Ford government's slow and steady fiscal approach fraught with risk
The Ford government has a five-year plan to balance the province’s budget by 2023/24. The government’s strategy is to continue increasing nominal spending—but at a slower rate than government revenue is forecasted to grow. If these forecasts come to pass, revenue and expenditures can converge, the deficit will gradually shrink.
Unfortunately, there are a number of problems with the “slow and steady” approach—it takes unnecessary risks, misses key opportunities for pro-growth policy, and ignores the historical evidence about the most successful deficit-elimination efforts in Canada.
First to the most obvious downside. A long path to deficit-elimination means that, in the meantime, Ontario will pile up significant debt. Indeed, provincial debt is forecasted to increase by $48.2 billion between 2018 and 2023. By 2023/24, Ontario is forecasted to hold more than $390 billion in net debt, with interest costs (paid by taxpayers) of $15.5 billion annually.
Secondly, over time, there’s a higher risk that the economy won’t cooperate. A five-year plan relies on the economy ticking along as expected for half a decade. This is a risky assumption, and if a big slowdown or recession hits (and it’s now been a long time since the last one), the Ford government’s plan would be derailed, debt would climb higher, and the balanced budget would be further delayed.
This key point is why it’s so important to pay attention to the lessons of Canadian history, which show us that the most successful fiscal consolidation (deficit-elimination) efforts tend to be fast-moving—not gradualist plans that last half a decade. For example, the successful fiscal consolidations of the 1990s, at the federal level and in many provinces, eliminated large deficits in two to three years. Moving quickly takes some (though never all) of the risk and luck out of deficit-elimination efforts.
And crucially, the “slow-and-steady” approach to deficit reduction seems to be linked with a delay or perhaps outright refusal by government to pursue meaningful and badly-needed tax reform. Sweeping tax reform in the United States has largely eliminated Ontario’s advantage over its U.S. peers on corporate taxes—reducing Ontario’s general corporate income rate would be prudent and come at a low fiscal cost, but the government has made no moves in this direction.
Meanwhile, on the personal income tax, the Ford government is maintaining Ontario’s status quo—the second-highest combined provincial/federal top marginal tax rate in Canada or the U.S. On this front, the government could also make meaningful progress at a low cost to the treasury, but it’s that much harder if the government isn’t committed to adequately reducing spending to eliminate the deficit quickly.
In short, what Ontario needs is spending reform and reductions (to eliminate the deficit quickly) and tax reform (to boost the economy). Instead, we’re getting no meaningful movement on income taxation coupled with a “go slow” approach to deficit reduction.
Yes, this strategy represents a step forward from the reckless spending of the Wynne government. But it’s still weak tea compared to what Ontario needs to regain its long lost reputation for sound public finances and its erstwhile status as a primary engine of the Canadian economy.