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The Progressive Economics Forum

Could McGuinty’s cuts be worse than Harris?

The Ontario government’s long awaited and much discussed report of the Commission on the Reform of Ontario’s Public Services (aka, the Drummond report) was finally publicly released this afternoon.

As was rumoured, the report says Ontario would need to increase program spending by no more than 0.8% per year for the government to reach balance by 2017/18.   Drummond has adopted a pessimistic forecast of GDP growth, but unfortunately this could become self-fulfilling if the Ontario government does proceed with his proposed cuts.  

It would be much better to introduce fair and progressive revenue increases to balance the budget while maintaining reasonable program spending growth–but unfortunately the mandate Drummond was given forebade him from proposing tax increases and Premier McGuinty has also ruled them out.

The consequence of this that Ontario could be in for program spending cuts in McGuinty’s third term that are considerably worse than the spending cuts enacted under Mike Harris’s first term in office.

Constraining overall program spending growth to an average of 0.8% per year would result in a -2.5% cut in real per person terms every year for McGuinty’s third term (assuming 2.2% inflation and 1.2% annual population growth, as is assumed on page 115 of the Drummond report and in Table 1).   That’s more than  twice as deep as the annual average -1.2% cut in real program spending per person under Mike Harris during his first term in office from 1995 to 1999.   

If overall program spending is kept to nominal growth of 0.8% per year until the next election, provincial program spending in real dollars per person will be cut by -9.8% in McGuinty’s third term compared to -4.7% in the four years of Harris’ first term.

By 2017/18, Ontario’s program spending per person would be 16.2% lower in real dollars than it was in 2010/11.

(Chart and figures updated Feb 21 according to inflation and population growth assumptions in report, as discussed in comments section.) 

 

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Comments

Comment from Paul Tulloch
Time: February 15, 2012, 5:02 pm

I wonder how far McGuinty will go with these recommendations.

If the recommendations are willy nilly accepted, (which we already know some of the education cuts will not) then these are very dangerous waters we are entering in terms of staving off a recession and setting in place a deflation spiral. Truly, as mentioned a few times in this document, we need to have a mature conversation about these cuts and their impact on the economy. Not once was that mentioned, accept to say, that with the decline of manufacturing, our ability to grow out of this has been compromised (thanks Mr. Harper for all you relief in terms of a high dollar)

So the mature part of that conversation- we know Harper is coming next with his austerity budget- so the two combined will be a substantive blow to the economy. When will we learn that austerity only makes the situation worse- do we really want to go through the Greek situation??

Stephen Gordon happened to mention this morning that with a bit of optimism coming from the USA, we can afford to take these hits of austerity. A few points worth mentioning :

1) I do not think even Mr. Gordon would have predicted cuts this deep, i.e. if they are willy nilly passed into the next budget.

2) Hank Paulson stated this morning, that although the employment numbers in the USA looked not so bad to begin the year, the GDP numbers just do not equate to these employment gains. So unless we see a quick turn around in GDP, he feels these numbers will not be sustained. I know there is a lot of politicking with the numbers because of an election year in the USA, but the reality is, it is hard to place that much optimism on one months employment data and a few other small signs that Gordon mentions. We sure are not in Kansas yet.

3) Most of the EU nations are now officially reporting a first quarter GDP and there are no signs of growth. Italy officially entered recession this quarter. And Greece, I am not sure what to call their economy- destroyed by bankers?

4) Okay I get the fact that Greece has had a government administration undemocratically elected and are now shoveling austerity on a massive scale down the throat of greece, but why in Ontario are we witnessing a similar fiasco, Since when did voters elect a banker to draw up a budget? And look at Canada’s overall deficit, a mere 2.3 % of GDP one of the lowest of all developed economies. The USA and the UK are at 10% deficit to GDP. We have plenty of room.

What’s the big rush, can we at least try and make our way out before we cut our throats with the austerity knife???? Really, we are seriously on the verge of generating a made in Canada recession, all for what, so we can prove to those countries that are at 10% that we can make cuts. Look at what austerity did to Greece- negative 7% decline in GDP- how does that grab you. I find it quite tragic that McGuinty would scale back on education, given he was just elected on such promises.

Anyway I just do not understand why other alternatives are not on the table.

On a positive note- I did like some of the healthcare recommendations- like the end of sole proprietorship for doctors, we need some new ideas in administration of GPs and specialists- accountability is a good start. And there was a bit of good stuff on the big pharma front, a bit of economies of scale and also some accountability. Given pharma is the biggest expenditure it is fitting to have some of these recommendations passed.

Please Canadian policy makers be mature and do not shot yourself in the foot. A recession is such a waste, and given we still have not recovered from the last one, it will be even harder on those that are least able to adjust to these measures.

