Dear Mr. Clark, please tell the premier revenue is not Ontario’s problem

According to the Globe and Mail, Ontario Premier Kathleen Wynne has a new advisor, former TD Bank chief executive officer, Ed Clark. Mr. Clark will apparently advise the government on a host of issues including finding new sources of revenue to help balance the provincial budget.

We hope Mr. Clark, a well-respected business leader, does not believe the popular myth that Ontario policymakers are blameless for the massive debt accumulated by the province. As the myth goes, the province’s annual deficits and mushrooming debt are driven by forces outside anyone’s control. To rectify the problem, the government simply needs to find more revenue.

Back in 2010, Mr. Clark favoured hiking the GST to combat the federal deficit. His recommendation demonstrated a surprising lack of understanding about the real source of the federal deficit.

As a result of the recession, federal revenues had decreased significantly in 2009/10. This decline in revenue was short-lived with revenues rebounding to pre-recession levels within two years (by 2011/12).

Despite the rebound in revenues, the federal government will only balance the budget this coming fiscal year.

The real problem wasn’t a lack of revenue. It was the massive ramp-up in government spending that was supposed to be “temporary” but never was. (As the old saying goes, there’s nothing as permanent as a temporary government program.)

Now back to Ontario, where the provincial government is currently running a $10.9 billion dollar deficit.

The government and many in the media think the deficit is the result of a lack of revenue. That is why the Ontario government has been desperately seeking new revenues and has apparently recruited Mr. Clark to help.

But the current deficit is not driven by a lack of revenue. Ontario has a spending problem.

Over the past 10 years, the Ontario government has increased spending at an average rate of 4.6 per cent a year. That is well beyond what was needed to compensate for population growth and cost increases, and well beyond the rate of economic growth.

In fact, had spending increases been held to the rate of economic growth (an average of 3.1 per cent a year), the Ontario government would currently be spending $104 billion a year instead of the nearly $119 billion it actually plans to spend this year.

That’s a difference of $15 billion, more than the current $10.9 billion provincial deficit. Had the government increased spending more prudently, Ontario would have a $4 billion surplus today.

Put differently, the only reason Ontario is in a deficit today is because it has not managed its spending.

Of course, the narrative at Queen’s Park is completely different. According to this narrative, provincial policymakers have been hamstrung by the global restructuring in manufacturing and a host of other external factors. The implication is that the government is not to blame for its ballooning debt because it was driven by forces outside of its control.

If that were true, other jurisdictions like the Rust Belt states of Pennsylvania, Ohio, Indiana, Michigan, and Illinois would be in similar situations.

They’re not.

In fact, many Rust Belt states are more reliant on manufacturing than Ontario, meaning they are more sensitive to the global restructuring.

Ontario’s economy has actually grown faster than its Rust Belt counterparts and yet, they have been much more fiscally responsible.  From 2000/01 to 2012/13 (a period which covers both good and bad economic times), Ontario’s annual deficit averaged 4.2 per cent of its annual budget (spending). Ohio and Indiana run surpluses while Michigan and Illinois ran small deficits.

As a result, Ontario’s net debt was 36 per cent of GDP in 2011/12, the last year of comparable provincial-state data. Every Rust Belt state had government debt of 5 per cent of GDP or less.

The red ink in Ontario stems from poor fiscal policy, not external forces. To solve the problem, the government needs to strike at its root, which is irresponsible spending.  This is the message that Mr. Clark, a man who no doubt understands the need for families, businesses and governments to be prudent, should bring to the premier.