Published in the National Post on April 23, 2015
Finn Poschmann is Vice President, Policy Analysis, at the C.D. Howe Institute.
Rising debt charges will leave residents with fewer services
Ontario’s new budget is masterful in many ways, most strikingly in the number of pages dedicated to saying very little, but also in launching a tremendous array of programs, mostly infrastructural, and re-announcing or expanding others.
“Building Ontario Up” proposes to spend countless billions on infrastructure over the next 10 years, via a long list of initiatives labelled “Moving Ontario Forward,” which no doubt is better than the backward alternative.
And credit where it is due, Finance Minister Sousa proposes only trivial tax increases — more precisely, reductions in special credits — in the film and television sector, and to raise the income tax rate for estates and trusts. And to phase in a 12 cent per litre beer tax, for unspecified reasons. It seems safe to assume the money will help fund the “New Beer Framework,” and the office of the Beer Ombudsman.
Like any government budget, there are genuine accounting mysteries. For instance, the revenue the province gets from selling some bits of Hydro One is going to reduce Ontario debt, and pay for infrastructure. Under the Electricity Act, however, the revenue clearly must flow to reducing the stranded debt held by the Ontario Electricity Financial Corporation. A mystery to be unravelled at some later date.
More pleasingly, Sousa proposes to reduce the special tax on sales of local electricity distribution utilities to private investors, increasing the likelihood of bringing private money and management practices to these local fiefdoms. Less pleasingly, the tax rate will only drop from 33 per cent to 22 per cent, and then only through 2018; the likelihood of private money coming to a local utility near you has moved from zero to something trivially different from zero.
Turning to spending, there is something like a bright spot, in that total spending is at last beginning to slow, at least in its growth rate, at less than 2 per cent for the coming year.
The fastest growing category for the next half decade, however, will be interest on the public debt, projected to grow by just shy of 6 per cent per year. The reason is simple; the huge rise is in part owing to the likelihood of higher interest rates, but mostly because the public debt will be bigger than it was before.
The word “bigger” could take any number of modifiers. One could say humongously bigger, terrifyingly bigger, or outrageously bigger, to name a few. The fact that the coming year’s deficit will be $8.5 billion, six years after the recession ended, is just fuel for the fire.
Over the five years through to 2015-16, net provincial debt will have increased from $215 billion to $299 billion. Consider that net debt, which was just over 13 per cent of GDP in 1991, will be 39.4 per cent by next year. Now, the net debt figure accounts for, in some inscrutable fashion, the lending and borrowing relationships between the government and its business enterprises, like OEFC. Owing to that inscrutability, and the fact that the province owes billions more to various pension funds, it might be better to look at total, not net public debt. As reported, just five years of deficit spending will have taken total debt from $237 billion to $324 billion.
Hence, when pages and pages of budget material outline new programs and initiatives that move everything forward or build it up, we know the government’s eye is carefully averted from those frightening numbers, and might like ours to be averted as well.
The inevitability of the numbers, however, will force hands. Allowing the debt to continue to grow is not an option. Another debt downgrade will increase the rate of growth in debt charges even more. In turn, rising debt charges will put even more downward pressure on program spending, leaving residents with fewer services and higher fees for them. Borrowing more now for more services now makes that problem worse, not better.
A wise government would recognize this inevitable trajectory, and the unhappy voters it is likely to cause, and prepare the groundwork. And there is a response — prepare voters for the idea that there really is a case for balanced budgets and fiscal prudence, and the reason is not the near-term economics of it, but that voters eventually want to hold their governments accountable. And when the divergence between the price voters pay and the services they receive becomes ever the more obvious, they will respond.
What to do is not so hard. Ministers control departments, and if empowered by cabinet they can reduce spending growth rates. One particular help would be to ensure that public service pensions were funded, rather than they are now.
The other part of the solution is not to launch programs, even if they might build something up or move it forward. Programs build constituencies, internal and external, who become both cost centres and defenders of those programs, or future headaches. Going a day without launching a program makes for a happier day later.
And in future, budgets would be shorter, simpler, clearer, and the accounting comprehensible.
