NORTHERN ECONOMIST

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A Tale of Two Deficits

The federal government and Canada’s largest province are both engaged in deficit reduction planning exercises for their spring 2012 budgets. The Federal government according to its June budget has expenditures of about 281 billion dollars and revenues of 249 billion for a deficit of about 32 billion dollars. Ontario, based on its last budget, has expenditures of about 124 billion and revenues of almost 109 billion for a deficit of about 16 billion dollars.   While Ottawa’s deficit is just under two percent of Canada’s GDP, Ontario’s is just over two percent of provincial GDP. 

The way to fight a deficit is to either raise revenues or reduce expenditures or some combination of the two.  The Federal and Ontario governments have both publicly opted to focus on expenditure reduction.  Ottawa is engaged in a review exercise that aims to cut 5-10 percent in spending across departments.  Indeed, the Federal Finance Minister on Tuesday hinted that the government might be compelled to be more aggressive and some of the cuts might be more than 10 percent. Ontario, has engaged the services of former bank economist Don Drummond to provide recommendations on government spending.  Preliminary reports in the media outline cuts as high as 30 percent for some Ontario ministries with health and education being priorities and somewhat spared.

In the case of the federal government, a 10 percent reduction of spending across the board would generate 28 billion dollars and would quickly balance the budget especially given that revenues were forecast to rise to 264 billion in 2012-13 and 281 billion by 2013-14.  While the economic growth outlook is now more uncertain, federal government revenues are not anticipated to decline.   As for Ontario, a 10 percent cut would also nearly balance its budget if spread across the board but Ontario has said that education and health are priorities. 

About 38 percent of Ontario’s spending or 47.6 billion dollars is health and 19 percent or 23.2 billion dollars is education.  Another 10.3 billion (8 percent) is interest on the debt.  Adding these components up brings you to 81 billion dollars, which leaves only another 43 billion dollars in spending. Cutting this remaining spending by 30 percent – post-secondary education and training, children and social services, justice, transportation and all other programs – would just about balance the budget. But it is unrealistic to expect such a dramatic reduction in these categories. 

Even a ten percent drop in government spending all at once is a significant and painful cut.  Yet, both governments have avoided talking about the revenue side of the deficit reduction equation to mitigate the effects of spending reduction.  What is instructive here is that if one examines the total government revenue to GDP ratio for the Federal government and Ontario, the ratio has been falling for Ottawa over the last decade but it has grown for Ontario.  Between 2000 and 2011, Ottawa’s revenue to GDP ratio declined from approximately 18 to below 15 percent while Ontario’s grew from about 15 to 17 percent.  However, Ontario’s revenue includes federal transfers, which now account for about twenty percent of its revenues.  Its own source revenue to GDP ratio is now actually similar to that of the Federal government but it rose over the first half decade of the 21st century and then declined during the recession.

Of the two jurisdictions, Ontario has the more serious deficit problem.  First, it is dependent for twenty percent of its revenues on the federal government.  While the federal government does not appear to have targeted transfer payments for expenditure reduction, it may become a concern. Second, Ontario has vowed to protect health and education, which leaves a much smaller base for expenditure reduction. The federal government has a broader base on which to apply its expenditure reduction though much of it is also transfer payments to individuals and it remains to be seen how it will deal with these.  Third, given its slow economic growth and lagging productivity, raising taxes would be viewed by Ontario’s business community as a poor economic move.  Given the decline in its revenue to GDP ratio, Ottawa is actually in better shape to raise taxes to fight the deficit but it is even more strongly committed to not raising taxes.  This leaves both Ottawa and Ontario with limited room to maneuver.  We await the outcome of the fiscal spring.

 

 

Election Eve: Looking Ahead at Post-Election

The time has comes to take stock of the implications for the North of the potential outcomes of the October 6th provincial election. According to the polls, it is a close race and the possibility of a minority government is high.  At the same time, polls do not always fully predict the outcome and much depends on the concentration of party support across the various ridings, as well as the actual voter turnout.  What can we expect the morning after?

Whatever party forms the government, expect to see the donning of sackcloth and ashes as it suddenly becomes apparent that the economy is on the verge of recession, the stock markets have dropped 20 percent and the province’s coffers are bare as a result of a massive deficit.  All those rosy revenue forecasts that were going to see the budget balanced by 2017 will now go out the window.  Expect to see announcements of government expenditure cuts, freezes and restructuring as well as the discussion of temporary “revenue enhancements.” A Liberal or NDP backed government will likely favor revenue enhancements over expenditure cuts while a Conservative government is more likely to favor cuts or restructuring. 

Should the Liberals win another majority, it will be interpreted as a vindication for their program of policies, especially their job creation strategy focused on Green Energy.  As for the North, it means the Far North Act will stay in place.  For northern Ontario, a Liberal majority win will put it in an odd situation.  If the North returns Liberal members and there is a Liberal majority, it means that any future complaints about the government’s economic policies towards the North especially with respect to energy, the forest sector and natural resource development will be taken with a grain of salt and Northerners dismissed as simply habitual complainers.  On the other hand, not returning Liberal members to a Liberal majority after the substantial investments that the Liberals have made in the North’s knowledge economy, research and health sectors and road construction will be seen as adolescent ingratitude.  With a Liberal majority, the North could be in a political no-win situation.

If there is a Conservative or Liberal minority, the situation becomes much more fluid for the North.  Either will likely be short-lived as given the differences between the parties, a formal alliance or coalition that might provide stable government is unlikely.  For the North, a minority government will provide it with more opportunities to get its points across as every party will now be much more sensitive to opinions even from smaller and more remote regions. A minority government, because of its inherent fragility, is much more open to debate and compromise.  The parties need to work together and that forces a degree of consultation and accommodation that takes multiple points of view into account.  On the other hand, a minority government may be less able to take concrete action especially given the fiscal situation.  Moreover, a minority government could place a halt to the public investment in research and knowledge economy jobs that has been driving the northern economic transition.  The Ontario minority government of the 1980s saw the creation of Northern Health Travel grants and the Heritage Fund. On the other hand, there was not a looming 250 billion dollar provincial debt in the 1980s and an international sovereign debt crisis.

Are there any wild cards in all of this?  Is there a possible Conservative majority?  Not really likely based on the polls but then nobody saw Bob Rae’s NDP victory coming in 1990 either.  A Conservative majority would help create an environment that would boost private sector job creation in the North but it would also be accompanied by public sector austerity that would hurt the North disproportionately given its dependence on government spending for job creation.  The North’s dependence on public sector funds for job creation has grown in the wake of the forest sector crisis. 

Of course, nobody is forecasting an NDP government this time, but who knows?  An NDP majority government may have campaigned on “Respect for the North” but once in power would also face the same constraints as any other government.  There will be respect for the North when necessary but the most respect would flow towards the greatest mass of voters – and they are in the South, not in the North. As for the NDP economic strategy, what short term benefits it creates will come at the expense of the long-term competitiveness of the Ontario economy.

As a sign of where the priorities really lie, consider the fact that in all of the main party platforms, there was no real mention of new institutions for the North or any real policy of decentralization or devolution of decision-making when it comes to northern resource development.   On the other hand, there seems to be no real demand in the North for new institutions either.  Northerners seem to be quite happy in their role as an economic dependency punctuated by bouts of adolescent outrage.  They will be dealt with accordingly no matter who forms the government.  As for new decentralized decision making institutions for the North? Their day will come when the growing aboriginal population in the region reaches a critical mass and articulates a compelling case for a new deal.  When that day comes, it will be a call that no provincial government will be able to ignore.

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