An overview of the 2012-13 Ontario Budget

The "Shock Doctrine" Comes to Ontario

The bad bank debt that triggered the crisis in 2008 never went away – it was simply shifted on to governments. Private debt became public debt.”

– David McNally, Global Slump

Naomi Klein’s 2007 best-selling book The Shock Doctrine describes how big business and governments around the world have learned to take advantage of crises to create new investment opportunities and boost corporate profits. Any kind of crisis will do – an earthquake, or a war, or a recession – and it doesn’t matter who is to blame. Because when the crisis hits, the “solution” put forward is always the same: money moves upward from people who can’t afford to lose it to people who already have a lot. Usually, the people who are hit hardest are too disoriented and intimidated by the crisis to fight back.

The global recession of 2008-09 did not start in the public sector, and it did not start in Ontario. It started on Wall Street and in other financial capitals, where a small number of bankers and hedge fund managers took insane risks that sank the global economy. Now, regular people in countries around the world are being told to pay up for the colossal mistakes of the richest people on the planet.

In the 2009 and 2010 budgets, the Ontario government responded to the Great Recession by spending money. This “stimulus spending” was the right approach to take, and governments around the world took the same path. Government spending created jobs, and it saved jobs. It did not prevent the recession, but it did lessen its impact on people.

The recession has left governments everywhere with Budget deficits, and Ontario is no exception. Finance Minister Dwight Duncan has estimated the deficit for 2011-12 (the year just ending) at $15.3 billion. For the year ahead (2012-13), Duncan says the deficit will be $15.2 billion. The Budget introduced on March 27, 2012 says the deficit will be reduced to zero by 2017-18 (see chart at right, from p. 6 of the Budget).

How Big is the Deficit?

The deficit is the difference between how much money the government is taking in compared to how much it is spending. Fifteen billion dollars sounds big, but compared to what? Any government’s ability to pay depends on the size of its economy. Viewed in that way, $15.3 billion is about 2.4 per cent of the province’s economy. To put that in context, Ontario’s deficit was worse than that for five years in a row from 1991-92 to 1995-96, as the chart below shows.^[1]

If the government’s goal is simply to balance the Budget, it seems obvious that this can be done without the severe cuts that happened in the mid-1990s. But Don Drummond, the bank vice-president who advised the government on how to balance the Budget, has recommended spending cuts that are deeper and longer lasting than those of the 1990s. In his Feb. 15, 2012 report, Drummond called for cuts in real per capita spending^[2] of 2.5 per cent per year for six years.^[3] This means a real cut, after compounding, of more than 16.2 per cent.

In the 2012-13 Budget, Finance Minister Dwight Duncan has more or less accepted Drummond’s target, choosing to spend a mere 0.2 per cent more than Drummond recommended. For the next three years, the Budget will increase spending by 1.0 per cent in dollar terms. But after inflation and population growth are taken into account, what sounds like an increase is actually a cut. Overall, the Budget plans for a real spending cut of about 2.3 per cent per year.^[4]

It is important to emphasize that the current Ontario deficit was in no way caused by government spending. Prior to the recession, Ontario’s Budget was in balance for 2005-06, 2006-07, and 2007-08. Furthermore, Ontario spending per person is the lowest of any province in Canada. “This is the backdrop to Ontario’s efforts to bring down its deficit,” says Matthew Mendelsohn, director of a University of Toronto think tank. “It already runs the least expensive, most efficient programs in the country.”^[5] In fact, for the year just ended, Ontario’s program spending per capita is 11 per cent lower than the average of the other nine provinces.^[6]

The idea that Ontario’s public services need to be slashed to pay off the deficit does not stand up to scrutiny. There must be another explanation.

Exaggerating the Deficit

In the 2009 Budget, the McGuinty government decided to speed up major investments in infrastructure to save jobs and create jobs in the construction industry, with the goal of injecting stimulus into the whole economy. At the same time, the government made two major moves that transferred money from people and public services to Ontario’s corporations. The first was to introduce the Harmonized Sales Tax (HST), which caused Ontario consumers to pay consumption taxes that had previously been paid by businesses. The second was to announce a cut in the Corporate Income Tax rate from 14 to 10 per cent of taxable profits. The government said this move alone would cost provincial coffers $2.4 billion a year when fully phased in. (As of July 1, 2011, the rate had reached 11.5 per cent and was costing $1.5 billion a year.) It was obvious in 2009 that the money lost could only be recuperated by a) raising taxes; or b) cutting public spending. It was also obvious that the McGuinty government had made a decision to transfer money from regular Ontarians to business – including some of the richest corporations in the country.

The 2012-13 Budget is another step on the journey the government began in 2009.

