Beyond Austerity in Ontario

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The CCPA-Ontario office hosted a full-day session at Ryerson University in Toronto on January 9, 2013. The session focused on countering the austerity agenda in this province and beginning the conversation about what a post-austerity agenda could look like. This is CCPA economist Hugh Mackenzie's presentation on Ontario's manufactured deficit crisis.

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Beyond Austerity in Ontario

  1. 1. Fiscal outlook 2013-14• Key points – Context – nationally and provincially – a silent, shifting of the line between what is public and what is private that has never been acknowledged, much less subjected to democratic debate – Current Government of Ontario plan essentially mirrors the “preferred” option in the Drummond Report – Drummond’s preferred option is not a response to a contextualizing economic analysis; rather, the assumptions behind the economics were carefully constructed to drive towards preferred ”smaller government” option. – The rationale for the preferred option is based on • “official” forecasts that we know to be systematically designed to overstate the deficit; and • assumptions about revenue growth, program expenditure growth and government borrowing costs that serve to create a fiscal “crisis” where none exists. – The Ontario plan, in conjunction with the current Federal plan, will result in a further shift between the public and the private that is at least as large as the dramatic change that took place in the early 2000s. – There is no answer to Ontario’s fiscal plan without confronting directly the public-to-private shift which it is designed to reinforce, and the reduction in fiscal capacity which sets the terms of the so-called fiscal crisis behind which it is taking place.
  2. 2. What this is really about … Government outlays % GDP Canada and US 1970 to 201160504030 Canada United States2010 0
  3. 3. Setting the context• Consistently exaggerate the deficit
  4. 4. Ontarios deficit forecasts An evolving story302520 2-year forecast 1-year forecast15 Budget Fall ES Next budget Next Fall ES (public accounts)1050 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15
  5. 5. Setting the context• Consistently exaggerate the deficit• Validate with an imported expert• Use the most simplistic projections – Straight-line annual percentage changes• Carefully select the assumptions that make your point – Underestimate revenue – Overestimate program spending – Exaggerate interest costs – Assume no revenue action• Make sure it adds up to a headline number – Gets to more than $30 billion by adding a “contingency” to the forecast
  6. 6. Constructing Drummonds Fiscal Crisis Drummond’s “Status Quo” Scenario 2017-18 forecast deficit $30.1 billion 35.0 30.0 25.0Budget Deficit ($ billion) 20.0 15.0 10.0 5.0 - 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18
  7. 7. Constructing Drummonds Fiscal Crisis Revenue Growth at GDP rather than GDP minus 0.8% Reduces forecast deficit by $8.8 billion to $21.3 billion 35.0 30.0 25.0Budget Deficit ($ billion) 20.0 15.0 10.0 5.0 - 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18
  8. 8. Constructing Drummonds Fiscal Crisis Assume spending maintained at current real per capita rather than growing at real per capita plus 0.5% Increases deficit forecast by $5.6 billion to $15.7 billion 35.0 30.0 25.0Budget Deficit ($ billion) 20.0 15.0 10.0 5.0 - 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18
  9. 9. Constructing Drummonds Fiscal Crisis Reverse assumption that interest rates will increase Reduces forecast deficit by $4.1 billion to $11.6 billion 35.0 30.0 25.0Budget Deficit ($ billion) 20.0 15.0 10.0 5.0 - 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18
  10. 10. Constructing Drummonds Fiscal Crisis Eliminate $1.9 billion contingency in 2017-18 Reduces forecast deficit by $1.9 billion to $9.6 billion 35.0 30.0 25.0Budget Deficit ($ billion) 20.0 15.0 10.0 5.0 - 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18
  11. 11. Constructing Drummonds Fiscal Crisis Reverse post-recession corporate tax cuts Reduces forecast deficit by $3.2 billion to $6.4 billion Less than estimated structural deficit on the revenue side 35.0 30.0 25.0Budget Deficit ($ billion) 20.0 15.0 10.0 5.0 - 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18
