Bad news out of Ontario illustrates need for a better fiscal plan

The economic news coming out of Ontario in recent days has been far from positive. The province's economic and fiscal position is weak and new analysis released by the Ministry of Finance suggests its economy will remain sluggish for the foreseeable future.

And yet in spite of this mounting evidence that Ontario needs a new course with respect to economic and fiscal policy, the government continues to insist that the province is "On track today and in the future." The fact is, however, this description of Ontario's economic and fiscal health belies the evidence.

The time has come to face Ontario's economic and fiscal realities and start to enact a new agenda that stabilizes the province's poor public finances and encourages more capital investment and job creation to put its economy on a stronger footing.

Ontario's economy has performed relatively poorly in recent years across a range of different economic measures.  Here are a couple of key examples.  From 2003 to 2012 real gross domestic product (GDP) per person grew by an average of only 0.3 per cent annually, the lowest growth rate among all Canadian provinces. Further, Ontario's average income (real GDP per person) plunged to $2,710 lower than the national average in 2012 from $612 above the national average in 2003.

This evidence gives a sense of how weak the province's economic record has been.  And the Ministry of Finance's latest report on Ontario's long-term economy suggests that these trends may continue for years to come. In fact, its own projections estimate that Ontario's economic growth will lag behind the rest of Canada (Canadian provinces excluding Ontario) over the next 20 years.

One of Ontario's economic challenges is its poor government finances which are a symptom of both undisciplined spending and a weak economy. The government has run budget deficits in seven of the past 10 years and according to its own precarious projections, it expects to remain in deficit until at least 2017-18. One of the consequences is a rising government debt which has almost doubled over the past decade and is now the highest provincial net public debt of all the provinces, and the second highest net debt as a share of the economy.

High levels of government debt have resulted in debt interest payments that now consume 9.1 per cent of total government revenues and are projected to be the fastest-growing expenditure in the provincial budget over the next three years. Growing debt interest payments "particularly if interest rates rise above the historic lows we have seen in recent years" risk crowding out spending on other provincial priorities.

The long-term report also raises concerns about the direction of the province's fiscal prospects. An aging population (the government estimates that the number of seniors living in Ontario will double by 2035) will put pressure on the health-care system which already consumes more than 40 per cent of total program spending. The report notes that health-care spending on seniors alone is about three times higher than the average for the overall population. And so similar to debt interest payments, there is a risk that in the absence of reforms, health care will continue to consume a growing share of public resources.

These challenges facing Ontario are well documented. Yet the government's policy direction is not moving in the right direction. Recent developments suggest that the government intends to continue growing spending on the types of policies that have contributed to the problem such as high deficits and a new round of corporate subsidies.

What Ontario needs is a bold plan that puts the government's finances on a better footing and sets out a pro-growth agenda including tax reform and changes to labour policy. To this end the provincial government can look to the 1990s examples of the Liberal government in Ottawa and NDP in Saskatchewan which made tough choices to restore fiscal discipline and improve economic competitiveness leading to positive outcomes.

The news out of Queen's Park in recent days ought to be a wake-up call to the short- and long-term challenges facing Ontario. The time for standing pat and tinkering at the margins is over. Ontario needs a new and better plan. Here is hoping that next month's budget delivers in this regard.