Wynne's chance to break from the past

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Appeared in the Financial Post

With the Ontario government expected to soon introduce a new budget and the province continuing to head towards its own fiscal cliff, Premier Kathleen Wynne has a chance to make a clean break from the fiscal mismanagement of her predecessor, former Ontario Premier Dalton McGuinty. To stem the tide of rising debt, Premier Wynne needs to initiate a radical re-think of current spending and put forth a credible plan to balance the budget in the short term. Let’s hope she understands and embraces the need for change.

After nearly a decade of excessive spending and large deficits, Ontario’s indebtedness is more than a little worrying. A sign of the province’s significant debt is the fact that it performs worse than the poster-child for bad public finances, California, on every measure of indebtedness.

For example, as a share of the economy, Ontario’s debt (38.6%) in 2011 was more than five-times that of California (7.7%). On a per capita basis, Ontario’s debt is more than four-and-a-half times higher than the Golden State. And Ontarians spend more than three times as much of the provincial budget on interest costs on that debt compared to California: 8.9% vs. 2.8%. Such revelations regarding the seriousness of Ontario’s indebtedness should propel real change in policy at Queen’s Park.

Of course, as the old adage goes, the first step to recovery is admitting you have a problem. The common view is that Ontario’s deficits and mounting debt are the result of a lack of revenues. Nothing could be further from the truth.

Consider that in 2002-03, the fiscal year before the governing Liberals took office, Ontario collected $74.9 billion in revenues. Revenues grew to $104.1 billion by 2007-08 (prior to the recession). In 2012-13, revenues are expected to be $113.8 billion, nearly $10 billion higher than the pre-recession high. Put differently, revenues have grown by 50% since 2002-03.

The problem is that program spending has increased at a much higher rate. Specifically, program spending is expected to reach $114.7 billion for 2012-13 compared to $65.1 billion in 2002-03, the year before the McGuinty Liberals took office. This represents an increase in program spending of 75% compared to revenues that increased 50% over the same time period.

Clearly, the Ontario government has a spending problem not a revenue problem.

Had the government simply held spending increases in line with economic growth, spending would be some $26 billion lower this year and the province would be operating with a significant surplus.

Instead, the deficit remains at nearly $12 billion and the province’s debt has ballooned to $236 billion or nearly $18,000 per Ontarian. Most worrying, however, is that if Ontario’s spending and revenues maintain the staus quo, its debt is forecast to reach more than $550 billion (66% of GDP) by the end of the decade (2019-20).

The challenge for Premier Wynne is to demonstrate leadership in both understanding the seriousness of the province’s indebtedness and devising a realistic plan to solve the situation.

As a first step, Premier Wynne should abandon the Liberals’ unrealistic 2012 budget that hoped growth in program spending could be constrained to an average 0.6% over the next six years while relying on optimistic revenue growth forecasts averaging 3.7% annually.

The notion that the government will be able to hold program spending growth to an average rate of 0.6% is wishful thinking, at best, given its inability to control spending over the past decade. In addition, the assumed growth rate is less than that proposed by the much-heralded report of the Commission on the Reform of Ontario’s Public Services (the Drummond report), without enacting anywhere close to the level of reforms proposed by the commission.

Put differently, the government assumes it can hold the growth in spending increases beyond what the Drummond Commission recommended without enacting substantial portions of the reforms the Commission explained were necessary to reduce the growth in spending.

Herein lies the risk of producing a budget that simply assumes spending constraint and improving revenues. It will likely saddle Ontarians with deficits into the foreseeable future and unfairly burden younger Ontarians with even more debt.

A credible plan to balance the budget in the near-term would strike at the root of the problem: excessive government spending. The key is to both reduce and reform government spending. To that end, the government would do well to take the reforms recommended by the Drummond Report seriously.

One area of spending that deserves perhaps the greatest scrutiny is public sector compensation. Government workers in Ontario earn wages that are nearly 14% higher on average than private sector workers in comparable positions. In addition, public sector workers enjoy significantly greater non-wage benefits including pensions, earlier retirement and greater job security. If public sector compensation was aligned with that of the private sector, Ontarian taxpayers could save billions annually.

Other key targets for spending reductions include Ontario’s costly electricity subsidies and corporate subsidies which unfairly subsidize poorly performing businesses at the expense of investments in successful, high performing businesses.

Adopting two key health policies common in other nations with universal access health care – a change in hospital funding to encourage competition and the introduction of consumer cost sharing-- would save money and result in improved access to health care.

Substantial savings are possible if the government is open to reforming programs.

With the coming provincial budget, Premier Kathleen Wynne should seize the opportunity to show real leadership and face the budget challenge head-on. Further delay and inaction will send the province towards a fiscal crisis with dire economic and social consequences.

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