It's a penny-pinching austerity budget! It's an irresponsible spending blowout! It's a fire sale of precious public assets! Judging from the media reaction, Ontario's 2015 budget, tabled on Thursday by Finance Minister Charles Sousa, can be interpreted in many different ways, depending largely on where the interpreter is sitting. Let's take a look.
As far as the "austerity" part is concerned, the Province is sticking to its goal of eliminating its budget deficit by 2017/18. Considering Ontario's fiscal follies over the last decade -- which have seen debt balloon to about $300 billion, and attracted something like horrified contempt from the ratings agencies -- Sousa probably felt he had very little choice in the matter. In order to meet the deficit target, which many economists think is entirely unrealistic, the Government plans to cut most program spending by about 5 percent this year, with the exception of health care and education, which will be allowed increases below the rate of inflation.
And the "spending blowout"? The big-ticket item is what appears at first glance to be a massively ambitious infrastructure investment program, with particular focus on transit and transportation, costing $130 billion. Anyone who has tried to drive in rush hour in the Toronto area, or in any of the Province's other major cities, will understand the need for action before gridlock becomes even worse. However, it's not clear how much of this is really new money; for example, it includes the UP Express train to Toronto airport, which is basically complete and is set to open in just over a month. More importantly, and taking a leaf from the Federal budget unveiled earlier in the week, the money is to be spent over the course of a decade. For those interested in the details, there's an excellent analysis of the transit portion of the infrastructure plans here.
So how does the Government square its commitment to eliminating the deficit with all this infrastructure spending? This may in the end prove to be the most contentious part of the entire budget. One element of the plan is a loosening of Ontario's byzantine and anachronistic rules on the sale of alcoholic beverages. The unloved "Beer Store" run by the major brewers (all now foreign-owned) will shortly start to face "competition" from supermarkets; "competition" in quotes because there will be no price competition allowed, the supermarkets will only be allowed to sell 6-packs, and only a limited number of stores will be granted licenses. Wine sales will also be revamped later, if the Province can figure out a way to favour domestic producers without attracting lawsuits from every wine producer from California to Chile. This is all well and good, but all of these changes -- plus a small increase in the tax on beer, the only new tax in the entire budget -- will only bring in about $100 million per year, which doesn't build a lot of streetcar tracks.
More contentious is the previously announced plan, now firmed up, to sell about 60 percent of Hydro One, the power distribution network, to private investors. This is supposed to bring in $4 billion, which may help to close the deficit on a one-time basis, but will ever after deprive the Province of much of the hundreds of millions that Hydro One pays in dividends each year.
This sale is a real head-scratcher. Ontario governments of all stripes have badly botched past privatizations, at untold cost to the taxpayer. Edmund Clark, former CEO of TD Bank (full disclosure: also my former boss), who was hired by Premier Kathleen Wynne to seek out ways to monetize public assets, initially recommended against it. As a former banker, Clark no doubt realized that in the current low interest rate environment, it would be possible to raise far more money by hypothecating a portion of those dividends in support of debt issuance than by selling off a stake in the company. Evidently the Government's desire to be "fiscally responsible" (i.e. not to borrow even when borrowing makes sense) has won out, and the die is cast.
In a sense, then, all three characterizations of the budget that we started out with -- austerity, spending spree, asset fire-sale -- are sort of true. The Government is trying to spin all three of them as positives, in the face of scorn from the opposition parties and cries of pain from vested interests. In the end, boxed in by the toxic fiscal legacy of their predecessors, notably the feckless Dalton McGuinty, Wynne and Sousa maybe did as well as they could with the cards they were dealt.
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