Is Ontario’s Ensuing Fiscal Squeeze Salvageable?

Andrew Perez

The Backdrop

Ontario just can’t get a break. Once the economic backbone of Canada, the province was paralyzed by the global economic crisis that ravished the globe three years ago. Fast forward to January 2012: the province is saddled with a $16-billion dollar deficit and a rate of growth that is slower than that of some other provinces. With scarce natural resources to draw upon and a deep reliance on the U.S. economy, Ontario’s fiscal outlook is more severe than that of other provinces.

It is in the context of this ominous milieu that an influential credit rating agency recently put Ontario on notice that it would put its rating in jeopardy if it fails to get its fiscal house in order. Moody’s Investors Service warned last month that it might lower Ontario’s rating if it does not take aggressive steps in Budget 2012 to wrestle its multi-billion dollar deficit to the ground.

To be clear, credit ratings ought not to be viewed in the abstract: in concrete terms, a credit rating downgrade would render Ontario government bonds less attractive to investors; moreover, it is likely a credit downgrade would make it more costly for the province to borrow money at the very time when its debt is escalating. Ontario’s fiscal woes must also not be viewed within a vacuum: Ontario’s fiscal squeeze is germane to the rest of Canada because its economy is larger than that of many countries and accounts for roughly 40 per cent of the country’s economy, with a gross domestic product of $612-billion in the fiscal year 2010.

And so it is against this perilous backdrop that the Ontario government has enlisted the esteemed Don Drummond – formerly chief economist at TD Bank – to advise on ways to accelerate the pay down of next year’s $16.3 billion deficit – a deficit that will boost Ontario’s net debt to a frightening $241.4 billion. Appointed to the position in March 2011, Mr. Drummond chairs the Commission on the Reform of Ontario’s Public Services and will report on his findings later this month.

The Players

The principal players include a nexus of senior-level public servants and a clique of influential policy advisors who surround the veteran premier. The unenviable mission: slash government expenditures without causing political pain. In laymen’s terms, government services must be cut or streamlined with minimal pushback from the Ontario people.

The seminal figures include Premier McGuinty and Finance Minister Dwight Duncan. Aside from Mr. McGuinty – long viewed as the quintessential pragmatist – Mr. Duncan is the most prominent ‘fiscal hawk’ in the premier’s cabinet. Behind the scenes, Peter Wallace will play a muscular role as the Ontario government’s top bureaucrat. Mr. Wallace, until recently the deputy minister of finance, will play a make-or-break role in transforming the way in which the province administers and consolidates services. Government insiders say Mr. Wallace will bring a more ‘economic and fiscal-related’ bent to the table; the senior bureaucrat is armed with three decades of experience in the public service and is said to be uniquely qualified to confront the province’s fiscal challenges head on.

Mr. Wallace will be joined by senior level aides from the premier’s office and the ministry of finance. Among them will include the premier’s youthful chief of staff, Chris Morley, principal secretary and policy guru Jamieson Steeve, and the premier’s erudite director of policy, Karim Bardeesy. Of course, joining them, will be the public face of the entire effort: Mr. Drummond, or ‘Premier Drummond’, as his detractors in cabinet refer to him. It is anticipated Mr. Drummond will be unflinching in his diagnosis of Ontario’s fiscal status, providing Messrs McGuinty and Duncan with an impetus to move forward in pursuit of their mission.

The Policy Menu

Armed with an ambitious mandate, Mr. Drummond has already signalled to his political masters that consolidation of government services will be the order of the day when his report is released later this month. By all accounts, Mr. Drummond’s political masters are also trumpeting the consolidation ethos. As of late, the McGuinty government has advanced the notion that by modernizing delivery mechanisms, the government would be able to find billions of dollars in savings without adversely affecting public services. That would mean slashing duplication in government. Translation: the government would endeavour to identify incidents where many public servants are doing the same job and streamline government agencies where responsibilities overlap.

Mr. Drummond is known mostly for his expertise in macroeconomics. And thus far, his assertions regarding the province’s finances – namely the call for overall spending increases to be capped at one per cent annually – have hardly probed what will need to take place at a micro-level. While that may change with the report’s release, in the mean time, it is valuable to examine what private sector organizations are saying about Ontario’s fiscal crisis. The Ontario Chamber of Commerce (OCC), a federation of 160 local chambers of commerce and boards of trade, is a case in point. The organization, headed by Len Crispino, recently released a policy statement to the Commission on the Reform of Ontario’s Public Services.

In its submission, the OCC proclaims that ‘Ontario should embark on a continuous process of short-term actions and long-term planning’ and then proceeds to delineate four ways in which the Ontario government can expeditiously achieve cost savings. The four strategies enumerated include:

1. Controlling rising health care costs by adopting a more efficient health delivery system.

2. Developing a long-term public sector compensation restraint strategy.

3.  Ensuring Municipalities spend provincial transfers prudently.

4. Identifying programs that could be effectively and efficiently delivered by private entities.

With regards to controlling rising health care costs, the OCC cites that health care costs currently comprise 46 per cent of Ontario government spending; moreover, that number will soar to 80 per cent if current growth rates persist. And while the government has signalled its intention to hold health care spending increases to three per cent annually, it has yet to outline a detailed plan that stipulates how this will be accomplished.

The OCC, among other things, recommends the Ontario government permit more specialized privately-run clinics to operate within the province, all within a publically-funded, universally accessible health care framework. A second recommendation within the health care sphere involves adjusting the cumbersome compensation model for nurse practitioners and all partners in Ontario’s health care system.

