A new year’s resolution for Ontario’s government: Reduce spending

As the new year begins, many Ontarians are making resolutions to address long-standing problems or bad habits. For Ontario’s provincial government, the appropriate new year’s resolution is clear: it should reform and reduce government spending in 2016.

Ontario’s government currently faces severe fiscal challenges. The province’s net debt (a measure of debt that adjusts for financial assets) has approximately doubled over the last decade and now stands at approximately $300 billion or $21,000 per person. And Ontario will run a $7.5 billion operating deficit in this year alone.

The underlying cause is the inability of successive governments to restrain spending; that’s why reducing spending should be the government’s primary objective this year.

The problem began many years ago. Since 2003/04, Ontario has increased program spending (all spending aside from debt service payments) at an average annual rate of 4.7 per cent—far beyond what was necessary to compensate for population growth and overall price increases (2.8 per cent annually). And well beyond the overall growth rate of the economy (3.2 per cent annually).

Consider this. If the Ontario government had held program spending increases to the rate of economic growth since 2003/04, program spending for 2015/16 would be approximately $103 billion rather than the $121 billion the government is actually projected to spend. The difference of $18 billion is more than twice as large as the province’s projected $7.5 billion deficit for this year. This means that if the government had increased spending more prudently, Ontario would have a substantial surplus this year instead of a large deficit.

So much for the narrative that Ontario’s fiscal woes are solely the result of global economic forces that have affected government revenue growth. A lack of revenue has not been the problem at all. Revenue has grown more than enough to offset population growth and inflation. The problem is that spending has gone up even more.

However, some defend Ontario’s rapid spending growth by pointing to stimulus spending during the “great recession.” But this argument ignores the fact that much of the spending growth occurred before the recession began. It also ignores the government’s failure to bring “temporary” stimulus spending levels back down once the recession was over.

This past summer, Standard and Poor’s affirmed the severity of Ontario’s fiscal problems by downgrading the province’s credit rating, citing “very weak” budgetary performance. Credit downgrades may further increase the cost of Ontario’s borrowing. This is especially troubling considering that interest payments already consume nine per cent of all revenue collected by the government. That’s $800 per person per year of taxpayer money squandered on servicing Ontario’s debt.

So how can the government begin to address its spending problem?

An important place to start is the compensation of government employees. On average, Ontario’s government workers receive 11.5 per cent higher wages than comparable private-sector workers (in terms of education, experience, etc.). This premium comes atop more generous non-wage benefits that the government sector enjoys. Bringing compensation levels (which consume around half of Ontario’s total program spending) into closer alignment with private-sector norms would help rein in overall government spending.

As Ontarians start another year with promises to lose weight, get their personal finances in order, or achieve other individual objectives, the provincial government should firmly resolve to tackle its spending habit by committing to reform and reduce spending in 2016.