Drags on the economy; Ontario and Quebec are undermining Canadian growth

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Appeared in the Financial Post

With Ontario and Quebec accounting for nearly 60% of Canada's gross domestic product, as they go, so goes the Canadian economy. Unfortunately, the economic news from Canada's largest provinces doesn't look good, and many forecasters are now downgrading their economic growth projections.

While part of the reason for their lagging economies stems from external forces (i.e., a shaky U.S. economy), the policies implemented by the Ontario and Quebec governments have contributed to, rather than mitigated, economic woes in those provinces.

Consider their management of provincial finances, a critical issue since sound fiscal policy is a key determinant of long-term economic success. Yet Ontario and Quebec, led by premiers Dalton McGuinty and Jean Charest, are among the worst fiscal managers in the country.

A new study, Measuring the Fiscal Performance of Canada's Premiers, published Tuesday by the Fraser Institute, highlights just how poorly premiers McGuinty and Charest have done. The study measures the relative performance of 10 Canadian premiers at managing key aspects of fiscal policy during their time in office. Ontario's McGuinty ranked ninth overall, with a score of 34.0 out of a possible 100. Quebec's Jean Charest did slightly better, ranking sixth overall, with a score of 45.5.

Leading the pack of poor policies is their performance on government spending, as both premiers McGuinty and Charest have displayed an inability to restrain spending. For example, during McGuinty's tenure, program spending has grown 7.1% annually - more than twice the average rate of economic growth (3.2%). If an Ontarian family managed its budget the same way - that is, by increasing spending at double the rate of income growth - it would be on a quick path to bankruptcy.

Premier Charest's performance was less severe, but he also increased government program spending (4.7%) considerably faster than the rate of provincial economic growth (3.5%). That's an unsustainable approach to managing provincial finances.

Other more prudent premiers like Nova Scotia's Darrell Dexter and former B.C. premier Gordon Campbell (ranked as Canada's best fiscal manager) kept spending increases roughly in line with economic growth.

Since government spending ultimately drives taxation, it's no surprise that the governments of McGuinty and Charest have relied on a combination of tax increases and deficits to finance their spendthrift ways.

While in power, the McGuinty government has accumulated $41-billion in deficits with plenty more to come over the next six years ($68-billion). Likewise, the Quebec government has racked up $17-billion since Premier Charest took office and plans another $3.3-billion over two years. Although premiers McGuinty and Charest are quick to blame the economic downturn for their deficits, the reality is their current fiscal woes are primarily the result of excessive spending well before the recession.

McGuinty and Charest have also implemented highly damaging tax increases to help pay for their government spending excesses. For ex-ample, both premiers hiked the corporate income tax rate during their tenure, which increased the cost of business investment in their provinces.

By contrast, while Ontario and Quebec increased corporate income taxes, governments of all ideological stripes in Western Canada reduced them. For example, Conservative-led Alberta decreased its corporate income tax rate (12.5% to 10%), as did Liberal-led British Columbia (16.5% to 10%) and Saskatchewan's NDP and now Conservative government (17% to 12%). In other words, while McGuinty and Charest increased the cost of investing in Ontario and Quebec, governments out west were moving in the opposite direction.

Fortunately for Ontario, McGuinty realized his errors and changed course, announcing a phased-in plan to reduce the general corporate income tax rate from 14% in 2009 to 10% by 2013. The same can't be said about Charest in Quebec.

Unfortunately, neither premier has made any effort to reduce personal income taxes for highly skilled workers. Marginal tax rates in both provinces remain high, particularly the rate on high earners, which tend to be precisely the skilled professionals these provinces want to attract and retain.

The Canadian economy is facing many risks. To overcome them, we need strong economies in our two largest provinces. Let's hope the Ontario and Quebec governments take a lesson from their provincial counterparts and make sound fiscal policy a priority.

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