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CIBC Misses the Point About Ontario's Economy

04/17/2014 05:54 EDT | Updated 06/17/2014 05:59 EDT

As Ontario continues to undermine its economic future with growing debt, the province does not receive near the critical scrutiny it should from the media and financial markets. In reading CIBC World Markets' latest Economic Insight, it's not hard to understand why.

CIBC takes square aim at a recent study published by the Fraser Institute highlighting Ontario's worrying level of indebtedness by comparing it to that of California, which has received widespread attention for its long-standing inability to balance its budget and growing government debt.

The study finds that Ontario's $267.5 billion (Cdn) government debt pales in comparison to California's $144.8 billion (U.S.) debt, despite California having a larger economy and population. When boiled down to a per person basis, government debt in Ontario is more than five times that of California's.

CIBC however leaps to Ontario's defence, claiming the Fraser Institute study misses "the fundamental point" that Canadian provinces and U.S. states "aren't peers" and that comparing them "is folly."

In reading the CIBC's Economic Insight, one of course must ponder just who exactly is missing the point.

CIBC's Economic Insight explains that provinces and states cannot be compared because "provinces are endowed with great fiscal flexibility, including sovereign-like taxing powers, an unchecked ability to run budget shortfalls." Meanwhile U.S. states, "exhibit less fiscal flexibility; they're generally prohibited from running operational shortfalls, must clear higher hurdles when it comes to raising taxes and face more binding constraints on issuing debt."

It is certainly true that U.S. states have different fiscal rules than Canadian provinces. However, arguing against comparisons of jurisdictions with different fiscal rules is akin to arguing that you can't compare how many cookies kids eat because one has easier access to the cookie jar.

If the CIBC authors had actually read our studies on Ontario and California they would have come across a three page section "Stating the Obvious--U.S. States Are Different from Canadian Provinces," where we explain that unlike the provinces in Canada, U.S. states have their own constitutions that can restrict the fiscal powers of the respective state governments.

As CIBC notes, California, like most other U.S. states, has a constitutional mandate for a balanced budget. However, that requirement only applies to the annual operating budget, which in California is referred to as the General Fund. In addition to its General Fund, California has two other funds for state-level spending: the Special Fund and the Bond Fund that in 2012-13 comprised of 28 per cent of state spending. When all three funds are included, the scope for debt accumulation is much greater and any proper analysis should include all three funds, as ours does.

The CIBC however wants people to "forget comparisons of Ontario to California" and instead claims "it's more relevant to stack up Ontario vs. Alberta" and other provinces.

Again, had the CIBC economists actually read our report they would have realized that Ontario was compared to other provinces. Ontario has the second highest level of net debt in the country at 37 per cent of GDP, second only to Quebec (49 per cent). And although Quebec's debt is higher, Ontario is accumulating debt at a faster pace and if reforms are not put in place, Ontario will soon be the most indebted province in the country.

But again CIBC jumps to Ontario's defence noting "Quite simply, not all provinces are endowed with equal opportunity. When it comes to economic performance, Canada's resource-rich Western provinces have enjoyed a pronounced edge over Central and Eastern Canada." It seems that the CIBC authors want us to believe that Ontario's higher debt is because the west has resource riches.

The CIBC report says nothing about Ontario destroying its investment climate through bad policy. Consider that Ontario has raised personal income and business taxes, made labour laws more unbalanced, created uncertainty with imprudent management of its finances, destroyed its energy markets which will result in some of the highest energy costs in North America and has done little to incentivize the extraction of its own natural resources.

Compare that to Saskatchewan, a historic economic laggard despite its resources, which has improved its investment climate and is now reaping the rewards.

But the CIBC saves the best for last, noting that there is a "silver lining for the more distressed provinces." As the CIBC puts it, the federal government is set to balance its budget next year which means there is a "potential for a more accommodating federal government in Ottawa." What exactly does that mean? Well, according to the CIBC, "deploying stimulus dollars at the federal level may help."

And there you have it, the analysis of one of Canada's leading banks incorrectly concludes Ontario can't be compared to California, should be compared to other provinces, isn't necessarily at fault for being the second most indebted province, and argues the federal government should consider bailing Ontario out.

No wonder Ontario is in the state it's in.