Social Policy in Ontario

Drummond-style restraint would be Ontario’s Greek tragedy

Posted on February 22, 2012 in Governance Debates

Source: Toronto Star — Authors: Thomas Walkom

TheStar.com – news/canada/politics
Published On Tue Feb 21 2012.   By Thomas Walkom, National Affairs Columnist

For Ontario, the real lesson from Greece is not the danger of debt. It is the danger of overreacting to that debt.

This is not how the debate is usually framed. The standard argument, articulated most recently by Liberal government adviser Don Drummond (and repeated Tuesday by Premier Dalton McGuinty), is that debt and deficit will career out of control unless public spending is dramatically curbed.

Ontario’s debt may seem manageable now, Drummond’s four-person commission wrote in a report released last week. But so did the debt of hard-hit Spain just four years ago.

“Even Greece, the poster child for rampant debt, carried an Ontario-style debt load as recently as 1984,” the report warned.

In this, Drummond is correct. As a percentage of gross domestic product, Spain’s debt did double between 2007 and 2011. But that doubling happened not because Spanish government spending was out of control.

Rather, the crises in Spain, Portugal and Greece occurred because government spending cuts designed to remedy debt problems sent those countries spinning into economic decline.

Throughout much of Europe, measures aimed at reducing debt have created a self-reinforcing spiral of doom.

Government workers are laid off to save money, which leads to higher unemployment. Higher unemployment reduces tax revenues, thereby widening fiscal deficits. Governments are forced to borrow more to cover these shortfalls, thus increasing debt.

And on and on.

True, there are significant differences between Ontario and the hardest-hit eurozone nations. Unlike Greece, Ontario has not been in the habit of fudging its financial accounts. Nor does Ontario countenance as much tax fraud.

Yet there are interesting similarities. Like Italy, Portugal and Spain, Ontario is captive to a currency over which it has little control, one which — for this province’s economy — is priced too high.

Spain for instance, is unable to make its exports more competitive through currency devaluation because it no longer has a national currency to devalue. Instead it uses the euro over which it has virtually no control.

In the same way, Ontario manufacturers are losing export markets because the currency they use — the Canadian dollar — is priced too high.

One reason why Caterpillar Inc. was encouraged to move its locomotive operations from Ontario to Indiana this year is that Canada no longer has a currency advantage in American markets.

In Europe, the value of the euro is determined by exports from wealthy Germany — to the detriment of Greece.

In Canada, the value of the loonie is determined largely by petroleum exports from Alberta — to the detriment of Ontario.

A well-functioning federation would address this disparity by shifting money from rich to struggling regions. But in Canada, transfer payments like employment insurance have long been biased against Ontario.

When Ontario was on top, that didn’t matter. Now it does.

All of this puts the province in a difficult spot. If we assume, as Drummond seems to, that the U.S. economy will never fully recover and that the price of oil (and therefore the loonie) will stay perpetually high, then Ontario’s economy will remain precarious.

In this scenario, “unprecedented” spending cuts of the kind Drummond recommends would be the worst possible action.

It would be far better for Queen’s Park to undertake a less ambitious debt reduction scheme, even if doing so caused the government to miss its 2018 target date for balancing the budget.

Spain’s austerity regime has led to a youth unemployment rate of 50 per cent. Greece’s has led to rioting in the streets. Ontario doesn’t need either.

< http://www.thestar.com/news/canada/politics/article/1134672–walkom-drummond-style-restraint-would-be-ontario-s-greek-tragedy >

Tags: budget, economy, featured, globalization, ideology, standard of living

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