Cuts to public services like health, education, transportation, environmental protection and so on are seldom popular. That is why scaring Ontarians has been an important part of the government’s deficit strategy. By claiming that the deficitS will grow rapidly unless drastic measures are taken, the Liberals hope to make Ontarians accept severe cuts that they would never accept in normal times.

In his report, Don Drummond claimed that Ontario’s deficit would reach more than $30 billion in six years if the province did not change its ways. Hugh Mackenzie, a researcher with the Canadian Centre for Policy Alternatives, has documented the assumptions Drummond makes in order to get the number that high:

1. Drummond assumes that government revenue will grow more slowly than the economy. It won’t. Revenue growth normally outstrips growth in the economy.

2. Drummond assumes the average interest rate Ontario pays on its debt will go up. It won’t. Right now, all Ontario debt that comes due is being refinanced at a lower interest rate. The average interest rate on our debt right now is 4.3 per cent, but we are refinancing new debt at 3.5 per cent. With a struggling economy, the U.S. has vowed to keep interest rates low. Interest rates aren’t going up any time soon.

3. Drummond assumes real per capita spending (after inflation is taken into account) will go up by 0.5 per cent a year. It won’t. It could be maintained at the current level.

4. Drummond’s assumptions include a contingency fund that will add $1.9 billion to the deficit in six years.^[7]

If we reject these incorrect assumptions, the Ontario deficit is actually on track to go down to $9.6 billion in six years just by keeping per capita spending at current levels. And $9.6 billion is NOT $30 billion. The chart below, from Mackenzie’s report, tells the story:

It is worth noting that Finance Minister Dwight Duncan has overestimated the provincial deficit every year since the recession began. In 2009, Duncan said the deficit would be $24.7 billion; by the end of the year it was $19.3 billion. In 2010, he said the deficit would be $19.7 billion; the final figure was $14 billion. Clearly, the Minister has worked hard to keep deficit estimates frightening so that the final real result is cheerful.^[8] What this means, in simple terms, is that the Minister’s numbers can’t be trusted.

Ignoring Revenue Options

Perhaps the biggest assumption the Drummond Commission made was that the government has few options when it comes to raising revenues. This is not true. The government recognized this in the 2012-13 Budget when it postponed the cuts to the Corporate Income Tax rate, leaving it at 11.5 per cent, and also postponed cuts to the Business Education Tax rate. Together, these changes will save the government $1.1 billion a year (by 2014-15) that would otherwise have been lost.

The only other revenue measures contained in the budget involve either a) increased user fees, specifically for services provided by the Ministry of Transportation or the Ministry of Environment^[9]; and b) plans to make more money from drinking and gambling by “optimizing” the Liquor Control Board of Ontario and “modernizing” the Ontario Lottery and Gaming Corporation.^[10]

Taken together, these measures add up to $4.4 billion over three years, or just over 1 per cent of total revenues. Other than these few changes, however, the government has not looked seriously at the revenues that could be raised by making the tax system fairer. “The plan rejects tax increases,” the Budget intones^[11]. “In total, we have reduced taxes for Ontario businesses by over $8 billion a year,” the Minister boasted in the Budget speech.^[12]

At one point, the Budget notes that:

Ontario tax revenue has been falling as a share of the economy. Tax revenues are 11.6 per cent of gross domestic product (GDP), almost 15 per cent lower today than the ratio in 1994. While some may argue for tax increases, the McGuinty government will not take that path to balance the budget.^[13]

What the Budget doesn’t say, but should, is if we had the same tax rates today that we had in 1994, Ontario’s current Budget deficit would be a Budget surplus!

With 600,000 unemployed Ontarians, 400,000 children growing up in poverty, and long waiting lists for housing and long-term care, it is clear that Ontario has urgent problems that need to be addressed. Ontarians, including those who think of themselves as middle class, are working longer hours at stagnant wages and going deeper into debt in a bid to maintain a decent standard of living. But while the majority struggles, high-income earners and corporations are living in a different world.

High income earners can disguise much of their income as “capital gains” and pay a much lower rate of tax than those who cannot make use of such loopholes. In 2010, the average income of Canada’s Top 100 CEOs was 189 times that of the average full-time worker.^[14]

The result of tax changes that benefit the well-to-do is greater income inequality. This inequality cannot be ignored as simply another issue to be dealt with – or not – at some distant time after the deficit is eliminated. Dealing with the deficit must be done in a way that reduces income inequality and strengthens the economy at the same time.

