Social Policy in Ontario

A recent editorial in the Toronto Sun compares Ontario’s public debt to that of California, suggesting that, at five times the size of California’s, Ontario’s debt is laying the foundations for a fiscal and economic emergency. Before readers get too terrified, the editorial changes tone: it’s alright, it coos; we can avoid the Californian nightmare if we just get our fiscal house in order.

Before looking at this second, prescriptive claim, it is best to first look at why there is no sensible comparison to be made between the public debts of California and Ontario.

The Sun frightens its readers by citing the fact that Ontario debt is, for example, five times higher than California’s when examined as a percentage of GDP. The arguments are rehashed versions of those made in a Fraser Institute report released a little over a year ago and have been quickly debunked, even by mainstream economists. The comparison really is one of apples to oranges.

Consider just one way in which this is so: the two jurisdictions face very different constraints on borrowing. As we saw with the recent debacle around the federal debt ceiling, the politics of debt in the United States can be, to put it mildly, complicated. At the state level, they are often even more so. For example, the constitution of California explicitly prohibits the state government to borrow in excess of $300,000… in an economy whose GDP is currently almost $2 trillion.

Despite this, California has a debt of nearly $150 billion. The magic lies in a range of accounting gymnastics based on extraordinary measures from launching popular-vote propositions to selling direct agency bonds. While these measures give California some fiscal policy leverage, they are by nature haphazard, frail and open to being contested. Indeed, a number of counter-measures have worked to limit fiscal leverage: the California government is required to balance its books every year since 2004 and the legislature requires a two-thirds majority to pass any tax increase.

These constraints help explain why California has a low credit rating and problems funding its debt, while Ontario enjoys good credit standing and its bonds require yields only slightly higher than those on equivalent federal government bonds.

Although debt-rating agencies are not the most trustworthy sources (see their high ratings of toxic assets up to the financial crash of 2008), in this case, they do provide some good arguments for why Ontario enjoys high credit ratings. For example, Moody’s cites Ontario’s control over fiscal policy, large and diverse economy and “strong debt management practices” as three key reasons for the sustainability of its debt. California only checks off the second on that list.

What, then, of the second question? Even if there is no California-size emergency, should Ontario nevertheless pre-emptively undertake fiscal adjustments to “rein in” its debt? For example, the Sun editorial suggests capping program spending growth at 4 per cent annually.

The fiscal policy constraints faced by California help answer such questions. Indeed, the Fraser Institute inadvertently leads us to the conclusion that the size of debt matters less than political and institutional context. The relative size of debt matters less than is commonly thought but has long been used as a magic number to push ideological solutions.

The ideology of the Fraser Institute casts the causes of debt as an excess of expenditures – in particular, social program spending. This ideology is currently triumphant. Despite having a much smaller debt than Ontario on any measure, California nevertheless undertook painful cuts to schools, universities, health care and social services to stop adding to its debt.

While tackling the other side of the ledger – raising revenues – could have accomplished the same goals, this tool was used only at the last minute and in relatively small ways because government institutions have been molded to make its use extremely difficult. Both the story of excess expenditures and the solution of draconian cuts seem so sensible because they flow from the same narrative of individual responsibility that has been created to mask inequality and legitimize its explosion.

Ontario has fewer legislative constraints and a larger revenue base than California, but it is subject to the same institutional struggles. Like California, the province has slowly undermined its ability to raise revenues through regressive and unnecessary tax cuts. Today, it is much easier to lower taxes than it is to raise them; much easier to cry wolf at debt than point the finger at causes of inequality.

So while Ontario is not California, the scary bit is that the province could become much more similar to the U.S. state if the thinking promoted by the likes of the Fraser Institute gets its way.

Michal Rozworski is an economist and lead researcher at Cause Comms. He blogs at Political Eh-conomy.

< http://www.thestar.com/opinion/commentary/2014/03/21/ontario_is_no_california_when_it_comes_to_debt.html >