuinty significantly increased the cost of investing in Ontario, governments out west were moving in the opposite direction.

Fortunately for Ontarians, McGuinty partially realized his errors and changed course, announcing a phased-in plan to reduce the general corporate income tax rate from 14%to 10% by 2013.

McGuinty also reduced Ontario's bottom personal income tax rate from 6.05% to 5.05% on Jan. 1 of this year. However, he left the middle and top personal income tax rates unchanged -- Ontario's personal income tax rates on skilled, educated workers remain among the highest in Canada.

In a world of increasing competitiveness, sound fiscal policy is a critical determinant of long-term economic success. Provincial premiers must show leadership by restraining spending growth, balancing budgets, and improving incentives for individuals and businesses to engage in productive economic activity. Unfortunately for Ontarians, Mr. McGuinty has been a failure on this front.

Come next year's election, Ontario voters should be looking for a leader willing to do a quick U-turn in managing the province's finances.

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