Geography explains why provincial, federal budgets...
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Feb 25, 2016  |  Vote 0    0

Geography explains why provincial, federal budgets are destined to be billions apart: Cohn

While most other provinces are facing economic malaise, Ontario is going gangbusters by comparison

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If you take the treasurer at his word, and believe his numbers, this is Charles Sousa’s final deficit budget.

Barring an economic cataclysm, Ontario’s governing Liberals vow to bring in a balanced budget next year.

As promised in the last provincial campaign.

Unlike the federal Liberal government, which plans a hefty deficit in its own budget next month.

As promised in the last federal election.

Both are Liberal governments — they speak the same language and talk to each other all the time.

Why then are their budgets destined to be so many billions apart?

What motivates Premier Kathleen Wynne to eliminate the provincial deficit — $4.3 billion in the coming fiscal year — amid so much economic doom and gloom?

After all, Prime Minister Justin Trudeau’s sunny ways will transform Ottawa’s finances — from the balanced budget he inherited, to a deficit in the range of $30 billion.

Why the Canadian deficit disconnect?

As they say in U.S. politics: It’s the economy, stupid.

The difference here isn’t ideological, it’s geographical. While most other provinces are facing economic malaise, Ontario is going gangbusters by comparison.

When the country is hurting there are good reasons for fiscal stimulus bankrolled by deficit financing. But there is little reason to do it in Ontario now, at least no more than the provincial government is already doing, planning, and borrowing as it has for years.

Ontario’s economy grew by a robust 2.5 per cent in 2015 — more than double the national average. It grew by an impressive 2.7 per cent in 2014, and is projected to stay well above 2 per in future. Ontario’s unemployment rate has declined from 7.6 per cent in 2013 to 6.6 per cent this year, well below the Canadian level, and will trend down toward 6.1 per cent by 2019.

Weighed down by years of borrowing, and a burgeoning debt, Ontario can and should stay on track to reduce the red ink. While Wynne is most keen to maintain her political credibility, and Sousa is mindful of Ontario’s precarious credit rating, there are other good reasons for fiscal prudence.

First, because the government already has an accumulated debt of nearly $300 billion that is costing us more than $11 billion a year in interest costs alone.

That burden is almost double what it was a decade ago under the Liberals, which means our net debt now adds up to nearly 40 per cent of Ontario’s total economy — the highest ratio in decades.

Much of that debt is owing to infrastructure, which Ontario has been investing heavily in since the last economic downturn. While Ottawa is belatedly planning a bigger infrastructure spend under Trudeau’s Liberals, Ontario already has already allocated $137 billion over the next decade for transit, roads, hospitals, and schools — investments that promise an economic multiplier with a social dividend.

When people wonder why Ontario isn’t going deeper into debt, the answer is that it already has, for a long time. That fiscal reality didn’t stop some members of Wynne’s cabinet from fighting an internal battle for more deficit spending this month, notably on health care.

But Wynne, backed by Environment Minister Glen Murray, argued they could achieve their social goals — in health, education, welfare and shelter — without going further into debt. One reason for Murray’s reticence may be the realization that his ministry will be bringing in an additional $1.9 billion a year in annual revenue — a stealthy sin tax levied on companies for their carbon emissions in the fight against global warming — much of which will be reallocated to expanding mass transit.

Under a cap-and-trade system that “makes polluters pay,” higher corporate costs will be passed on to consumers at the gas pump and on their natural gas bills. A tax by another name, cap and trade will be controversial, but is unavoidable after years of inaction — the laws of the land are changing, and Ontario is only now catching up to neighbouring Quebec on setting a price on carbon.

The government is also counting on an extra $2-billion injection from higher than expected tax revenues and the partial privatization of Hydro One.

But a balanced budget is not an end in itself; it also requires a political balancing act that weighs competing interests, not just interest rates.

For this budget, the premier and treasurer have been blessed with good economic luck.

But that good luck is equal parts opportunity and preparation.

And Ontario is benefiting from having imposed restraint in order to free up money for investments.

While waste may be as rife at Queen’s Park as in other governments, wage hikes have been constrained more than most. Since mid-2012, public sector wage hikes in Ontario averaged 0.6 per cent, compared to 1.8 per cent municipally, 1.9 per cent in the private sector, and 1.7 per cent federally. While public sector unions continue to call for higher wages as a form of stimulating the economy, the reality is that wage restraint did not stand in the way of Ontario’s recovery, which benefited from the focus on infrastructure. And events beyond the control of Queen’s Park.

Two big factors are a strengthening U.S. recovery, and a weakening Canadian dollar (worth barely 73 cents U.S.), which have combined to stimulate Ontario’s manufacturing exports far more effectively than any government policy. All the more reason for Ontario to focus on getting its fiscal house in order, conserving cash in good times so that it can brace for bad times in the next economic cycle.

This is not the time to overspend on over-stimulating Ontario’s economy, no matter what is happening nationally.

The big challenge, as the province tries to keep its balanced budget promise for 2017-18 and beyond, is avoiding the appearance of short-changing the vital health and education sectors.

Much of the low hanging fruit has been harvested in the process of expenditure restraint, and the heavy lifting was always seen to be heavily loaded toward the back end of the deficit-elimination deadline. By spending more in the health and education sectors than in other ministries, while reorganizing program delivery — long term care for seniors, free tuition for lower income families — the government may be able to assuage suspicions.

We’ll know for sure when Queen’s Park produces its next budget.

Toronto Star

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