Drummond Report: Bloodbath Aftermath

Ontario_Deficit_689462283
McGuinty Government's Dire Situation Requires many tough decisions

by Angus Gillespie

They are merely economic recommendations from a noted expert, but with 362 from which to consider, each comes with a painful jolt of reality that many Ontarians are still trying to comprehend. When a detailed financial status report was released by former TD Bank Chief Economist Don Drummond, it took even the most ardent, aggressive pessimists by surprise with its candor, harshness and in-depth analysis in terms of what Ontario’s provincial government needs to do in order to rid itself of its annual crushing deficits. Putting it in perspective, this document makes the Mike Harris Common Sense Revolution spending cuts look like a walk in the park.

But the deeper, much wider implications of the report go well beyond Ontario and should serve as a stark reminder to all provinces and territories that running huge deficits will invariably lead to crippling financial debts. Ontario and Quebec, Canada’s two largest provinces, now log expenditures well beyond their means; and even more worrisome are concerns there have been few answers to address the crises.

“The government will have to cut program spending more deeply on a real per capita basis and over a much longer period of time than the Harris government did in the 1990s,” Drummond writes in his detailed account. There have already been a number of economists who have made comparisons of Ontario’s out-of-control spending with that of the debt crises faced by the likes of Greece and Portugal, but in reality it would take decades to reach those levels. The problems and economic neglect from countries such as those first surfaced as far back as 40 years.

The Ontario government wanted honest answers from Drummond on how to cut its mounting deficit; it got that, and then some. As it stands, Canada’s largest province runs an annual deficit of more than $16 billion. Drummond has indicated the figure will balloon to $30 billion in the next five years unless some serious belt-tightening begins – and soon. The cumulative debt stands at $215 billion, but will rise to $410 billion by 2017 if the same charted course were to remain. To its credit, the government did move forward on this contentious matter with a relative degree of transparency, knowing full-well that the final report would be one huge black eye for the provincial Liberals. But since the report was first released, there has now been ample time to digest its contents.

So the big question is: What now, Mr. McGuinty? The decisions, or non-decisions, to be made by the premier and Finance Minister Dwight Duncan will have huge short-term and long-term ramifications. Economic Development Minister Brad Duguid says the Liberal government is looking at streamlining $1.3 billion in business subsidy programs to save “hundreds of millions of dollars.” However, as of our publication date, there was still no word on what specific cuts would be made.

Drummond, 58, is the first to admit that implementing his recommendations will be extremely painful, but he was commissioned to reveal and detail what is needed in order to get the books balanced. He says such drastic measures are “necessary if Ontario is to escape its recent history of rising public debt that forces the government to spend more than it should on interest payments.”

362 Ways to Cut Costs

With those 362 recommendations on the table, virtually every sector of government spending has been targeted. Proposed changes include having more healthcare patients treated away from hospitals whenever possible, which would result in far less expenses. Healthcare spending currently rises at a rate of almost 7 per cent per annum. The report determines the goal should be to cap increases at 2.5 per cent. Given that this hasn’t been achieved in any jurisdiction in Canada for about three decades, it seems highly doubtful Ontario will be the one to break the infamous trend.

Other recommendations include: increasing hydro bills, average school classes going from 20 to 26 students, better control over public-sector wages, expanding LCBO outlets and shuttering Casino Niagara in Niagara Falls. Casino Niagara was the original gambling haven built in the Honeymoon Capital in 1996, but was done so on the premise of being an interim solution, while the much larger and more expensive Niagara Fallsview Casino Resort was being constructed. However, due to its prime location in the tourist section of the city, the Ontario government decided to keep both operating, even after the $1 billion Fallsview Casino opened its doors to the public in 2004.

Furthermore, Drummond says the Ontario Child Benefit needs to be held at $1,100 per child, per year, instead of allowing it to rise to the $1,310 as called for in last year’s budget by Finance Minister Duncan. Drummond calls for the elimination of all-day kindergarten, which the Liberals immediately flatly rejected – this despite the fact Duncan promised the government would look at each of the recommendations very closely before making any final decisions. Skeptics’ question just how much time would be spent teaching these 4 and 5-year-olds, and how much would amount to little more than an extended, free, all-day babysitting service.

It’s Drummond’s contention that if the government is unwilling to slash programs in order to save money and prevent itself from going further into debt, it has few options other than to significantly raise taxes. McGuinty and Duncan were both quick to quash that idea. Problem is, they’ve already said “no” to a number of suggestions – so if that’s the case, where and when will any significant cost-cutting measuring come?

