Friday, October 23, 2009

Ontario economy hits the wall

By Ian Connerty, guest columnist

Back in April 2008 the Ontario government projected a balanced budget and a surplus of $800 million.

Eighteen months later, Ontario Treasurer Dwight Duncan says the provincial deficit will be almost $25 billion this year and the accumulated deficits over the next three years will total $65 billion.

Wow. What a difference 18 months can make.

One the major bond rating agencies, DBRS was quick to react to the news, lowering the province’s bond rating from AAA to AA, a move which will increase the cost of borrowing money to finance the deficit.

DBRS also said it will take at least a decade for the province to reduce its debt burden to a more manageable level without tax increases or sharp cuts in government spending.

This huge downturn is the result of the global recession which hit Ontario’s economy and especially its auto sector very hard. More than 200,000 jobs were lost in Ontario this year including 25% of all jobs in the auto sector - gone and not likely to return.

At the same time, because of business loses and closures, corporate tax revenues have dropped by almost $6 billion, a whopping 48% less than last year. Other tax revenues are also down.

But government spending continues to grow. Spending is up almost $5 billion to $113 billion, mainly on health and education which account for more than 65% of all government spending.

Another $32 billion has been allocated for infrastructure projects to create short term jobs to replace the ones that have disappeared.

Treasurer Duncan indicated that cuts in spending are coming, but not right away. So far, cuts have been put off in favour of three years of continued deficit spending. But that might not be possible if the economy remains in free fall.

Mr Duncan announced a review of all government spending and Premier McGuinty has not ruled out forcing public servants to take days off without pay, a move that is being compared to the infamous “Rae Days” which led to the downfall of Ontario’s only NDP government back in the 1990s.

Given that 80% of all provincial government spending is on salaries, the government may have no other choice. Either lay people off or cut back their salaries with forced days off.

The options facing the government are very limited – keep spending and borrowing, cut program spending or raise taxes. Two out of these three will be very unpopular with voters in the run up the next provincial election slated for October 2011.

Premier McGuinty, who is nearing the end of his second majority government mandate is facing the biggest political challenge of his career and is obviously hoping for a miraculous economic recovery before the next election.