On the thorny issue of public sector compensation, the OCC cites all the relevant statistics: the Ontario government currently spends 50 cents of every taxpayer dollar on compensation for employees in the broader public service (this includes teachers, nurses etc.). As Mr. Drummond will inevitably recommend later this month, any genuine plan for public service reform will necessitate curtailing Ontario’s labour costs. In this vein, the OCC pointedly recommends that the government spearhead a ‘comprehensive long-term public sector compensation restraint strategy’ that engages municipalities and extends beyond the current government’s minority mandate.

As has already been suggested by PC leader Tim Hudak, any dialogue surrounding a public sector compensation restraint strategy must include public pensions, salaries, and employee benefits: a considerable bone of contention among workers who comprise the broader public service. In spite of the uncomfortable nature that surrounds a discussion of workers’ compensation, the government must fashion a constructive dialogue with public sector unions in order to discuss all available options.

Regarding municipalities’ judicious use of provincial transfer dollars, the OCC shrewdly suggests the Ontario government must do more to ensure provincial transfers are being wisely allocated among municipalities. According to the relevant statistics, the Ontario government exhausted $3 billion on transfers to municipalities in 2011: that figure is expected to rise to $4 billion by 2018. By that juncture, Ontario will have undergone increased support to municipalities by 270 per cent since 2003, all while having uploaded $1.5 billion in municipal costs.

A possible solution, as advocated by the OCC, would see the government freeze or limit provincial transfers to municipalities that do not ‘undertake comprehensive, meaningful actions to reduce or limit spending, obtain efficiencies or act on recommendations by an Auditor General.’

Finally, the OCC stresses the need to identify programs that could be delivered more effectively or efficiently by private entities. The OCC notes that a number of private sector organizations in Europe deliver business services in lieu of government line ministries. Most notably, the Scottish Chamber of Commerce equips businesses with pro-bono mentoring services. The analogue in Ontario would be the Ministry of Economic Development and Innovation which currently provides advisory services to Ontario businesses on the government’s dime. The thought here is the Ontario government could divest itself of the responsibility to administer such services, prompting private entities to fill the void. There are several other domains in which the government ought to consider alternative service delivery mechanisms, but we’ll leave it to Mr. Drummond to incorporate the remaining examples in his report.

The Politics

It’s now apparent Mr. Drummond’s commission has been subject to remarkably less media scrutiny than the City of Toronto’s recent Core Services Review, spearheaded by KPMG under the auspices of the Ford administration. Characteristic of their respective styles, Mr. Ford and Mr. McGuinty have struck decidedly different tones in tackling what is in essence, an identical policy challenge: to consolidate government services in an era of fiscal austerity. However, Mr. McGuinty has meticulously avoided the public-relations disaster that engulfed Mr. Ford’s core services spectacle this past summer.

And yet, Mr. Drummond’s commission has not fallen below the radar in the bustling corridors of Queen’s Park. On the contraire, Mr. Duncan has been paddling upstream, struggling to persuade the Liberal caucus the time is ripe for restraint and change. In spite of Mr. Duncan’s unwavering support from the premier’s office, he still faces an uphill battle to bring the Liberal caucus enthusiastically on board. For one, most Liberal MPPs did not enter public life endowed with a hunger to reduce the size of government. But more practically, in light of the government’s minority status, Liberal members are highly cognizant of potential austerity measures dampening their electoral prospects back home in their respective districts.

And so it is within an environment marked by anxiety that Mr. Duncan must gently nudge a nervous caucus – not to mention a reluctant public service – to swallow what could most aptly be described as ‘strong medicine’ for Ontario’s economy. Luckily, for Mr. Duncan, recent pronouncements from Moody’s Credit Service and the bewildering news from the Eurozone might help to illustrate his urgency.

Finally, it bears highlighting that Dalton McGuinty’s Liberals recently campaigned for a third consecutive mandate on the narrative that Ontario is successfully navigating its way through turbulent economic conditions. A third-term premier, Mr. McGuinty is now uniquely qualified to honour his pledge to his electors and the public at large; as astute political observers will recall, Mr. McGuinty ran for the leadership of his party in 1996 as the ‘conservative’ candidate, pitted against the more left-leaning Gerard Kennedy. At the time, Mr. McGuinty spoke eloquently about the virtues of a pragmatic liberalism: one that clearly endeared him to a majority of party members as he eventually emerged victorious as party leader.

The previous eight years have shone a light on Mr. McGuinty’s enduring quality: his political pragmatism. The cerebral premier has proven adept as a nimble politician with the foresight to tact to the centre-left by investing massively in health and education (among other programs) when Ontario’s economy was thriving. This ability, without a doubt, has been the catalyst for much of his success in public life. But the province’s circumstances have now shifted rather dramatically and Mr. McGuinty will again face a litmus test: if history is any indication, the premier will once again defy expectations and prove the critics wrong. Ontario’s fiscal health and future economic and social affluence will hinge upon his actions in these next few months.

Andrew Perez is a second-year student in the Master of Public Policy program at the School of Public Policy and Governance, University of Toronto. He holds an Honours Bachelor of Journalism from Carleton University and previously worked for several elected officials of varying political stripes on Parliament Hill, Capitol Hill in Washington D.C., and most recently at Queen’s Park in Toronto.


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