Are "Wynne Days" Coming?

07/21/2014 06:13 EDT | Updated 09/19/2014 05:59 EDT

We've seen this script before. Higher spending. Tax increases. Persistent deficits. Growing debt. Warnings from credit rating agencies. A government unwilling to make the tough choices to turn things around.

That's the Ontario of the 1980s and early 1990s. It's also where the province finds itself today. The parallels are striking. Ontarians have been down this path before and it doesn't end well.

The experience in the 1990s offers a powerful case study of the consequences of such fiscal policy. Pressure from bond markets, poor economic conditions, and the sobering reality of fiscal arithmetic ultimately forced the Ontario government of the day to change course.

So much for learning from history. The current Ontario government appears steadfastly committed to its agenda of spending, taxing, and borrowing more. Its latest budget does nothing to address the province's fiscal challenges, despite repeated and strong warnings from credit rating agencies. What the government fails to realize is that bond markets, concerned about its ability to repay its debt, will eventually impose the tough decisions to get provincial finances on track. The longer the delay, the more painful the adjustments will be.

Ontario fiscal policy in the 1980s and early 1990s was also punctuated by a series of tax hikes, massive spending increases, and debt expansion. Personal income taxes were raised to 58 per cent from 53 per cent of basic federal tax in 1990 (and from 48 per cent in 1985); new surtaxes and capital taxes were enacted; program spending grew by more than 25 per cent between 1989/90 and 1991/92; government debt grew by nearly $50 billion between 1990 and 1995; and interest payments on the debt jumped from 11.3 per cent of revenue in 1990/91 to 17.5 per cent in 1995/96.

The consequences were felt across the province. The economy faltered. Welfare rolls exploded. And the government got caught in a spiral of persistent deficits, mushrooming debt, and rising interest costs.

An unsustainable trajectory forced the government to reduce spending in 1993/94 and unilaterally undo public sector contracts, imposing wage freezes and unpaid "holidays" that became famously known as "Rae Days." These reforms were followed by further action to cut spending, lower taxes, and reform government programs following the 1995 election.

The shift in fiscal policy was painful for many Ontarians but necessary. The pressure from capital markets ultimately gave the government little choice but to act, and act quickly and aggressively. It is impossible to escape the reality of higher borrowing costs and the expectation of further increases.

There is a real risk that history is repeating itself. Following several years of poor policy choices, the current government's latest budget is recreating similar fiscal conditions that preceded the reforms in the 1990s.

The budget deprioritizes short-term deficit targets and projects this year's deficit to be $12.5 billion - $2.4 billion higher than previously projected. It adds $29 billion in additional spending on transit initiatives and $2.5 billion for a new corporate welfare slush fund. It raises taxes on personal income and aviation fuel. It proposes an unnecessary mandatory provincial pension program that would see a dramatic increase in payroll taxes.

The same budget estimates that interest payments on the debt will swallow nearly 11 per cent of total government revenues in the next four years, up from 9.2 per cent today (and this assumes that interest rates will remain historically low). Government debt is set to reach $324.5 billion by 2017/18 (almost 40 per cent of Ontario's economy), a more than doubling of where the debt stood in 2003/04.

The government says it will balance the budget by 2017/18 but with a plan that lacks credibility, there's reason to be skeptical. How exactly it will balance the books in the absence of meaningful reforms while growing spending is a mystery. Credit rating agencies and the bond markets already seem to be questioning the math.

They say those who fail to learn from history are doomed to repeat it. While the provincial budget does nothing to put public finances on the right track, Ontario's fiscal problems can't be ignored forever. The problem will eventually be solved; it just may soon be out of the government's hands.


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