A pragmatic Ontario budget under trying circumstances

Globe and Mail – Commentary – A pragmatic Ontario budget under trying circumstances
March 26, 2008 at 3:37 AM EDT

Ontario has little room to manoeuvre, given slow growth, weakening exports, a high dollar, an infrastructure deficit, a relentless health-care budget, and a drain on its resources from six provinces through equalization and federal transfers.

Under these trying circumstances, Premier Dalton McGuinty’s government did well to balance the budget (again), keep spending below revenue growth, put additional money in sensible places, nibble at corporate taxes, and reject simplistic advice from the Harper government.

Federal Finance Minister Jim Flaherty (a senior minister but not finance minister in Ernie Eves’s government, as reported here yesterday) had been lecturing Ontario about lowering corporate taxes. With all the adversity Ontario faces, that measure might have made some difference but not much. Instead, the Ontario Liberals opted for a balance of spending increases of 3 per cent a year spread around the budget, with an emphasis on roads, bridges and labour training.

Not very sexy politically, and not very ideological, either. But a pragmatic budget under these trying circumstances.

To make corporate tax cuts work, without risking a deficit, would have required spending cuts. But where?

Start with health care. Every provincial budget in the country is essentially a health-care budget. Ontario’s was yesterday, since 46 per cent of all spending will go to health.

Here’s the show-stopping figure: In 2008-2009, Ontario will spend $2 on health care for every $1 on all education, K-12, colleges and universities.

Education is mostly about today and tomorrow: the next generation. Health care is mostly about today and yesterday: the ailments and diseases that disproportionately afflict middle-aged and older people.

Provinces preach health-care promotion. Look at the Ontario budget: slightly more than $40-billion for health care, $389-million for health promotion, or less than 1 per cent of the total. (By the way, $1.5-billion from lotteries, charity casinos and slot machines goes to the health-care system; $10-million to amateur sports!)

Health-care costs will have grown annually by 7.4 per cent from 2003-2004 to 2010-2011 under the Liberals. Costs are “only” supposed to rise by 5.1 per cent in each of the next two years – it would be a miracle if this were accurate – compared with provincial revenues increasing by 3.5 per cent.

It’s a broken record everywhere in Canada: Health-care costs are rising faster than inflation adjusted for population, faster than government revenues, faster than spending in almost all other program areas. Let any government try to constrain these costs, and listen to the howls.

So, when almost half your budget is rising by a rate faster than revenues, and economic growth has generally slowed, you’re in a tight fiscal spot.

About 85 per cent of Ontario’s exports go south, to a U.S. market entering recession. Billions of dollars are being siphoned from taxpayers through federal programs to other provinces, some of which have much more generous social programs than Ontario. Ontario cannot afford these transfers any more, at least not at historic levels, but cannot get out of them.

A Canadian dollar near parity is slamming the manufacturing sector. Settling immigrants (Ontario takes 43 per cent of them) costs a lot: short-term financial pain for long-term economic gain. There’s a huge physical infrastructure deficit, as Ontarians are reminded at late-winter pothole time: roads, streets, public transit, sewers, water mains, social housing.

So what’s the right long-term strategy? The best is for government to focus on productivity and competitiveness, since the province can’t rely on a natural resource bounty of oil and natural gas.

Lower corporate taxes, as preached by Mr. Flaherty, would certainly be useful in a world competition for capital. But capital location decisions take many more factors into account than whether a provincial tax rate is 14 per cent or 12 per cent.

The skills of the work force, including new arrivals, and the quality of the infrastructure – that is, human and physical capital – are more important than an adjustment in the corporate tax rate. The McGuinty budget, or what was left after health care, nodded usefully in these directions.

In the short term, Ontario could also use the two levels of government trying to work together, rather than scoring political points off the other.

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