Ontario: after the orgy

ONTARIO’S economy has been struck hard by the recession leading to a collapse in provin­cial revenue that combined with a massive in­crease in expenditure has helped raise its defi­cit  to a historical high of $24.7 billion.

As a share of GDP, this deficit comes in at 4.4 per cent, which is the worst in Ontario's economic history edging out the previous record of 4.3 per cent in 1992 during the Rae Regime.

Indeed, by any reasonable measure, Ontario is on the verge of a fiscal calamity given the devastation of its manufacturing economy and tax revenue base, rising expenditures and a mounting debt.

This situation, however, has been years in the making as Ontario has continued to spend beyond its means while its economic productivity stagnated.

In the mid-1960s, Ontario had the second highest real per capita GDP in the Canadian federation (British Columbia was first) putting it 41 per cent above the Canadian average. By 2008, mighty Ontario ranked 5th in real per capita GDP and was actually two per cent below the Canadian average -- surpassed by Newfoundland and Saskatchewan -- resulting in equalization payments.

Much of this relative decline has occurred in the decade since 2000 as real per capita GDP first stagnated and then fell as the recession took hold.

Ontario has a serious productivity problem brought about by high electricity and energy costs, a reliance on automobile manufacturing, and a political culture focused on process, bureaucracy and regulation rather than economic fundamentals and getting things done.

The economic millstone of low productivity has not slowed down the growth of government spending and by extension, long-term net debt. In 1965, Ontario had a net debt of $1.6 billion, which rose to $39 billion by 1989. Since then, the net debt of the province of Ontario grew to reach $184 billion in 2009 and is projected to reach $238 billion in 2011.

Put another way, 16 per cent of Ontario's debt since Confederation was incurred by 1990 while the remaining 84 per cent -- about $200 billion, was added in the two decades afterwards. The ratio of net debt to GDP was seven per cent in 1965, 15 per cent in 1990 and will reach nearly 40 per cent by 2011.

By 2011, the provincial debt per person in the province will be an amazing $17,000!

Despite the inclination to blame this fiscal performance on the recession, the warning signs of this disaster have been apparent for a decade. Between 2000 and 2007, government spending in Ontario rose by 50 per cent while revenues rose by 47 per cent. This occurred during a period when real per capita GDP in Ontario did not grow at all.

In other words, while Ontario's per capita economic output stayed flat, the provincial government continued its business as usual -- raising the tax and expenditure burden on the economy.

What does Ontario have to show for this orgy of spending and taxation at a time when its economic productivity was flat? Does Ontario have the lowest university tuition fees and the highest government funding per student in the country? Does Ontario rank at the top of national health performance rankings? Does Ontario have the best public transit systems in the country or the best roads? Do Ontario high school students perform at the top of national or international rankings in math and science? Not really.

Ontario is at best a mediocre performer whose skills have been nurtured by years of a philosophy that the government that governs best is a government that regulates most. Witness the initiatives of recent years: closing cost-effective coal plants and implementing higher cost energy initiatives in the name of the environment, sequestering large land areas of the province's north from economic development, banning pit bulls and pesticides as well as both smoking and cell phones in vehicles. Of course, most of these regulatory initiatives probably required substantial expert consultations resulting in the expenditure of more government dollars.

The solution to Ontario's fiscal situation is stark. To bring Ontario's expenditures in line with its projected revenues in 2011, will require an expenditure reduction of nearly 20 per cent. At present, the provincial government is likely praying that the economy will recover more quickly than expected, thereby raising tax revenue above projections and mitigating the fiscal pain so that business as usual can continue.

Given the collapse of corporate tax revenue and the manufacturing sector during the recession and the stagnant long-term performance of per capita GDP, such an expectation is equivalent to wishing upon a star.

Livio Di Matteo is professor of economics at Lakehead University.

Republished from the Winnipeg Free Press print edition November 4, 2009 A13