Economic analysis

What a real fiscally conservative plan for Ontario would look like

Parties of any political stripe can be fiscally conservative—it’s a matter of simple arithmetic, not radical theories

Queen's ParkDespite the mathematical mysteries that have bedevilled the current Ontario election campaign, one thing has been clear throughout: Ontario needs a fiscally conservative plan to address its budgetary challenges.

No party has a monopoly on being fiscally conservative. If we look to recent history, we can point to New Democrat Roy Romanow in Saskatchewan, Progressive Conservative Ralph Klein in Alberta and Liberal Gordon Campbell in B.C. as good examples of fiscal conservatives.

Being a fiscal conservative means aiming for budget balance in normal circumstances and returning to balance quickly if economic circumstances require running a deficit. It means working toward a sustainably low level of government debt so that more tax dollars can fund services and the burden of current spending is not passed on to future generations. These are goals that all parties can embrace despite differences about the appropriate role of government or how to fairly share the tax burden.

What are Ontario’s fiscal challenges? As a result of a deep recession and slow recovery, Ontario has run six consecutive deficits. The most recent equates to more than $800 per person. Although eight of 10 provinces are projecting deficits for 2013-14, only three are planning to take up to three more years to return to fiscal balance.  Ontario’s tax burden is relatively low—provincial revenue as a share of GDP is third lowest in Canada behind oil provinces Alberta and Saskatchewan. Net debt per capita and debt-to-GDP ratios are relatively high, second only to Quebec. At current tax rates and with modest growth in health spending, non-health program spending must be cut by about $4 billion from current levels to balance in 2016-17 or about $800 million to balance a year later. In sum, while the sky is certainly not falling, there are storm clouds on the horizon, especially if the private sector economists’ modest growth forecast does not materialize.

How would fiscal conservatives address these challenges? On the revenue side, they would set taxes at a competitive level and in a way to share the tax burden equitably.  They would avoid the temptation to raise taxes to increase revenues when in deficit.  Taxes are the most important automatic stabilizer the government has and should be allowed to rise in booms and fall in recessions. They would also avoid cutting taxes in an effort to stimulate economic growth. In open economies like Ontario, much of such stimulus simply flows to neighbouring jurisdictions. Once taxes are set at competitive levels, future demand will be the most important factor in business investment decisions. Fiscal conservatives would focus most of their economic policy on the fundamentals that drive economic growth like open markets, skilled workers and efficient infrastructure.

On the expenditure side, spending is the lever governments control most directly, so fiscal conservatives would set spending targets and stick to them “come hell or high water,” as a successful Canadian finance minister famously remarked. Cutting spending is hard work. After the first four to five per cent, waste and inefficiencies have been eliminated and services must be cut. This is why many deficit-reduction exercises really just offload deficits to other governments. This is not a strategy fiscal conservatives would employ.

In allocating spending cuts, fiscal conservatives know that sacrifices are best borne if they are shared equitably and don’t target particular groups. They also know not to blame their public servants for the government’s fiscal problems, just as no private sector CEO turns a firm around by blaming the staff. Fiscal conservatives would look to enlist public servants in the effort to re-establish balance.

Wherever possible, fiscal conservatives would let markets work and government managers manage. Wage and hiring freezes would be unnecessary if deputy ministers had firm targets that included all their costs, including labour. When looking for spending reductions, fiscal conservatives would ask themselves hard questions. Is this program a must-have or a nice-to-have? Could someone other than government provide this service? Finally, they would understand the need to report regularly and celebrate milestones as they are achieved. Returning to fiscal balance is a long haul that requires sustained support from citizens and public servants.

Our history shows that parties of any political stripe can be fiscally conservative. It’s a matter of simple arithmetic, not radical theories about how the economy works. What’s essential is a real commitment to balanced budgets and a willingness to stay the course until the job is done.

Paul Boothe is Professor and Director of the Lawrence National Centre for Policy and Management at Western’s Ivey Business School.  Formerly he served as Deputy Minister of Saskatchewan Finance and Associate Deputy Minister of Finance Canada.