“Our recommendations can deliver the needed degree of spending restraint to balance the budget by 2017-18 only if all are implemented,” Drummond says. “We expect that many of our recommendations will be rejected. We accept that, but each rejected recommendation must be replaced not by a vacuum, but by a better idea, one that delivers a similar fiscal benefit.”

Obviously, the vast majority of Ontarians won’t go to the bother of sifting through all of the many hundreds of pages but some may choose to target specific aspects that directly affects them. Many of the ideas and recommendations outlined in the Drummond Report have been raised by other financial experts, but this one exposes all the shortcomings right out in the open.

While it is evident changes are necessary, what still remains unclear is how to actually implement an effective strategy that would lead to major successful reforms across the board. The business sector has been quite vocal in its efforts to have the Ontario government get its fiscal house in order by setting out a deficit reduction solution, which among other things, would include negotiating a new fiscal plan with the federal government. Coming up with more efficient service delivery would also go a long ways on the road to recovery.

During the past seven years, Ontario government spending has increased by more 60 percent; about 25 per cent after taking into account increases in prices and population. It seems the only way for Premier Dalton McGuinty to extricate the province from this quagmire is to roll much of it back. As an aside, under the category of ironic humour, when putting together this article in Microsoft Word, spell-check did not recognize the word “McGuinty” – and so, in its attempt to be ever-so-helpful, offered up an alternative suggestion – “Mutiny”.

When inflation and estimated population growth are factored in, holding government spending to .8 per cent annually for seven years works out to a 16 per cent cut in real per capita terms. For sustained restraint, Drummond says, this would be “unprecedented in the post-war period in Canada” — even more so than Ralph Klein’s well-documented cuts in Alberta and Roy Romanow’s in Saskatchewan.

“The McGuinty government remains committed to putting Ontario’s finances on a long-term, sustainable path,” Duncan says. The public just hasn’t been informed on when that will be.

Hudak Response

In a one-on-one interview with official opposition leader Tim Hudak of the Progressive Conservatives, he says the importance of the Drummond Report is that it provides an objective, behind-the-scenes look at what’s happening.

“But Drummond is only part of the equation,” Hudak tells CBJ. “He addresses spending issues today, but we have other suggestions to help reign in the runaway spending including a public sector wage freeze and ending corporate welfare in a province where a government picks winners and losers and decides who can create jobs and who cannot.”

“For a long time, Dalton McGuinty sugar-coated the situation saying everything was running fine, but Mr. Drummond revealed it’s quite the opposite – we’re heading over a cliff,” Hudak declares. “If we don’t start taking some tough medicine in Ontario now, we’re going to be in a much worse crisis down the road. I urge Dalton McGuinty to act on policy ideas that the Ontario PC Caucus has advocated for months in the spirit of collaboration, to rein in the size and cost of the government.”

Speaking of medicine, healthcare and education have been two of the focal points regarding government spending with both showing little improvement in terms of quality, yet the costs continue to skyrocket.

“There are no easy answers when it comes to sustaining healthcare given the fiscal hole we find ourselves in,” Hudak says. “We have seen an unfortunate focus on creating bigger and more bureaucracies including the LHINs and far too many dollars are being diverted from frontline care into administration. Secondly, we have to start doing things differently, including the use of more clinics. I don’t think people care who owns and MRI or a CT scan as long as they can get service promptly and be able to pay with their OHIP card, not a credit card.”

A recent Conference Board report showed Ontario’s growth slumping to 1.9 per cent. Based on that shortcoming, it means the Liberals will miss their 2017 balanced budget target by about four years. The economic mess has resulted in a stern warning of a possible credit downgrade for Ontario from Moody’s Investor Services. A second such missive also came from Dominion Bond Rating Service, which released this statement. “The longer the province takes to initiate the difficult actions needed to curtail spending significantly, the more likely it is that tax measures will also be needed to restore fiscal balance, especially if growth fails to materialize as originally planned.”

“I am worried that the Liberal government is already running away from the Drummond Report,” Hudak states. “Mr. Drummond knows not everyone is going to agree with all 362 recommendations; we’re all human beings. But if you take something off the table, you have an obligation put something of equal or greater value back on the table; otherwise we’ll never get out of this hole.”

Specifically, Hudak is concerned the government has already taken off the option for cutting full-day daycare and the clean energy benefit, which is a 10 per cent reduction on energy bills. Additionally, there’s the back-peddling on class size recommendation as well as reducing the number of non-teaching personnel in our school boards.

“All told, those recommendations total over $3 billion,” Hudak notes. “But the Liberals have not put anything back on the table to compensate for that, so it makes me very concerned that Dalton McGuinty is not taking seriously the depth of the hole he’s dug us into.”

