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The Progressive Economics Forum

Drummond: The Good, The Bad and The Ugly

The Drummond Commission reported today.

The Good

While the McGuinty government prevented the Commission from considering tax rates, it proposes some sensible measures to raise revenue. Chapter 18, “Revenue Integrity,” recommends combating corporate tax avoidance and cracking down on the underground economy.

Businesses sometimes hire workers as “contractors” to avoid paying Ontario’s Employer Health Tax. Drummond advises the province to deem them as employees.

Chapter 11 advocates greater scrutiny of tax expenditures and business subsidies, which might threaten worthwhile targeted measures but could end some useless giveaways. We should similarly scrutinize the supposed benefits of cutting the corporate income tax rate.

Recommendation 11-12 is to “eliminate the Ontario resource tax credit and review the mining tax system to ensure that the province is supporting the exploration and production of minerals in Ontario while receiving a fair return on its natural resources.” I have drawn attention to this resource allowance (tax credit) and how little revenue Ontario’s mining tax collects.

Chapter 17 makes the case against selling the Ontario Lottery and Gaming Corporation, Liquor Control Board of Ontario, Ontario Power Generation and Hydro One:

A full divestiture of any or all of the GBEs [government business enterprises] would result in a lump-sum payment to the province at the expense of future revenue streams. If proceeds of a sale were used to pay down provincial debt, Ontario could save on interest costs of up to four per cent, based on recent bond yields. By comparison, GBEs provide a return on assets (ROA) of at least eight per cent. Any full divestiture would have to overcome this spread to provide a fiscal benefit to Ontario.

I made the same argument in a Toronto Star op-ed a couple of years ago (when the long-term provincial bond rate was more like 5%).

Recommendation 5-59 is to shift doctors’ compensation away from fee-for-service and toward salaries. This reasonable means of limiting healthcare costs is quite consistent with the Co-operative Commonwealth Federation’s original vision of medicare.

The Drummond report validates several other arguments that progressives have been making. Page 63 notes, “Proposed federal changes on income splitting and Tax-Free Savings Accounts could cost Ontario $1.3 billion in lost revenue, since the province would likely mirror these changes.” I made this point in another Toronto Star op-ed during the last federal election campaign.

Page 460 echoes a concern raised by critics of Canada-EU free trade:

The outcome of the negotiations for a comprehensive free trade agreement with the European Union could have significant impact on the cost of prescription drugs in Ontario. A key negotiating point, the extension of Canadian patent protections for pharmaceutical drugs to European standards, could cost Ontario taxpayers up to $1.2 billion annually ($551 million for the Ontario government and $672 million for the private sector) . . .

The Bad

Unfortunately, the McGuinty government appointed the Commission to usher in an age of austerity. Drummond does so by positing that spending will grow twice as fast as, and revenue will grow much less than, provincial budget projections (Table 1.1). Instead of a balanced budget by 2017-18, Drummond’s scenario projects a $30-billion deficit that year.

His revenue measures raise only $2 billion annually, so the remaining $28 billion must be slashed from projected public spending. Toby has already laid out the implications of such cuts.

Why does Drummond envision such weak provincial revenues? The provincial budget projected that, going forward, revenue would grow a bit faster than nominal Gross Domestic Product (GDP). Drummond assumes less GDP growth and that revenue will grow even slower than GDP.

The report provides some plausible reasons why own-source revenue might lag economic growth, including the continued phase-in of corporate tax cuts and HST input tax credits. The NDP emphasized the fiscal cost of both policies during the last provincial election campaign.

If Ontario’s economy underperforms private-sector forecasts (and other provinces) as badly as Drummond predicts, it strikes me that the Ontario government would consequently collect a much larger share of Equalization payments. These payments and the Canada Health Transfer will grow in line with national GDP rather than provincial GDP.

So, it seems likely that federal transfers to Ontario will grow faster than the provincial economy, at least partly offsetting slower growth in own-source revenues. Drummond says that he took these factors into account, but his 543-page report presents no breakdown of projected revenue. His scenarios lump all revenue together into a single line with a single (sluggish) growth rate.

