01/30/2013 05:37 EST | Updated 04/01/2013 05:12 EDT

Will Wynne Untangle Ontario's Fiscal Mess?

Having won the Ontario Liberal Party's leadership, Premier-designate Kathleen Wynne has a golden opportunity to chart a new course and undo Dalton McGuinty's legacy of fiscal mismanagement. As Wynne contemplates priorities for her leadership she should seriously consider putting Ontario's deficit and debt problem on the top of her to-do list.

First off, Wynne should take little comfort in the government's recent announcement that the provincial deficit will be lower-than-expected this year ($11.9 billion instead of the $14.8 billion originally planned). This news is not as positive as it seems; the reduced deficit this year is largely the result of one-time revenue boosts and expenditure savings -- not a deliberate plan to restore fiscal sanity to provincial finances.

While it's good to see the government coming under its deficit target this quarter, a deeper problem remains: the province is struggling with persistently large deficits without an end in sight.

Consider the context. Ontario has been in deficit since 2008/09 and currently has the second largest debt-to-GDP ratio in the country. Provincial debt will grow to $255.1 billion this year from $156.6 billion in 2007/08 and on-going deficits until 2017/18 mean the debt is on track to double in the span of just a decade.

The reality is that the Ontario government does not have a concrete plan to eliminate the deficit and rein in debt. This was thoroughly highlighted in last year's high-profile report led by noted economist Don Drummond -- a report commissioned by the McGuinty government. The report explicitly said that to realistically balance the budget by 2017/18, the government had to implement no less than a total of 362 reforms.

Nothing of the sort happened. Ontario's 2012 budget came and the McGuinty government did not enact anywhere close to the level of reforms proposed in the Drummond report. In fact, many major reforms were taken off the table outright.

After essentially ignoring the Drummond report's recommendations, outgoing Finance Minister Dwight Duncan in a recent speech acknowledged that the road ahead for his successor will require tough decisions. He even warned that interest payments on the debt are "a ticking time bomb."

Interest on Ontario's debt will reach $10.5 billion this year and consume 9.2 per cent of government revenues. If the trend of growing interest payments continues, proportionally less of what the government takes in will go to funding important public programs and tax relief while more will go to servicing the debt.

For Wynne, the McGuinty government's legacy of overspending, persistent deficits, and growing debt will not be easy to overcome. However, Canada's own history with slaying deficits in the 1990s suggests it is certainly achievable and that same record also shows governments of various political stripes have successfully done so.

Both history and academic research indicate the key ingredient for balancing the budget is to do so swiftly and rely more heavily on spending reductions than tax increases. Fortunately Wynne has many options to reduce spending but doing so will require fundamental reforms in many areas.

One reform that would permit meaningful reductions in spending is aligning overly generous public sector pay with wages and benefits paid in the private sector. Roughly half of Ontario's government spending is on public sector wages and benefits. In a 2012 publication entitled "Avoiding a Crisis: Fixing Ontario's Deficit," Fraser Institute researchers calculated that matching wages with the private sector alone would save $3.8 billion annually (this figure excludes the potential savings from matching benefits).

Another option is to eliminate business subsidies that cost Ontario taxpayers and successful businesses approximately $2.7 billion per year. Cutting costly electricity subsidies would save an extra $1.1 billion per year.

Ontario could also improve the quality of public health care while reducing costs by implementing policies that are common in other nations with universal access and portable health care.

Solving Ontario's fiscal problems will not be an easy task, but history shows it is achievable. Ms. Wynne has an opportunity to correct past mistakes and plot a new course for Ontario. Let's hope she's up to the challenge and puts forth a realistic plan to balance the books and halt the growth in government debt in the next provincial budget.

This column was written with assistance from Hugh MacIntyre, Fraser Institute policy analyst.

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