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Restoring fiscal sanity to Ontario requires reform of government programs, $10.8 billion spending cut

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Release Date: March 19, 2012

TORONTO, ON—The Ontario government’s plan to balance its budget in six years will leave the province with a debt of $411 billion, stifle its economy, and penalize the province’s young. But the crisis can be avoided if Ontario’s upcoming budget includes much-needed reforms to government programs and a significant reduction in spending, concludes a series of new articles published by the Fraser Institute, Canada’s leading public policy research organization.

“During the 1990s, federal and provincial governments of all political stripes reduced spending and reformed government programs to avoid a looming debt crisis. Dalton McGuinty’s government now faces a similar challenge,” said Niels Veldhuis, Fraser Institute vice-president of Canadian policy research and co-editor of Avoiding a Crisis: Fixing Ontario’s Deficit.

“Ontario needs a credible plan to address its $16 billion deficit. In this collection of articles, our authors present reforms to government programs that would enable Ontario to cut $10.8 billion in spending and eliminate its deficit in two years.”

Avoiding a Crisis: Fixing Ontario’s Deficit is a series of articles by 11 authors published this week in Fraser Forum, the Institute’s flagship magazine on public policy.

The Fraser Institute authors present a more aggressive deficit reduction plan than that contained in the February report from the Commission on Reforming Ontario’s Public Services, headed by noted economist Don Drummond.

 “The Commission’s report contains many worthwhile recommendations but it was partly restricted by the government’s mandate, making many of its proposed reforms too timid. And by keeping the six-year time frame for reducing the deficit, the plan increases the overall debt while running the risk of unanticipated negative economic shocks. By contrast, our plan will set the stage for Ontario’s economic recovery in a much shorter time frame,” Veldhuis said.

Charles Lammam, Fraser Institute associate director of tax and budgetary policies, emphasizes that the Ontario government’s current deficit reduction plan is not credible since it relies on overly-optimistic revenue projections and a questionable commitment to slowing the growth in government spending.

“Canadian governments have adopted similar approaches in the past and failed to balance their budgets. To successfully eliminate the deficit, history tells us that Ontario needs to move swiftly and aggressively.”

Lammam recommends Ontario enact a two-year deficit elimination plan that would involve cutting spending by $10.8 billion, or $5.4 billion per year – less than five per cent per year – over two years. Any future spending increases must be kept to the rate of revenue growth or population growth plus inflation (whichever is less). This would decrease Ontario’s projected debt by approximately $128 billion over the next six years, resulting in substantially lower annual interest costs.

Other recommendations from Fraser Institute authors touch on reforming a variety of government programs in ways that would improve public services and produce annual cost savings. Among their recommendations are to:

  • Eliminate corporate welfare, specifically business subsidies and special loans. Estimated cost savings: $2.7 billion.
  • Change hospital funding to encourage competition and introduce consumer cost sharing. Estimated annual cost savings: $7.8 billion.
  • Restructure Ontario’s K-12 education system by changing funding mechanisms for private and independent schools to mirror British Columbia’s system. Estimated annual savings: $1.3 billion.
  • Reform Ontario’s public drug insurance plan to remove government price-fixing, replace age-based drug subsidies, and introduce percentage-based co-payments to replace the current flat co-payments. Minimum annual savings of $710 million out of $4.2 billion annual expenditures on the public drug plan.
  • Establish an independent wage board to set public sector pay. Ontario public sector workers currently earn wages 14 per cent higher on average than equivalent positions in the private sector. If public sector pay was aligned with that of the private sector, Ontario could potentially save $3.8 billion annually.
  • End Ontario’s costly electricity subsidies.  Estimated annual savings: $1.1 billion.

“The current Ontario government’s fiscal record is quite poor. Ontario families need and deserve a plan to return fiscal sanity to the province. With these recommendations, we’re proposing bold reforms that will avoid a debt crisis in Ontario and provide taxpayers with better value for their hard-earned money,” Veldhuis said.