The Ugly

The Drummond report contains several seemingly unpalatable cuts such as cancelling full-day kindergarten (except at the few schools that already had it). These objectionable proposals could serve to allow the McGuinty government to make other deep cuts that seem less painful.

Recommendation 19-3 is that “the province either terminate the Pension Benefits Guarantee Fund or explore the possibility of transferring it to a private insurer.” This fund backstops pensions when an employer goes bankrupt, safeguarding the retirement income of Ontario workers.

Although the provincial government made a one-time contribution a couple of years ago, the Pension Benefits Guarantee Fund is financed by premiums from defined-benefit pension plans. Terminating it would have no effect on annual provincial expenditures. (Instead, this recommendation is presented as reducing provincial liabilities.)

The Ontario government should adopt the good, minimize the bad by reversing corporate tax cuts and permanently restricting HST input tax credits, and forget the ugly.

UPDATE (March 26): Quoted in today’s Sudbury Star

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Comments

Comment from Sarah
Time: February 16, 2012, 10:22 am

There are also other central themes in the Drummond report that the progressive community should pay attention to.

1) Drummond proposes that the Province gains from privatizing Service Ontario and from moving most service delivery to online services. This would result in significant job loss and fails to consider that most of the public employees who would lose their jobs are lower skilled women. It also fails to consider the fact that privately run service Ontario offices lack the overall audit function provided by the public offices.

Further because private offices are run for profit they are imbued with similar problems found in fee for service medial services. If the more cases a centre processes increases the amount of money the private for profit office receives than there is less incentive to take the time to check documentation and the service provider is less willing to spend time assisting applicants with disabilities, particularly cognitive impairments.

This in turn means that more people with mental health, cognitive, literacy and language difficulties end up without ID, valid OHIP cards or other needed provincially issued provincial documents. Without these documents employment, housing, health care, income supports etc. are difficult if not impossible to access.

2) On the wonderful side the Drummond report publicly acknowledges that fragmenting health and justice services for individuals who live with chronic mental health and addiction based disabilities is very expensive and fails many people. The silos that divide different support services and that push these individuals into detention when they are charged with “lower level” criminal charges; theft under, assaults, breaches of everything, followed by a release to exactly the same life conditions that gave rise to the charges is a misery to live through and expensive for the Province. Coordinating services and expanding criminal diversion programs help people stabilize, improves public safety and saves the Province money.

T

Comment from Andrew
Time: February 19, 2012, 4:41 am

Drummond also seems to fail to take into account that spending and job cuts on the scale suggested will weaken an already weak economy.

And I find it more than annoying that he and all the commentators now argue that deindustialization has made Ontario an increasingly have not economy. Correct, but the Drummond types spent years arguing that free trade and globalization opened up new paths to prosperity and opportunity and accused us of fetishizing manufacturing.

Comment from Paul Tulloch
Time: February 19, 2012, 3:30 pm

Good point Andrew, it drives me nuts that for years we have been trying to send that message that manufcaturing matters, and every right wing nut jib would tell me the world was flat and the knowledge economy is now gonna save us. We had to scream and yell to get that across and yet itwas so nonchalantly cast aside as spme has been. Sadly for us, fads caught us in the midst of this great crisis.

However, i do want to stress something about the ontario economy, the level of auto sales in the USA have almost returned to pre-crisis levels. Housing is still way way down and so too is construction employmen, but a healthy american auto sector will bring some relief to Ontario. We just need to ensure auto pact investment levels are maintained nowthat the sales are healthy again. Imagine where ontario would be if they letbthose companies go into the dust bin?

So itbshould be said that there is some positives for the Ontario economy and we need to realize that we are not greece or Italy, but we do have to manage our delicate recovery. Austerity on the level of drummondeggon or drummond lite is not managing the economy, but pullingbthe rug out. What the hell is the rush, we just need a bit more time in Ontario for the auto sector to come on stronger, but we alao need to ensure the auto pact ike investment is maintained, especially with a high dollar. Recall the auto pact and why it was the best trade deal ever for canada, well to me it is needed again to close the door to capital flight.

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