Expect provincial spending cuts to make matters worse

TheStar.com – Ontario – Expect provincial spending cuts to make matters worse
Published On Sat Oct 24 2009.   By Thomas Walkom National Affairs Columnist

The most talked-about news from Ontario Finance Minister Dwight Duncan’s economic update is that the government expects a $24.7 billion deficit this year. The most important news, which received little media attention, is that Queen’s Park now predicts the province’s unemployment rate to stay above 9 per cent for at least three years.

The two are related. Ontario’s deficit – the shortfall between what the government brings in and what it spends – is high because, with so many out of work, the government collects much less tax revenue. Most important, any ill-advised attempt to reduce deficits by slashing government spending is bound to make unemployment (and ultimately the government’s fiscal problem) worse.

I think Duncan understands this in an instinctive way. He does hail from recession-ravaged Windsor.

But if history is any guide, business bigwigs and their media friends will press him ceaselessly for cuts to what they call wasteful spending, by which they mean public service wages and programs for the poor. They will almost certainly never advocate the other solution to shortfalls – tax hikes.

In fact, until employment starts to seriously bounce back, neither would be a good idea.

This is not to say deficits don’t matter. They do. Any shortfall creates new costs, in the form of interest payments that taxpayers ultimately have to cover.

But deficits should be kept in perspective. In absolute terms, this one sets an Ontario record. But at 4.4 per cent of the provincial economy, its relative size is about the same as it was in 1992-93, during the depths of the last slump.

Compared to normal times, that’s high. But it’s not astronomical.

Still, Duncan says he plans to do something soon to balance the books – without making the mistakes committed by the Bob Rae New Democrats in the early ’90s and the Mike Harris Tories later.

Contrary to popular perception, Rae’s crucial error, after a brief fling with stimulus spending, was to pay too much attention to the deficit. His tax hikes and spending cuts made matters worse.

Conversely, and equally counterintuitively, Harris’s key fiscal mistake was to worry too little about the deficit. Taking office at the onset of a boom, he could have eradicated the shortfall. Instead, he spent most of his efforts shifting money from the poor (via welfare cuts) to the better-off (via tax cuts). Deficits continued apace for another five years.

The real lesson of the Rae-Harris period is that governments should not fret overly about deficits until employment is cooking again.

But this may not be the lesson Duncan has drawn. He and Premier Dalton McGuinty are more likely to follow the more orthodox approach suggested by TD Bank chief economist Don Drummond. (Duncan referred approvingly to him several times on Thursday.)

Drummond, as he told me in an email, argues that Ontario should, in inflation-adjusted terms, reduce spending per capita and, in particular, institute unspecified health reforms aimed at saving money. Such arguments will probably carry weight with McGuinty.

So expect significant cuts next year. They almost certainly would make matters worse. But the political pressure to eliminate deficits promises to be intense even though, in the grand scheme of things, this one doesn’t matter that much.

< http://www.thestar.com/news/ontario/article/715615–walkom-expect-provincial-spending-cuts-to-make-matters-worse >.

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