With Canada’s corporations sitting on $512 billion in cash and the top one per cent of Canadians earning 13 per cent of income in the country, it’s time for a discussion about tax fairness. Here are just a few options that would reduce inequality and help fund the public services people need:

• Eliminate the lower tax rates for income earned from stock options. Only the highest-paid Ontarians receive any of their income in the form of stock options, but those who do pay tax at half the rate most Ontarians pay on income. A buck is a buck, but so-called “employee security options” cost the Ontario treasury $180 million in 2010-11^[15] and are expected to cost much more in 2012-13.
• Make income tax rates more progressive. The Conservative government of Mike Harris reduced the tax rate on high-income earners from almost 17 per cent to 11.16 per cent. Even raising the rate on high income earners by two points to 13.16 per cent would have a significant impact on provincial revenues. That’s because the top one per cent of Canadian taxpayers earn more than 13 per cent of the income in the country.^[16]
• Introduce a Financial Transactions Tax (FTT). Much of the “investment” that takes place these days is not investment in the productive economy but speculation. Originally conceived as a way to dampen speculative trading, a “Robin Hood Tax” on trades in stocks, bonds, derivatives, and currency would also raise money for public services. Even a rate as low as 0.1 per cent on trades would raise well over $1 billion a year on the $1.5 trillion in trades made through the Toronto Stock Exchange. And that’s assuming the tax succeeded in dramatically reducing speculative trading.
• Tackle the problem of offshore tax havens. Canadian companies are now “investing” $160 billion a year in countries viewed as “tax havens”: Barbados Cayman Islands, Ireland, Bahamas, and Bermuda. The main “service” these and other countries offer to foreign corporations is, to be blunt, legalized tax evasion^.[17] One academic study estimated that Canadian banks avoided $2.4 billion in taxes in 2007 alone through the use of tax havens^.[18] The Ontario government should be working with the federal government and Canadian businesses with overseas holdings to insist that money earned in Canada be taxed in Canada.
• Restore corporate tax rates to 2009 levels. In the 2009 Budget, the Ontario government announced cuts to corporate income tax rates that, by the government’s own estimate, were designed to cost the Treasury over $2.4 billion a year by July 2013^.[19] While the government has postponed further cuts to the corporate tax rate, there is still approximately $1.5 billion a year missing from provincial coffers due to the rate cuts that happened in 2010 and 2011.

If corporate income tax cuts were going to create jobs, they would have done so by now. We have seen corporate income tax rates fall for the last 10 years, but the rate of investment has actually gone down.^[20] The federal government says that every dollar a government spends on corporate tax cuts creates just 30 cents worth of economic growth. But we get $1.70 in economic growth when we support unemployed and low-income people, and $1.40 when we invest in public services.^[21]

The government’s decision to postpone further cuts to the Corporate Income Tax rate is good as far as it goes, but it does not represent a sacrifice on the part of Ontario’s corporations. Those corporations’ profits come from centuries of hard labour by working people in Ontario. In the end, it is working people, and those who are unable to work, who are called on to make the sacrifices in the 2012-13 Budget.

A Catalogue of Cuts

While the government plans to raise $4.4 billion in new revenues over the next three years, it plans to cut four times that amount, or $17.7 billion, over the same period. The cuts to public spending and public services in the Budget are so numerous that the government has published them in their own book, available online at http://www.fin.gov.on.ca/en/budget/ontariobudgets/2012/addendum.html .

Prior to the Budget, the government had already announced the closure of the Bluewater Youth Centre (Goderich) and the downsizing of the Cecil Facer Youth Centre (Sudbury) and the Brookside Youth Centre (Cobourg). But the Budget goes farther, saying it will “rationalize excess capacity in the youth justice system, in part, by reducing the number of transfer payment agencies contracted to provide open custody services.”^[22] On the adult side, the government had already announced the closure of the Owen Sound, Walkerton, and Sarnia jails; now it is also closing the Brantford and Chatham jails and fully closing the Toronto West Detention Centre.^[23] These three closures will affect close to 500 active OPSEU members.

While no ministry of the Ontario government avoids the axe entirely in the 2012 Budget, some areas are notable for the severity of their punishment. The Ministry of the Environment is to be cut, in dollar terms, by over nine per cent, which makes for real cut of more than 12 per cent after inflation and Ontario’s population growth are taken into account. This is happening even though the Environmental Commissioner of Ontario noted recently that the MoE’s budget was 45 per cent less today, in real terms, than it was in 1992.^[24]

In social services, the government has frozen social assistance rates, which will very soon be only half of what they were, in real terms, in 1995. The Budget bluntly says that recent growth in social assistance spending is “not sustainable.” The government is awaiting the report of the Commission for the Review of Social Assistance in Ontario, expected late this year, but it is clear that whatever that Commission’s recommendations, they will only be considered in the context of cost-cutting.^[25]

At the same time, the government is slowing down its plans to increase the Ontario Child Benefit, currently at $1,100 per child per year.