It's not our problem; Ontario Liberals kick deficit can down the road

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Appeared in the Financial Post

The May 2 minority Liberal budget is a politically expedient document that likely avoids an election but unfortunately fails to tackle Ontario's looming fiscal crisis. The longer the province waits, the more difficult and painful the reforms will be when the inevitable day of reckoning arrives.

Minister of Finance Charles Sousa was quick to trumpet the $5-billion improvement in last year's (2012-13) deficit which came in at $9.8-billion instead of the original $14.8-billion. Of course, what he didn't mention is that over half of the improvement came about from one-time events, including a $1.2-billion boost in corporate tax revenues from tax assessments for years prior and $1.5-billion in savings from reducing liabilities associated with public sector sick-day banking.

In addition, Minister Sousa failed to mention that the budget projects a worse deficit in 2013-14, when the deficit is expected to increase to $11.7-billion.

The increase in the deficit from $9.8-billion last year is due largely to increased program spending. It's with respect to the spending increase that Ontarians should be extra skeptical since this government's plan to get to a balanced budget depends heavily on its ability to restrain spending growth going forward.

The Liberals plan to increase program spending by 3% this year (2013-14). However, in last year's budget, they promised to hold spending growth to 1.1% for 2013-14.

Put differently, Minister Sousa and his colleagues have nearly tripled the growth in 2013-14 spending from last year's plan to the one they put forth this year.

This government's inability to control government spending came through loud and clear in its budget. The increase in program spending planned for this year increases the deficit back to nearly $12-billion.

Indeed, all the major departments - health, education, postsecondary, social services, and justice - receive increases in spending over the next two years.

Unfortunately for Ontarians, the restraint is delayed until next year and the following, with increases of 1.1% and 0.4% respectively.

Clearly, the Liberals are kicking the can down the road and when they get there, they simply kick it further.

Had the Liberals actually spent prudently over the past decade there would be no deficit; in fact, the province would have a $12-billion surplus!

Since 2003-04, actual program spending increased from $70.4-billion to $113.6-billion in 2012-13. Had program spending increased by the rate of inflation and population growth, current program spending would be $22-billion lower. That means the province would already be in surplus and would have accumulated significantly less debt over the last decade.

This unfortunate history is critical since a significant part of the Liberal plan for deficit reduction is premised on the government's future ability to constrain spending growth and rein in compensation. Beyond that the Liberals will need decent economic growth, stable increases in revenues, and continuing low interest rates.

In short, it's not a plan grounded in reality.

There are however a few positive notes in the budget, including some discussion of constraining public sector wage and pension gains. These areas need attention, given both the deficit and the size of the gap between public sector compensation and comparable compensation in the private sector. A recent analysis comparing public sector wages in Ontario with similar positions in the private sector concluded that the public sector, on average, enjoyed a 14% premium. This is on top of markedly better pension benefits compared to the private sector and much greater job security. While the government should be lauded for progress to-date, much more is needed.

One of the striking failures of this budget is the absence of any meaningful measures to deal with the province's growing electricity problems. To put it simply, Ontario's Green Energy Act (GEA) has been an unmitigated disaster and Budget 2013 does nothing to rectify the problem.

A recent analysis by University of Guelph economist Ross McKitrick calculated that Ontario's electricity prices will soon be near the highest in North America, if not the highest.

Passing a budget when a government is in minority is always a tricky business. Unfortunately, all of the serious problems of deficits, debt, competitiveness, and energy prices were deferred to the future.

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