In yesterday’s speech, Finance Minister Sousa pledged to keep taxes at their current levels, and hold government spending growth to 1 percent. This was a profoundly disappointing announcement. There is no fiscal or economic reason for this policy stance and a different approach will have both economic and social benefits.
The Fiscal Situation
Minister Sousa stated that Ontario is ahead on its deficit reduction plan, and the deficit will be $9.8 billion for this fiscal year, $5 billion lower than forecast in the budget. The table below shows interest payments as a share of revenues and the accumulated deficit as a share of GDP. Both of these are important measures of fiscal health of the province,
The accumulated deficit as a share of GDP is only slightly above where it was 10 years ago. Interest rates are at historic lows. These low rates reduce interest costs of both new and maturing borrowing, and slow the growth of debt. In the short-term, low interest rates will reduce the government’s costs. One estimate is that it will save $5 billion over the next 5 years. Drastic action isn’t required to reduce the deficit. In fact, research and the experience in Europe suggest such drastic action would instead worsen the deficit.
Reductions In Public Services Will Do More Harm Than Good
In his speech, Minister Sousa stated that spending growth will remain at 1 percent for the second year in a row. With inflation and population growth that means real, per capita spending cuts of 2 percent each year. He also pointed out that at Ontario has the lowest per capita program spending of any province. While this is in part due to economies of scale that come from Ontario’s size, it suggests that the Province’s deficit doesn’t arise from a spending problem but rather a revenue problem.
This policy direction will not support economic growth. Signals from economic data on Canada’s economic performance are mixed. The federal government’s austerity policies, weaknesses in commodity prices, and international uncertainty are a cause for concern. However, U.S. economic growth prospects are improving including forecasts of strengthening U.S. auto sales and a rebounding housing market. There are signs, in fact, of a revival in manufacturing on both sides of the border. This bodes well for the medium-term outlook for the Ontario economy and its fiscal situation. However, short-term uncertainty and weakness in housing markets here at home suggest that an expansion in real, per capita, government spending would support both economic growth and social policy goals.
We can look to Ontario specific research from the Centre for Spatial Economics to understand the relative economic impact of changes in government spending and taxation. Of particular note is the longer-term positive impact that capital investments have on economic growth – more than two and half times the original investment. The reduction in GDP from spending cuts is uniformly greater than the impact on GDP from any of the tax increase in this study. The important lesson from this research is that balancing the budget by increasing taxes is much less harmful to growth than by cutting spending. Recent work by the CCPA shows a number of alternatives for Ontario to rebuild its fiscal capacity to reduce the deficit and enhance public services. A gradual increase in taxes would be sounder economic policy than the announced reduction in real, per capita spending.
An austerity budgeting approach will not support the government’s social justice goals. Recent data from Statistics Canada provides a telling snapshot of income inequality in Ontario. Average earnings for the top 10 percent were $150,000 compared to $30,000 for the other 90 percent. While inflation-adjusted earnings for the top 10 percent increased by 35 percent since 1982, for the remaining 90 percent they`ve only increased by 5 percent. This gap in growth rates shows that inequality is increasing in Ontario.
Public services are an important policy tool to address inequality. They provide essential services that benefit all of us and that lower-income Ontarians cannot afford to buy on their meagre incomes, especially not when combined with the high cost of housing, food, and transportation. Because of the progressivity of the tax and transfer system, addressing the deficit through an increase in taxes rather than constraining spending will reduce inequality. Public services also provide good paying jobs to lower income workers, and reduce the wage gap between men and women.
Public Services Level The Playing Field For Our Health
Public services are good for our health. Increased employment, good job quality, increased access to or increased levels of social benefits, and greater access to services that support social inclusion will all improve Ontarians’ health. These are the social determinants of health, what are called “the causes of the causes of what keeps us health or makes us sick.” The loss of these services through real, per-capita spending cuts will have the biggest impact on lower-income Ontarians. Losing these services will reinforce the adverse health impacts of being poor or marginalized. Reductions in income inequality that will arise from making more use of our progressive tax and transfer system will also improve health outcomes.
Reducing real, per capita spending will reduce public sector employment and private sector employment as growth slows. The link between unemployment and ill-health has been clearly established. An IMF report based on international evidence shows that austerity programs increase unemployment and long-term unemployment in particular. The report also shows that the burden of austerity is disproportionately borne by wage earners rather than those who rely on profits or rents for their incomes.
It may be too late to change the budget that will be introduced next week; but we need to remember that with a minority government, there is still room for improvement. From Minister Sousa’s speech yesterday, it seems that we will have to rely on the Opposition parties to ensure that we get a budget that will deliver on both economic and social goals.