Comment from T Manderly
Time: February 16, 2012, 3:18 am

We need Mcginty to dramatically increase spending to kick start the economy…

Comment from Kim Jarvi
Time: February 16, 2012, 11:08 am

Great piece on Drummond, Toby.

By being very cautious, you’re actually using a more conservative discount factor for population growth and inflation than Drummond is using, and his discount factor results in bigger cuts. He says that program spending will drop in real per capita terms by 16.2% over 7 years or 2.5% per year. That is more than double the Harris cuts you show in the article and higher than the cuts you estimated.

For the record, using Drummond’s discount rate, the real per capita cuts over seven years for each sector would work out to:

Overall: 16.2%
Health: 5.8%
Education: 15.1%
Post Secondary: 12.1%
Social services: 18.0%
All others: 33.2%

Comment from Ken Howe
Time: February 16, 2012, 11:13 am

The chart shows why the left deserted Rae’s NDP fairly clearly. And of course there was a recession on.

Comment from Darwin O’Connor
Time: February 16, 2012, 11:39 am

Toronto mayor Rob Ford also order a big report listing all the things he could cut. Then the list was whittled down and whittled down so that only modest cuts where made. I expect it will be the same process here.

Unlike Mike Harris, I don’t think McGuinty will cut just for the sake of it.

Comment from Paul Tulloch
Time: February 16, 2012, 1:56 pm

@Darwin, I agree, I think the biggest austerity threat is Harper. In fact I think he has a few surprises in store for us, and the OAS is kind of a straw man distracting with a mental prepping for some others cuts.

At least McGuinty’s process was highly publicized, Harper is using uncanny layers of stealth, where publicizing the cuts has become a massive political issue. Cuts by ultra stealth, it is just so Harper and quite demoralizing for workers.

We must be getting close to some cuts at the fed level as my union CAPE sent me some Workforce adjustment documents. Basically if the employer sends you a letter, you are laid off, with few options. Kind of weird for Statscan employees, it has been ages since a layoff letter has been sent. I am sure postal workers will be looked upon with scorn these coming weeks in Ottawa, I went to my mail today and actually hesitated opening it. I have never felt that fear before- the nearest emotional memory was a few family members back in the Sault when Algoma Steel was going through massive adjustments. It is different though when it is your own mortgage on the line. As Neil Young stated in a song, “the rent is always due”.

Comment from Kim Jarvi
Time: February 20, 2012, 8:14 am

Paul Krugman points out that in Europe and elsewhere, people seem to have forgotten the lessons of the Great Depression. You could add Drummond to that list of folks.

http://www.nytimes.com/2012/02/20/opinion/krugman-pain-without-gain.html?src=recg

Comment from Toby Sanger
Time: February 23, 2012, 12:14 pm

Kim is absolutely right. Thanks for those comments and I’ve updated the chart and text accordingly.

Drummond assumes a 2% CPI but a 2.2% deflator/inflation rate for public spending, as well as 1.2% population growth. There’s really no discussion of this in his report, although the Conference Board report on Ontario’s economy that he was closely involved in got deeper into these issues.

However, it doesn’t make sense for Drummond to have a 2.2% inflation rate for public services in all scenarios since so many of his proposals are supposedly geared towards reducing the costs of public services without reductions in the supply or quality. Accordingly the deflator/inflation rate associated with pubic services should be lower, not higher.

(There are of course many issues with measuring the value of public service inputs and outputs, and thereby the productivity of public services, but there’s no question that a very large number of his recommendations are focused on increasing efficiency and productivity of public services.)

Comment from Kim Jarvi
Time: February 29, 2012, 9:07 am

Thanks Toby.

You’re right. Drummond has effectively somewhat overstated the costs of his cuts by assuming an inflation rate that would be higher than the one that would prevail if his cuts really did happen. His cuts would drive the economy into the tank and thus force down inflation rates.

Moreover, he has included the effects of cuts already in the 2011-12 budget, which means he is not understating the cuts by omitting some of them.

I disagree mightily with what I believe to be the disastrous direction of his advice, but to his credit, he has not underestimated the hit to government spending. And at least he was honest enough to point out the important role of inflation and population growth, which is a trait rare in government shrinkers. They would rather talk nominal amounts and let the magic of inflation and population growth erode the government share of the economy.

Comment from Kim Jarvi
Time: March 3, 2012, 6:40 am

Toby:

A final point about your comparison of annual rates of change in real per capita program spending: The Drummond plan is to go for seven years, so the cumulative effect will be much greater than simply double the Harris rate in his first term. It will be about 3.3 times as large a percentage real per capita cut.

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