Ontario needs to speed up its deficit reduction: Government should look at compensation for government employees
The Ontario government has pledged to eliminate its budget deficit by 2017/18. However, the government’s recent record on fiscal issues casts doubt on whether it will meet this target.
To balance the books and begin getting its fiscal house in order, the government must develop a detailed, specific plan to speed up the pace of deficit reduction by reforming and reducing spending.
A quick look at the numbers illustrates the severity of Ontario’s debt problem. This year, Ontario is projected to run a budget deficit of $8.5 billion—this will be the province’s eighth consecutive year of deficit spending. And the province’s cumulative budget deficit during this period will eclipse $90 billion, bringing its debt (adjusted for financial assets) to $284 billion. That’s $20,000 for every Ontarian.
Net debt as a share of provincial GDP (a metric that gauges the sustainability of the debt burden) stands at approximately 40 per cent of GDP—much higher than during the mid-1990s when debt spiked under the Bob Rae government.
According to a recent report from the government’s own Financial Accountability Office, in recent years Ontario’s government has made very little headway in terms of deficit reduction. The report notes that between 2010/11 and 2014/15, Ontario reduced its deficit by an average of just $0.9 billion per year. Perhaps more troublingly, over the past two fiscal years the deficit has actually increased, from $9.2 billion in 2012/13 to $10.3 billion in 2014/15.
Balancing the budget by 2017/18 will require a dramatic improvement in the government’s deficit-reduction performance. Indeed, the province will need to reduce its deficit by an average of $3.4 billion annually going forward to meet the target. In other words, the government will have to reduce the deficit approximately four times faster over the next three years than it has over the past four to balance the budget on schedule.
Of course, it is entirely possible for the government to eliminate the deficit by 2017/18 as promised, but doing so will likely require a different approach to fiscal policy. In the years following the 2008-09 recession, the government’s deficit-reduction strategy has been to merely slow down the rate of spending growth (instead of actually cutting spending) while counting on increased revenues to shrink the deficit.
The persistence of large deficits shows this approach has not worked. Instead of continuing down this path, the government must take a more active approach to slaying the deficit, which requires a specific, detailed plan to reform and reduce spending.
An important place to start is the compensation of government employees, which has seen dramatic growth over the past several years and now consumes more than half of provincial program spending. In addition, research finds that government workers in Ontario receive 11.5 per cent higher wages, on average, than comparable workers in the private sector. This premium accounts for differences in the personal characteristics of workers such as their education, the nature of their position, and their experience. And it accompanies the more generous non-wage benefits (pension coverage, job security, early retirement) that the government sector likely enjoys.
Bringing compensation levels more in line with private-sector norms would go a long way in helping the Ontario government reduce spending.
Balancing the budget by 2017/18 is an attainable goal, but it will require a dramatic improvement in the government’s lackluster recent performance in terms of deficit reduction.
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