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Dalton McGuinty Thinks Money Grows on Trees

Posted: 10/08/11 08:43 PM ET

"Democracy is the theory that the voters know what they want -- and deserve to get it, good and hard."

The quote's usually attributed to HL Mencken. Whoever authored it, it certainly applies to the province of Ontario.

The Conservatives promised to close Ontario's $16 billion deficit without raising taxes. Dalton McGuinty's Liberals? See the quote above.

Ontario faced a near-term future of fiscal austerity, no matter who won the election. The ballot question in 2011 was: how was this austerity to be achieved? The McGuinty record was clear:

The McGuinty version of fiscal austerity included continuing pay increases for public sector workers.

The McGuinty version of fiscal austerity includes green-jobs boondoggles. Ontarians must overpay twice for energy: once in the form of huge overpayments to uncompetitive solar and wind producers, and then again in the form of subsidies to companies that manufacture the components for solar and wind.

The McGuinty version of fiscal austerity will tilt toward tax increases, and away from spending control.

A tax-heavy version of austerity will have serious consequences for Ontario within Confederation.

Federal taxes on business are scheduled to decline in the coming years. If Ontario is raising taxes as the feds reduce them, Ontario's attractiveness as a business location will suffer relative to other provinces. Making this decline even more consequential: Ontario already faced serious competitiveness problems.

In some ways, Ontario increasingly reminds me of Britain in the 1980s. Energy exports (from the North Sea in Britain's case, the West in Ontario's) push up the value of the currency. A higher currency burdens a manufacturing sector, which was not looking very robust even before the currency rise. But the higher currency enriches people in financial services, insurance and real estate sectors concentrated in the capital: London then, Toronto now.

The widening differential between the rich capital city and the struggling manufacturing belt opens resentments. One way to address those resentments: tax the rich city in hopes of somehow subsidizing the old manufacturing economy back to life. (The "green jobs" idea adds an environmental veneer to what is really an old UK-style industrial policy.) The cross-subsidy only aggravates the problem it was meant to solve. Once government gets into the subsidy business, companies discover that they face two very different ways to earn a profit. They can make attractive products at a competitive price (which is very difficult) or they can extract cash from a government desperate to claim it has "created" new jobs (which is very easy). No surprise: companies choose the easy way -- with the result that the manufacturing sector drifts even further away from global competitiveness.

Meanwhile, the higher taxes discourage business formation even in the capital city itself. More and more of the business of the country comes to be concentrated in fewer and fewer big, powerful financial giants, ever more exposes to a single shock -- like the shock that hit the U.S. and UK financial industries in 2008.

Instead of subsidizing manufacturing back to life, Ontario should be focused on the basics: lower taxes, modern infrastructure, quality schooling, and an energy policy purged of the McGuinty government's silly gimmicks.

Even in the best policy environment, Ontario would face tough years ahead. Thursday's wrong turn will make what was already bound to be tough -- even tougher.