Down and out in Ontario

Matthew Lau
April 11, 2018
When future historians study the Ontario economy from the early 2000s to today, they will be startled to see how growth flatlined relative to the rest of the country. What happened, they will wonder, to so badly depress investment, income and employment growth, and to so dramatically inflate provincial government deficits and debt? Was there a war, or natural disaster? No, writes Matthew Lau, in his first-hand account of Ontario’s protracted malaise. It was the election, and three re-elections, of one of the most economically destructive provincial governments in Canadian history. That same government is seeking another mandate this June, running on a budget that promises to stay the course.

Down and out in Ontario

Matthew Lau
April 11, 2018
When future historians study the Ontario economy from the early 2000s to today, they will be startled to see how growth flatlined relative to the rest of the country. What happened, they will wonder, to so badly depress investment, income and employment growth, and to so dramatically inflate provincial government deficits and debt? Was there a war, or natural disaster? No, writes Matthew Lau, in his first-hand account of Ontario’s protracted malaise. It was the election, and three re-elections, of one of the most economically destructive provincial governments in Canadian history. That same government is seeking another mandate this June, running on a budget that promises to stay the course.
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In his delivery of the 2018 Ontario Budget, Finance Minister Charles Sousa proclaimed that the Liberal government would be building upon their “past successes.” The economy has been flourishing, said Sousa, due to the government’s excellent management. Therefore, the only logical course of action would be to double down on the fiscal strategies that have produced this fine situation.

This means a massive increase in government spending. Budget 2018 hikes program spending by $8.4 billion (or six percent) in just one year, and by more than $18 billion over three years. Of course, the government might well spend even more. Consider that last fiscal year, the Ontario government spent about $10 billion more than it had projected just two years earlier.

What has been accomplished as a result of the massive increases in government spending since 2003? Nothing good, according to all the data. Take, for instance, the claims made by Sousa and other cabinet ministers that Ontario has been an engine of job creation, especially in the decade following the economic recession. The data show no such thing.

To get a full picture of “past successes” the Liberals say they want to build upon with Budget 2018, one must rewind 15 years to look at the policies they have implemented and the results they produced. Put simply, and bluntly, the last decade and a half of economic policy in Ontario has been characterized by more and more government control, and the outcomes have been poor.

Raising taxes since 2003

On October 29, 2003, less than a month after the election of a new Liberal government, CBC News reported, based on comments from the finance minister, that the regime “has no intention of raising taxes.” The next day, new Premier Dalton McGuinty announced a corporate tax hike and the cancellation of scheduled income tax cuts.

McGuinty had signed an election pledge in during the campaign promising “not to raise taxes or implement any new taxes without the explicit consent of Ontario voters.” But nobody asked for, or received, consent when the corporate tax rate, which had been scheduled to fall from 12.5 percent to 8 percent in a few years, was soon raised instead to 14 percent.

In their first budget, the Liberals also introduced a new tax on income – called a “health premium” – that today costs Ontarians $4 billion annually. They’ve raised other taxes too, including an income tax hike on top earners so economically damaging that a C.D. Howe Institute study found it would reduce rather than raise tax revenues in the long run.

More government control, less economic growth

All the other tax increases more than compensated for that, however. In 2017-18, provincial government revenue stood at 18.1 percent of GDP, up significantly from 14.6 percent in 2003-04. The size of the government payroll grew dramatically too. From 2003 to 2017, public sector employment in Ontario increased by 26 percent, which was more than twice the growth in private sector employment during the same period.

All those government jobs did not prevent Ontario’s employment rate from lagging behind the national average for the past decade (see the graph above). Nor did they produce economic growth. Two statistics best illustrate the poor economic outcomes that have coincided with the expansion of government control over Ontario’s economy. First, as government consumption grew, the growth in disposable income left to households stagnated badly. The latest data, accounting for population growth and price inflation, shows Ontario dead last among the provinces in terms of disposable income growth from 2003 to 2016.

Business investment similarly suffered. Business investment drives increased productivity and higher wages, but unfortunately for Ontarians, as government consumed more economic resources and increased regulation of business, investment growth lagged the national average.

The consequences of more government control, the data show, have been to impede employment growth, to increase the number and cost of workers on government payrolls, and to reduce the productivity of workers who do have private sector jobs (by discouraging business investment). These are primary causes of the sluggish growth in Ontario household disposable income over the last 15 years.

Deteriorating fiscal health

As adept as the Ontario government has been in taking more and more money out of people’s pockets, its spending grew even faster. Program spending grew speedily during the first several years, then shot up 12 percent in nominal terms in 2009-10 to deal with the recession. The budget deficit that year was $19.3 billion – a deficit so large and structural that the Ontario budget has never yet returned to balance.

The budget speech that year asserted that “governments cannot simply spend their way out of recession” (very correct) and predicted Ontario’s deficit would be “in line with most provinces and our own historical performance” (completely incorrect). Ontario’s deficit-to-GDP ratio that year was by far the highest of any province, and three times the size of Quebec’s.

The deficit has since shrunk but has not been eliminated, and Ontario’s Budget 2018 projects a $6 billion deficit this fiscal year (likely larger – the province’s auditor general has criticized the government’s accounting methods, which understate deficits). Budget 2018 projects deficits for the next five years as well. The resulting increase in debt will ensure a higher tax burden and yet more government control of the economy in future years.

The failures of government

While the Ontario experience represents an unfortunate case study, it is hardly a revelation that more government control, through higher taxes and more regulation, yields poor fiscal, economic, and social outcomes. This is a result that has been proven over time, across countries, and in every sector of the economy.

Consider the Ontario public education system. The latest data show education spending in Ontario increased 23 percent per student in the past nine years, after accounting for price inflation. Meanwhile test scores have steadily fallen in math, reading, and science. Today, half of grade six students fail to meet the provincial standard in math.

Healthcare continues to be rationed through waiting time (when it is not being denied outright) despite the government spending more and more. Corporate subsidies handed out by the Ontario government, allegedly aimed at encouraging businesses, have only discouraged productive economic activity to subsidize what is unproductive. And the Liberals’ ambitious green energy schemes have cleaned wallets instead of the environment, driving families into energy poverty.

Perhaps the best example of a government “solution” that does far more harm than good is the use of the minimum wage to reduce poverty. Since 2014, a study commissioned by the Ontario Labour Ministry, another study by a government-sponsored think tank, and an analysis by the province’s Financial Accountability Office, have all concluded that the minimum wage destroys jobs and is either ineffective or counterproductive when it comes to helping the poor. Yet the government has steadily increased the minimum wage over the past decade and hiked it most sharply this (election) year.

More of the same if Ontarians want it

The governing Liberals – insisting that the Ontario economy has flourished under their excellent management, despite all the evidence showing otherwise – have promised to continue barrelling down the same economic path of increased government control. Spending will continue to balloon, the minimum wage will rise by another $1 next year, and the fiscal plan calls for the government to run its 16th consecutive deficit in 2023-24.

A Liberal MPP from Mississauga recently tried to rebut his government’s critics by declaring that “we have tripled (the debt) and we’re proud of it.” Premier Kathleen Wynne, in damage-control mode, sought to clarify: what her member was proud of were actually the “investments” that their government had made. All those investments that have done so much to “stimulate” the economy over the last 15 years. In just under two months, Ontarians will decide whether they want more of the same, or have had enough.

 

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