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Published JUNE 3, 2018 – Globe and Mail
In the final days of Ontario’s chaotic election campaign, a single narrative has dominated: The public wants change. Even Liberal Leader Kathleen Wynne admits it.
The billion-dollar question for Canada’s largest economy is what exactly such change will bring.
The Progressive Conservatives and the NDP, the two parties now tied neck-and-neck for the lead in polls, have bashed the Liberals for being reckless with Ontario’s finances, but they have largely evaded talking about the consequences of their own fiscal policies.
Until Wednesday, the PCs had not released an official platform. What they finally unveiled, with only a week to go, wasn’t fully costed – that is, the full consequences for Ontario’s finances weren’t spelled out. PC Leader Doug Ford’s promise to find $5.6-billion in spending “efficiencies” in Ontario’s budget also wasn’t included, raising questions about one of his signature pledges.
As for the NDP, the party has given details on what its ideas will cost, but there is so much on the table that it is tough to absorb it all – everything from raising corporate taxes to boosting spending in virtually every area of the budget.
What’s at stake can hardly be understated. While the economy is humming with unemployment at a 17-year low, Ontario is already awash in debt and the existing growth could quickly vanish. U.S. President Donald Trump just implemented tariffs on Canadian steel and aluminum, and nine years into its economic expansion, Ontario is likely in the late stages of the current boom.
The province contributes nearly 40 per cent of Canada’s gross domestic product, the most of any province, and any fiscal woes will hurt a national economy that is just starting to shake off Alberta’s energy crash.
If the Liberals weren’t so far behind in polls, Ontarians would have a clearer picture of their economic future, because the party released its fiscal platform with the province’s budget in late March. Yet only a few days before the election, the PC and NDP plans each promise around $10-billion in extra annual spending, and they haven’t had much of a scrub.
Digging through the details of both, one clear message emerges: Neither party exhibits much fiscal prudence.
“It is difficult to make the case that any of the platforms are fiscally responsible or are grounded in a prudent economic strategy,” former federal parliamentary budget officer Kevin Page told The Globe and Mail.
Few issues are as politically toxic in Ontario as the cost of hydro, which, until last year, had soared at four times the rate of inflation since 2006. Meanwhile Hydro One, the province’s electricity distribution utility, was recently privatized to raise $9-billion for debt repayment and transit funding. (Ontario still holds a 47-per-cent stake.) Hydro One has hardly anything to do with energy rates, which are set by a regulator, but some voters conflate the sale with their expensive bills.
Mr. Ford has vowed to fire Hydro One’s CEO and replace the utility’s board of directors. The Progressive Conservatives have also promised to hand the annual dividend that Hydro One pays to Ontario straight to taxpayers, and to also lower hydro costs by moving energy conservation programs off of bills and onto the province’s balance sheet.
The NDP wants to buy back Hydro One, and also promises to slash Hydro rates by 30 per cent.
A DOSE OF REALITY:
As premier, Doug Ford would have no power to fire Hydro One’s CEO. This was populist politics at its best. And the Tories’ methods to lower hydro bills would force Ontario to tack on more debt – the two ideas will cost around $800-million a year.
If the NDP tries to buy back Hydro One, it will likely cost around $10-billion. The party claims it can do this bit-by-bit using the dividends the utility pays to the province, but that would take decades. The dividends also help pay for current program spending, so new debt would be needed to offset stockpiling them.
The NDP also hasn’t explained how it will lower rates. Campaign literature claims that the privatization largely sent hydro bills soaring. That isn’t true.
With so much uncertainty, Ontario is only hurting itself. The province still owns nearly half of the utility, and the share price has suffered lately. “The weakness is attributable to persistent political noise in the Ontario election,” Neil Kalton of Wells Fargo wrote in a recent note to clients.
Both parties plan to make significant changes – but true to their political stripes, they want to move taxes in different directions.
The Progressive Conservatives hope to slash taxes – and do away with some altogether. Changes would include: Cutting the second income-tax bracket by 20 per cent; taking 10 cents per litre off the provincial gas tax; ending income taxes for every worker on minimum wage; and scrapping the province’s carbon tax, which is implemented through a cap-and-trade policy. The PCs also want to reduce the corporate income tax by a percentage point, to 10.5 per cent. Combined, the resulting budget hole would total $7.2-billion.
The NDP wants to raise taxes to pay for its proposed spending. The party will raise income taxes for those earning more than $220,000; implement a property tax on those who do not pay taxes in Ontario; and change the way tobacco is taxed, among other things. As for corporate income taxes, the party will boost the rate to 13 per cent. It projects bringing in $5.9-billion from these new taxes within five years.
A DOSE OF REALITY:
There is a fear that Ontario’s corporate tax regime is now at a major disadvantage relative to the U.S., which just cut its own. But Don Drummond, former chief economist at Toronto-Dominion Bank, who also ran the recent Commission on the Reform of Ontario’s Public Services, believes there are flaws with this argument.
