Not a Credible Deficit Elimination Plan

During yesterday’s budget speech Ontario Finance Minister Dwight Duncan trumpeted his government’s fiscal record, saying: “Our government has a strong track record of fiscal prudence and discipline” and he called its plan to tackle Ontario’s deficit, “[a] prudent, proven and responsible approach….to the challenge of the deficit.”

The unfortunate reality for Ontarians is that this government’s fiscal record has been nothing short of a disaster and yesterday’s budget did little to bolster its credibility.

For starters, since being elected in 2003, Premier Dalton McGuinty and his colleagues have proven inadequate at managing Ontario’s finances. Our recent study, Measuring the Fiscal Performance of Canada’s Premiers found that Premier McGuinty performed the worst among 10 provincial premiers at managing the government’s spending, tax policy, and deficits and debt.

That’s why Ontario desperately needed a budget that actually turned the corner in managing the province’s finances, rather than one that just paying lip service to doing so.

Duncan’s proposed deficit reduction plan allows deficits to continue until 2017/18. All told, the Ontario government proposes to rack up another $67.5-billion in debt due to deficits from the current fiscal year through to 2017-18. With this plan, the provincial debt will swell to 40.6% of GDP in 2014-15 from 29% in 2008-09.

The continued deficits stem from the McGuinty government’s unwillingness to address its spending problem.  Rather than cut spending in order to place Ontario on a more immediate path to balancing the books in the near term, the government is relying on the hope that it will be able to constrain spending growth in the future and eventually match revenues.

In other words, the McGuinty government is delaying the tough decisions into the future in the hopes that revenues will grow robustly over the next seven years. Specifically, the 2011 budget plan assumes revenues will grow at an average rate of 4.3% from 2011/12 to 2017/18 while the government holds spending increases to an average rate of 2.0%.

This plan would of course be more believable if the current government had a track record of prudent spending. But that’s simply not the case.

During its first term, the McGuinty government ramped up spending from $79.8 billion in 2003/04 to $103.0 billion in 2007/08, an increase of nearly 30%. Then came the recession, and spending increased by $19.5 billion from 2008-09 to 2010-11 in the banal hope of “stimulating” the economy.

Now, rather than return to pre-stimulus levels, spending is set to grow again for 2011-12 (albeit modestly) and the remaining years of the government’s fiscal plan.  If McGuinty and Duncan are able to stick to their plan, spending will reach $141.1 billion in 2017-18, another 15% above where we are today.

Instead of ever increasing spending, a credible plan to a balanced budget would have involved some deep self-reflection on what brought the government’s finances to this situation – that is, its wild spending spree.

To return to balance within a reasonable timeline, Duncan should have reduced spending to pre-stimulus levels. In fact, reductions in spending of $5.9 billion, or 5.1%, over the next three years would have balanced the budget by 2013/14, four years earlier than the current plan.

But Duncan deferred the hard decisions – conveniently until after the provincial election later this year – and announced the creation of a new commission tasked to provide advice on how the government can “accelerate its plan to eliminate the deficit” and to make recommendations for how government can reform the way public services are delivered.

Rather than seek more discussion about how to close the deficit, what Ontario needed from Duncan was the type of straight shooting language that Paul Martin used when he tackled the federal deficit in 1995: “The debt and deficit are not inventions of ideology. They are facts of arithmetic... The only thing Canadians want is clear action.”

That language was backed up by a plan that led to the elimination of a deficit much larger than then one that Duncan is now grappling with (4.8% of GDP compared to Ontario’s current deficit of 3.3%) within three years, not seven.

While reforming the public sector to “get better value for taxpayers’ money” is a notable goal, Duncan was quick to note that the increased use of the private sector in doing so would be an unlikely result, “The Commission will not make recommendations that would…lead to the privatization of health care or social services.”

That is unfortunate, since most other developed nations with the same health care goals as Canada (universal access) allow competition from the private sector in the delivery of publicly funded care. As a result, these countries are able to purchase more health care for less money.

Similarly, education and other government services could be vastly improved through program reform and increased private sector involvement, while spending less.

Ontarians needed a new fiscal direction and a serious plan to return fiscal sanity to the province. What they got was the same old unsustainable spending increases, large deficits, and additional debt.