Ontario sleepwalking over a precipice
Drummond says cut, but a wider conversation on options is needed
Wednesday, February 15, 2012
Governments don’t make policy in a vacuum. They respond to pressure. When it comes to economic policy, it is hard to ignore the very loud voice of the business community. During the 2008 financial meltdown, Ontario joined its counterparts in dutifully pumping money into the economy to help turn the corner on the recession. Having narrowly averted economic collapse, governments across the world are now fixated on their resulting deficits, as insisted by the very financial sector those governments had just bailed out.
You wouldn’t know it by listening to the critics, but Ontario’s debt position significantly improved under the current government prior to the recession. However, that trend was reversed — the necessary consequence of complying with the demand to fight the recession. Even if the government hadn’t stepped in, the recession would have blown out the Ontario budget; that is what happens in recessions as revenue drops and expenditures rise.
In response to the clamour over the deficit, the government appointed the Commission on the Reform of Ontario’s Public Services (Don Drummond Commission) to provide advice on how to slay the growing deficit dragon. All economic decisions are seemingly on hold until Drummond comes down from the mountain with what he promises to be a momentous report.
Now is the time to consult Ontarians on potential options. Ordinarily, there are public consultations prior to the budget. But this is not an ordinary year. There have yet to be public hearings by either the Ontario government on the budget or the Drummond Commission. But what we know already should make us nervous — very nervous. Drummond was asked how to eliminate the deficit without raising taxes or addressing revenue. That leaves cutting spending, and he intends to do that quickly. He is of the view that spending growth should be limited to 1 per cent per year.
That sounds innocuous until one realizes that after correcting for inflation and population growth, the 1 per cent growth rate is conservatively equivalent to a 2.2 per cent cut per year in real per capita spending. If these spending restraints continued for the full seven years of planned restraint, this would add up to a dramatic 15.4 per cent real per capita cut.
This would radically change the province; you can’t take that much money out without sharply cutting back services and destroying jobs. If the government attempted to make these cuts while preserving big-ticket items like health and education, then other areas like social services and poverty reduction would bear the brunt of the cuts.
A different way to deal with the deficit would be to increase government revenues. While that was excluded from his mandate, Drummond himself has said that we should be having that public conversation.
Second, the timing for severe spending restraints is bad. It will worsen the economic slowdown and in so doing, ironically make it harder to solve the debt problem.
Even if cuts were achieved through efficiencies, the economy would still suffer. Directing savings to programs that benefit the poor would be most effective in restoring demand. And while we are speaking of timing, there is no better time to borrow than now, given the current very low interest rates.
Ontario’s economic recovery remains fragile and susceptible to economic downturns elsewhere. The province’s seasonally adjusted unemployment rate rose in January to 8.1 per cent. Youth unemployment rose to double that amount.
Economists may say that Ontario is technically out of a recession, but the public knows the economy is not out of the woods. A December Pollara poll found 70 per cent of Canadians thought the country was still in a recession. During the same month, another poll, this one by Angus Reid, found 57 per cent of Ontarians agreed that with a struggling economy, now was not the time to reduce government spending. Ontarians indicated they wanted a very different direction on deficit reduction. And 87 per cent agreed that job creation was the best route to eliminating the provincial debt. Very large majorities supported raising taxes on corporations and on higher-income people.
It is clear that a policy of sharp cutbacks is out of tune with public preferences. Drummond said we should be having a public conversation about taxes. That conversation should extend to the entire matter of what services government should be delivering and how we should pay for them.
It should be happening now, before we are stampeded down the path of major cutbacks, a path that few Ontarians want.
Kim Jarvi is an economist with the Registered Nurses’ Association of Ontario.