  12. 12. What about the assumptions?• Revenue growth 3.2% – Real GDP forecast is 2%; Nominal GDP forecast is 3.9%; Assumption that revenue will grow substantially more slowly than the economy not consistent with past experience.• Expenditure growth rate is 3.5% – In the unforgiving world of compound arithmetic, if you grow a larger number at a higher percentage rate than a lower number, the difference between them will grow• Interest costs will double – Assumes average debt service cost will INCREASE from 4.3% current to 4.7% – Not reasonable, given that high-coupon debt is being retired and replaced at current rates which average 3% to 3.5%.• Contingencies not normally included in long-term forecasts• No provision for revenue increases
  13. 13. Working from the Drummond script
  14. 14. Revenue Forecasts Budget and Drummond Scenarios145140135130125 Budget 2011 Budget 2012120 DRUMMOND "Recommended" DRUMMOND "Status Quo"115110105100 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18
  15. 15. Program Spending Forecasts Budget and Drummond Scenarios145140135130 DRUMMOND "Status Quo" Budget 2011 Budget 2012125 DRUMMOND "Recommended"120115110 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18
  16. 16. Debt Service Forecasts Budget and Drummond Scenarios211917 DRUMMOND "Status Quo"15 Budget 2011 Budget 2012 DRUMMOND "Recommended"1311 9 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18
  17. 17. Debt Service Forecasts Budget and Drummond Scenarios2.01.81.61.41.2 DRUMMOND "Recommended"1.0 DRUMMOND "Status Quo" Budget 20120.8 Budget 20110.60.40.20.0 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18
  18. 18. Budget Balance Forecasts Budget and Drummond Scenarios 5 0 -5-10-15 Budget 2011 Budget 2012-20 DRUMMOND "Recommended" DRUMMOND "Status Quo"-25-30-35-40 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18
  19. 19. Ontario’s fiscal capacity crunch Another Harris legacy untouched Annual Tax Cut Impact on Fiscal Capacity in Ontario 1995-96 to 2011-12 --- Debt Carrying Cost and Revenue Loss Personal Income Tax Cuts offset by Health Premium - -2,000 Corporate Income Tax -4,000 Cuts -6,000$ million -8,000 -10,000 Employer Health Tax Cuts -12,000 -14,000 -16,000 Other Tax Cuts -18,000 -20,000 Direct Debt Carrying Cost
  20. 20. Deficit paths to 2017-18 for Ontario Different futures with very different implications 35.0 30.0 Drummond Status Quo 25.0 Drummond Status Quo RevisedDeficit ($ billion) Structural Deficit 20.0 Alternative 15.0 2011 Budget Forecast 2012 Budget Forecast 10.0 5.0 - 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18
  21. 21. What is public sector wage austerity all about?• It’s just another way to avoid the reality that we actually have to pay for public services. – Conservatives claim we can cut taxes without cutting public services; – Others claim we can have better public services and someone else will pay the taxes to support them; – Cutting public sector wages is simply saying lets keep our public services and ask public sector workers to pay for them.
  22. 22. Alternatives• There is a remaining gap of $6.4 billion in budget balance target year of 2017-18 after we deal with the exaggerated assumptions. – 2% on incomes over $100,000; additional 2% on incomes over $250,000 • Would raise $2 billion in 2017-18 – Eliminate loopholes in Employer Health Tax -- flat rate of 1.95% on all employment-related income • Would raise additional $3.5 billion in 2017-18 – Restore corporate tax fully to pre-recession rate • Would raise a further $2.5 billion in 2017-18 relative to revenue from partially-restored rates
  23. 23. And that gets us back• To what it is really all about – that line between what is public and what is private
  24. 24. Ontario Budget 2012-13 and Drummond Shrinking the Ontario Public Sector 2010-11 to 2017-1820%19%18%17%16%15% Outlays % GDP Program % GDP14%13%12%11%10% 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18
  25. 25. Government outlays % GDP Canada and US 1970 to 2011 with Canada Federal and Ontario projection to 201760504030 Canada United States2010 0

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