Cure for Ontario’s credit woes worse than disease

TheStar.com – news/Canada/politics
Published On Fri Dec 16 2011.   By Thomas Walkom, National Affairs Columnist

Taxpayers relax. The announcement of a potential downgrade in Ontario’s credit rating is not good news. But neither is it cause for panic.

More alarming is the possibility that Ontario’s government — spooked by the debt crisis in Europe — might overreact by slashing spending.

Thursday’s announcement by Moody’ Investors Service is a logical result of the current crisis in Europe and the U.S. With Canada’s two major export markets in turmoil, the Ontario economy is virtually guaranteed to falter.

That means lower tax revenues for governments — which, in turn, makes it harder for Queen’s Park to balance its budget by the target date of 2018.

Nothing new here.

What is new is that credit rating agencies are weighing in. Moody’s already assigns Ontario a second-tier rating (of the provinces, only Alberta scores higher). Thursday’s announcement means Moody’s might, in the future, downgrade Ontario to third-tier status, which would put it on a par with five other provinces, including Quebec.

The practical effect? Those who lend the Ontario government money might demand higher interest premiums. If interest rates rose by just half a percentage point on Ontario’s total $190 billion debt, the extra cost to the treasury would be close to $1 billion.

In normal times, the government would be wise to assuage the ratings agencies by moving quickly to a balanced budget — as the opposition Conservatives demand.

But the times are not normal. That’s the rub. The ongoing debt crisis in Europe demonstrates that.

There, too, countries are being pushed by financial markets to scale back deficits. But the more governments reduce spending by, for instance, slashing public service jobs, the lower their tax revenues.

And the lower the tax revenues, the harder it is to meet fiscal targets — which spooks the financial markets even more. It is a pernicious circle.

What should Ontario’s government do? First, it should avoid panic. Bob Rae’s New Democratic Party government panicked back in the mid-1990s, the last time that Ontario’s debt and deficit fell victim to a slumping economy. The NDP made cutbacks from which the province is still recovering.

Second, it shouldn’t scapegoat public sector employees. To his credit, Premier Dalton McGuinty has avoided doing that. But the pressure on government to get tough with its workers, both from the Conservative opposition and parts of the public, is intense.

To that end, McGuinty might take a look at a new study on wage differences in the public and private sector done by the Canadian Union of Public Employees.

True, CUPE is an interested party in this debate. But as far as I can figure, the study itself — based on figures from Statistics Canada’s 2006 census — is sound.

It looks at comparable occupations and finds that, overall, public and private wage levels are about the same — with public sector workers earning an average of $49,655 annually and private sector workers netting $49,407.

While I don’t want to get into detail here (those who are interested can find Battle of the Wages, with some difficulty, at cupe.ca), the study also found that men in the public sector earn less than their private sector counterparts while women earn more — a result that the authors ascribe to government pay equity rules.

In short, there are no obvious villains responsible for government deficits. To use Toronto mayor Rob Ford’s term, there is little gravy.

Which brings me back to my original point: Debt and deficit — while costly — are sometimes better than the alternative. Bond rating agencies notwithstanding, this is one of those times.

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