“Part of our Conservative alternative approach is to get energy back to basics – more about reliability and affordability and not a social program,” Hudak maintains. “That’s why we believe we should end the Feed-in Tariff Program that is giving away massive subsidies for solar and wind projects that are paid through our hydro bills and are chasing jobs out of the province, because energy has gone from one of the major strengths of Ontario for business to a major expense.”

Ontario PC Finance Critic Peter Shurman echoes Hudak’s stand.

“In the face of growth projections of just 2 per cent, the last thing Ontario needs is more taxes – cancelling the next round of business tax rate reductions or raising others,” Shurman says. “Having blown a $4.3 billion (and counting) hole in a plan he commissioned to balance the budget – and with nothing to fill it – Dalton McGuinty will now reflexively increase taxes as the easy way out.”

When it comes to the gaming industry, Hudak is of the belief there are far better ways to address the overall deficit than to simply recommend shuttering Casino Niagara.

“Our gaming sector is burdened by a heavy bureaucracy at the Ontario Lottery and Gaming Corporation,” he says. “You have your casinos, charity casinos and racetrack slot operations. Perhaps a better model would be to have the private sector run the gaming sites, have the province take a tax off the top and simply regulate the industry to make sure you have honest games with honest players.”

In other words, Hudak is advocating much the same setup as seen in other jurisdictions, including other provinces and the United States, where they charge taxes ranging from about 7 per cent in Las Vegas to about 50 per cent in Pennsylvania. Hudak’s thinking is that it frees up the operators of these businesses without having the OLG bureaucracy questioning every decision and slowing them down. It seems like a plausible answer for speeding up the process and perhaps may lead to increased revenue and additional job creation, which would be added relief for some of the 593,000 Ontarians currently out of work.

When the Liberals last hiked taxes on job creators, in 2004, the result was the loss of 210,000 manufacturing jobs over the following four years – all before the recession began, Hudak noted.

“Take a look at two of the best-performing economies in Canada today,” Hudak points out. “BC and Alberta both have lower business taxes than Ontario, at 10 per cent. This is an obvious competitive advantage for them.”

Academic Perspective

Professor Angelo Melino is on the faculty with the Department of Economics at the University of Toronto and is an expert in financial economics. One area that caught his attention was energy policy. Like Drummond, Hudak and many others, he’s of the belief the government needs to take its medicine and start implementing cuts.

“I’m really pleased that the Drummond Report brought out just how difficult Ontario’s fiscal situation is,” Dr. Melino says. “This is something that we haven’t been discussing in a mature way in and I’m really happy the report has opened up this conversation and has forced people to face these stark choices that we have to deal with. We have an untenable path for public debt and we have to do something about it. The longer we wait, the bigger the problem will be and the harder it will be to deal with. It’s something politicians and the public want to avoid, but I think we have to face up to it now.”

These are difficult matters to deal with, but they’ll only be worse 10 years from now if Ontario stays on the same course. Another aspect that will eventually provide more consternation will be the day when interest rates eventually go up – and they will. So, once again, the time for substantial action is the present.
“As voters we’ll have to reward or punish them when the day comes depending on the decisions made by the government,” Melino says. “It’s relatively straightforward: you do less, you do things more efficiently, or you pay more taxes. Something will have to be done and I wouldn’t be at all surprised if enhancing tax revenues and charges isn’t part of the solution.”

“I think the government’s decision to hide the cost of energy production in Ontario by taking money off of hydro bills and paying for it through general revenues is a mistake,” Dr. Melino opines. “If electricity production is expensive, consumers should be aware of that; it should be showing up in their bills and they should be given incentives to try and avoid excessive use of electricity and rewarding people who can find ways of cutting back. When it’s in general revenues, it’s still there and we have to pay for it. But the incentive to economize is taken away to save energy.”

So, just how dire is Ontario’s current fiscal situation? Melino offers up a comparative.

“These are incremental problems that can quickly grow out of hand,” he states. “It would be 10 years before we (Ontario) look like Quebec and it would be 40 years before we look like Greece. That may seem like a long way off, but if we don’t start thinking about it now, there’s not much we will be able to do later. It doesn’t take long for small things to add up and then you have a serious problem.”

Another target has been the number of tax credits issued by the McGuinty government and whether or not a number of them need to be recalled as one measure of reining in the out-of-control deficit. Take for example, the Tuition Tax Credit, which Melino knows a lot about.

“I think it was a bad idea,” he declares. “It’s a bit targeted and not everybody gets it. I think it was a mistake for the government to introduce that policy particularly given the state of the government’s finances.”

A $215 billon dollar cumulative deficit – and climbing.

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