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How Dalton McGuinty Botched Fiscal Policy

Posted: 12/13/2012 12:52 am

At a recent political event, outgoing Premier Dalton McGuinty touted his legacy as leader of Ontario. "Our government hasn't been perfect," he said. "But when it comes to the big things that families count on us to get right -- schools, health care, the environment, and the economy -- we've gotten it right every time."

As is often the case, there's a gap between rhetoric and reality. That's certainly the case when it comes to McGuinty's claim about the economy. Since assuming power in 2003, Ontario's average annual economic growth rate has drastically underperformed most provinces and the Canadian average -- even in the period preceding the 2008 recession.

But take one policy area that McGuinty did not touch on in the quote above: fiscal policy. This is one of the "big things" the McGuinty government got terribly wrong.

Sound fiscal policy is when a premier manages government spending in a prudent manner, balances the books and pays down government debt, and maintains low and competitive corporate and personal income tax rates.

Doing so is important because research shows sound fiscal policy is a key determinant of long-term economic success.

Unfortunately for Ontarians, when Dalton McGuinty steps down next year, he will be remembered as one the worst managers of fiscal policy in the country.

A recent study published by the Fraser Institute, Measuring the Fiscal Performance of Canada's Premiers 2012, ranked McGuinty eighth overall with a score of 28.9 out of a possible 100, highlighting just how bad his record was in relation to other premiers.

McGuinty's poor performance is rooted in his inability to restrain the growth in government spending. During his tenure, McGuinty increased program spending by an average of 6.1 per cent annually -- nearly twice the combined rate of inflation and population growth (3.1 per cent) and well over Ontario's annual nominal economic growth rate (3.6 per cent). Imagine if an Ontario family managed its budget the same way, increasing spending faster than its growth in household income. It would be on a quick path to financial ruin.

Since government spending ultimately drives taxation, it's no surprise that McGuinty relied on a combination of tax increases and deficits to finance his spendthrift ways.

While in power, McGuinty's government recorded deficits totaling $54.2 billion. Partly because of these deficits, Ontario's net debt has grown to $235.6 billion in 2011/12 (36.9 per cent of GDP) from $138.8 billion in 2003/04 (or 28.2 per cent of GDP).

And there doesn't seem to be end in sight. A $14.4 billion deficit is planned for 2012/13 with plenty more to come over the next four years.

The growth in government debt is one aspect of McGuinty's legacy that will be felt for years to come. It will be a drag on future economic growth and add to the burden of repayment for Ontario's next generation. This increased debt will also require more tax dollars to be spent on interest costs and less on public services and tax relief.

To help pay for his government spending excesses, Premier McGuinty also implemented highly damaging tax increases. For example, he hiked the corporate income tax rate early in his first term which increased the cost of business investment in Ontario and sent negative signals to investors.

Although Premier McGuinty realized his errors and changed course, announcing a phased-in plan to reduce the general corporate income tax rate to 10 per cent in 2013 from 14.0 per cent in 2009, he has since changed his mind and will now leave the corporate tax rate at its current level of 11.5 per cent.

Since the Fraser Institute began measuring the fiscal performance of Canada's premiers, Premier McGuinty has consistently ranked among the bottom three. With McGuinty stepping down as premier next year, his fiscal legacy won't change. But whoever succeeds him has an opportunity to better manage provincial finances and set the foundation for a stronger Ontario economy.

Rather than getting the big things right, Premier McGuinty's legacy of growing government debt and poor economic growth will be a long-term burden on Ontario's families.


CORRECTION: A version of this article previously stated Ontario's net debt has grown to 36.0 per cent of GDP. It is in fact 36.9 per cent.

 

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