The U.S. changes, for one, are projected to add $11.7-trillion to the U.S. debt over the next decade, because they weren’t made revenue neutral. And even though the U.S. now has lower rates, Canada isn’t that far behind. “We’re about middle of the pack among developed countries.”
When it comes to raising taxes, however, he said it’s a different ball game. The last thing Ontario needs amid uncertainty with its major trading partner is an extra hurdle to win business investments. “You don’t want to put the province at a disadvantage,” he argued.
Industrial, innovation and labour policies
Here, more than anywhere else, the opposition parties propose grab bags of policies. Neither projects an overarching vision to help Ontarians excel in the 21st-century economy.
The signature element is scrapping the Jobs and Prosperity fund, which was created in 2015 to dole out $2.7-billion over 10 years to bolster Ontario’s productivity and innovation. The other policies are mostly platitudes, such as cutting red tape with few figures attached.
The plans are somewhat scattershot, but each individual item is concrete. The party will require employers to offer at least three weeks paid vacation, up from two; allow newly unionized workplaces to automatically move to binding arbitration; and make it easier for workplaces to unionize without a vote.
There is also one area where both parties overlap: Each wants to spur development in the Ring of Fire, a mineral rich area in the northern Ontario. The PCs vow to remove alleged bureaucratic delays, and the NDP has pledged to spend $1-billion “to get things moving on the Ring of Fire.”
A DOSE OF REALITY:
There is only so much the government can do to spur mining development. The industry was decimated when metals prices nosedived in 2011 and 2012, and many investors have fled.
Meanwhile, neither party has said much about the auto industry and the auto parts industry, which collectively employ 100,000 people in Ontario.
Government grants and loans to auto makers are vital to landing new investments that extend the lives of assembly plants by eight to 10 years. There are fears the Tories will view this money as government waste, while the NDP’s new union rules could discourage companies from making such investments.
Whichever party wins, the auto industry will need to educate it on the important role government plays in keeping Ontario competitive, argued Flavio Volpe, president of the Automotive Parts Manufacturers Association of Canada. “I worry that some of the people around those tables are ideologues and they will not listen to reason,” he said, referring to both the NDP and the Conservatives.
Education and health
After the Liberals fought tooth and nail to hold the line on spending within these ministries over the last four years, the NDP and Conservatives don’t seem too concerned with such restraint – particularly on health.
For education, the only material expense is a 75-per-cent tax credit for child-care costs. But with health care, the PCs are happy to shell out funds. Chiefly, the party will create 15,000 new long-term care beds over the next five years – which will eventually cost close to $1-billion annually.
The NDP plans to add 15,000 long-term care beds as well, but it will also create some signature programs, such as dental care for everyone and universal pharmacare to cover 125 essential medicines. As for child care, it will be free for families that need it most, and $12 for everyone else. There are more expenses, too, including adding 2,000 hospital beds, ending the budget freeze on colleges and universities and turning provincial loans for all postsecondary students into grants. The child-care plan alone will cost almost $4-billion annually within five years.
A DOSE OF REALITY:
Nothing matters more to Ontario’s finances more than these two ministries, because they comprise roughly 60 per cent of government spending. The new premier will have to wrestle with tough demographics – chiefly, an aging population – and merely capping spending can be politically toxic, because health and education matter so much to voters.
If either party really values solid finances, they’ll have to make some tough choices here – but that won’t be easy. As rating agency S&P noted in 2017, “we think spending reductions would be very challenging for the province with a growing population, given its education and health-care responsibilities and the share of Ontario’s work force covered by multiyear collective agreements.”
The Tories and the NDP bash the Liberals for their fiscal record, but both opposition parties’ platforms suggest they will be no better. That’s problematic, because with a net debt-to-GDP ratio of 38 per cent, Ontario’s burden is already sky high.
Despite promising nearly $10-billion in new spending, the Tories refuse to spell out whether these will be funded with debt. (Mr. Ford has promised to find efficiencies, but the idea is rather vague and isn’t even part of the official platform.)
The NDP are at least upfront about their intentions. Although they plan to spend heavily, they will raise taxes to cover some of it. The rest will come from adding to the debt, and they aren’t scared of that.
A DOSE OF REALITY:
Deficit-fuelled spending can be justified during recessions, because it can help spur an economic rebound by putting people back to work. Yet right now the economy is in great shape – which means the parties will add debt when Ontario is already at, or near, its best.
“What will happen to Ontario public finances when we hit the next recession?” wonders Mr. Page, the former parliamentary budget officer. “Will a future government be forced to cut spending and raise revenues when the economy is hurting because the next government chose to ‘over’-spend when times were good?”
Mr. Drummond is equally frustrated. “I have never intervened like this in an election period,” he said. Economists tend to worry their objective assessments will be taken as political statements during a campaign.
But Mr. Drummond just couldn’t keep quiet this time around. He likens every party’s spending promises to throwing gas on a debt fire. They all claim it can be contained. He sees it differently.
“There’s too much risk the fire burns out of control.”
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