The easiest target for deep spending cuts is corporate welfare
Troy Media – by Niels Veldhuis and and Charles Lammam
If citizens of Ontario are to believe Finance Minister Dwight Duncan, next week’s provincial budget will be “the most significant budget this government has ever delivered.”
Let’s hope so. With a deficit of nearly $16 billion this year and several more expected over the coming years, Ontarians desperately need and deserve a plan to return fiscal sanity to the province.
Thus far, however, details about the budget have been sparse. Duncan has only revealed that Ontario will cancel or delay billions of dollars in planned infrastructure spending to save hundreds of millions in interest costs. But hundreds of millions “over time” is small potatoes for a government that has ramped up spending at nearly double the rate of economic growth since 2003.
The root of Ontario’s problem
To deliver a credible plan to balance the budget, Minister Duncan needs to strike at the root of the problem: his government’s inability to control spending.
As a first step, the government must abandon the plan unveiled in last year’s budget. Rather than tackle the deficit head on, Minister Duncan’s government proposed that deficits continue for another seven years. And worse, the government pinned its hopes on growing out of deficit through rosy revenue growth forecasts (averaging 4.3 per cent annually) and unrealistic restraint in the growth of program spending (1.4 per cent annually).
Last month, the government’s own Commission headed by Don Drummond deemed its deficit elimination plan unlikely. In fact, the Commission projected that, under the government’s plan, Ontario will not eliminate its deficit at all; rather, it will nearly double in size from $16 billion to around $30 billion by 2017/18. According to the Commission, the government is on track to run deficits totalling $136 billion over the next six years and increase its debt to $411 billion.
Such a dramatic expansion of debt will stifle economic growth and unfairly saddle young Ontarians with the heavy burden of repayment. Deficits into the foreseeable future also increases the risk of economic shocks negatively impacting the government’s finances and delays the feasibility of enacting tax reforms that are needed to improve Ontario’s economic environment and investment climate.
That’s why a shorter timeline to balance the books is a must in the upcoming budget. It would be fairer to young Ontarians, improve provincial economic performance, and provide Ontario with the fiscal flexibility to implement pro-growth economic policies.
To do so, the government should implement a two-year deficit elimination plan that would involve cutting spending by $10.8 billion over two years. The government should then restrain future spending increases to the rate of revenue growth or population growth plus inflation (whichever is less). This would decrease Ontario’s projected debt by approximately $128 billion over the next six years, resulting in substantially lower annual interest costs.
Perhaps the easiest target for deep spending cuts is corporate welfare, which unfairly subsidizes poorly performing businesses at the expensive of investments in successful, high performing ones. Eliminating business subsidies and special loans would save Ontario taxpayers and businesses approximately $2.7 billion per year.
Another prime target is Ontario’s costly electricity subsidies, which cost taxpayers an estimated $1.1 billion a year.
Other reforms should include establishing an independent wage board to set public sector pay. Ontario’s public sector workers currently earn wages that are on average 14 per cent higher than equivalent positions in the private sector. If public sector pay was aligned with that of the private sector, Ontario taxpayers could save $3.8 billion annually.
Savings are possible
Adopting two key health policies that are common in other nations with universal-access health care – hospital funding that encourages competition and consumer cost sharing – would save taxpayers another $7.8 billion per year.
The point is that substantial savings are possible if the government is open to reforms that would improve public services and produce annual cost savings.
To avoid a debt crisis in Ontario, bold reforms are needed that give taxpayers better value for their hard-earned money. Tinkering around the edges is no longer an option for Minister Duncan and his colleagues.
Niels Veldhuis and Charles Lammam are economists with the Fraser Institute and co-editors of Avoiding a Crisis: Fixing Ontario’s Deficit available atwww.fraserinstitute.org.