NDP Math Error will Help the Party, Not Hurt It

The number-cruncher in me cringed in sympathy for the anonymous research nerds who made the now-famous math error in the Ontario NDP’s fiscal platform. They wrongly added a $700 million contingency reserve to net revenue, instead of to expenses.  The result is an underestimation of the planned deficit (if we include that reserve – more on that below) by $1.4 billion in each year.

Pompous voices predictably crowed that this error confirms the NDP’s supposed lack of fiscal credibility. In practice, though, this accounting tempest will turn out to be a non-event in this dramatic election campaign – and in fact, it may counterintuitively help the party’s surging campaign, rather than hurting it.First off, the budgeting error is clearly insignificant in the overall fiscal picture, no matter how much critics try to make it seem big and scary. The true effect on the bottom line is $700 million per year (not $1.4 billion), because the reserve itself was funny money in the first place; removing it has no real fiscal impact.  (What you can’t do is count it as revenue.) The remaining $700 million represents less than half of one percent of the total budget.  It wasn’t much of a “cushion” in the first place: the side effects from any run-of-the-mill macroeconomic swing would overwhelm it in weeks.

NDP Leader Andrea Horwath quickly acknowledged the error, and then pledged (credibly) that it would not alter the overall trajectory of program spending and taxes under her government. Yes, the deficit would be a little bit bigger, but the overall fiscal stance of an NDP government would not be affected.  This response was far more honest, and more effective, than former PC leader Tim Hudak’s stubborn, doomed denial of his own mathematical problems in the 2014 campaign – a denial which raised deeper questions about his very character, not just his skills with a calculator.

Most importantly, the attention on the NDP’s detailed fiscal plan merely highlights the complete lack of fiscal clarity from its main opponent: Doug Ford’s Conservatives. He is issuing a growing list of blank-cheque promises to any constituency with a populist-friendly gripe.  Power prices too high?  We’ll fix it.  Gas prices too high?  We’ll fix that too.  Transit woes?  We’ll build a subway.  Sick of health care waits?  We’ll fix it.  (Won’t tell you how, or how much it will cost, we’ll just fix it.)  And we’ll cut corporate taxes while we’re at it.

Some philosophical conservatives (like the National Post’s Andrew Coyne) challenge Mr. Ford’s expensive, unprincipled promises.  Most, however, are opportunistically keeping quiet: they don’t want to stand in the way of possible victory, nor undermine their chances to play a role in (or otherwise benefit from) a Ford-led government.  (We saw exactly the same dynamic in the U.S.: principled Republicans, initially appalled by Donald Trump’s contradictory policy scatter-gun, got quieter the closer he got to power.)

In previous work I argued that Doug Ford would face a serious fiscal challenge to reconcile his self-evidently contradictory promises of tax cuts, new program spending, and a reduction in the provincial deficit.  Using Patrick Brown’s “People’s Guarantee” as a starting point, I estimated that Ford’s various promises at that point left a $25 billion fiscal gap over three years – and $10 billion (or over 1 percent of Ontario GDP) in the third year alone.  Closing that gap through spending cuts (the most likely response of Conservatives if they win power) would likely cost the province 75,000 jobs.

How little did I know that Mr. Ford was just getting started! Almost every one of his grandiose promises since then either adds to spending, or subtracts from revenue – making the fiscal gap all the bigger.  Observers are scrambling to update the price tag; no-one (and certainly not the Tories) has a credible handle on the total cost.  Behemoth promises to create 30,000 long-term care beds (likely cost $4 billion) and build a new subway in Toronto ($5 billion for starters) pushes the total tab well into the tens of billions of dollars. Ford’s strategy is clearly to promise anything to anybody, not even pretending to make it add up, all framed as helping “the people,” in order to win power.  Whether such a cynical strategy actually works will be an important test of Ontario’s democratic culture.

On one level these Conservative promises, if actually realized, would constitute a massive fiscal stimulus. The combination of tens of billions of dollars of tax cuts and new spending, other things being equal, would drive a lot of new economic activity and job-creation (the spending much more than the tax cuts).  Whether that scale of stimulus makes sense at this stage of the macroeconomic cycle is a big question – even for someone, like me, who rarely meets a deficit they don’t like.

The problem is that all else will not remain equal: clearly there is another shoe to drop.  So far the only source of funds to pay for all these promises is Mr. Ford’s laughable, unspecified “efficiencies.”  Get on your unicorns, people, and ride to the fiscal happy place.  Of course, what Mr. Ford blithely calls “efficiencies” will turn out, by necessity, to be enormous reductions in program spending.  His promise to not cut a single job will be the first one broken.  In the end, the stimulus of his big-ticket promises will be counteracted (and then some) by the employment and macroeconomic side-effects of the corresponding austerity.  At the bottom line, the net fiscal retrenchment will be similar to what I suggested in the first place: around 1 percent of GDP in the third year, with a corresponding hit on jobs.  What is gained from Mr. Ford’s surprisingly expansionary promises will be more than given back through the austerity required to pay for them.  (I say “more than given back” because the contractionary effects of spending cuts are bigger than the expansionary effects of tax cuts, for well-known reasons.)

These fiscal unknowns are dozens of times larger than the NDP’s $700 million – pocket change by comparison. That’s why the Tories are being surprisingly laid-back about the NDP’s error; as the Globe and Mail’s Adam Radwanski points out, they don’t want any fiscal magnifying glasses turned on their own fiscal costing.  (Oh wait… they don’t have a fiscal costing.)

The NDP’s true error, in my view, was including a phony fiscal cushion in its platform in the first place. After all, the practice is a purely symbolic sop to the goals of fiscal rectitude (and ultimately austerity), and bears no relevance to true fiscal performance.  It was former Finance Minister Paul Martin who pioneered this manipulative practice in his austerity budgets of the mid-1990s.  On top of billions of dollars in program cuts, he built in billions more in fiscal padding (through both deliberately conservative economic assumptions and explicit fiscal reserves).  Hence his super-austere budgets were even tougher than they looked (to the joy of financial analysts).  Finance Ministers ever since have copied this phony strategy, supposedly proving their “prudence” – and setting themselves up for positive budget “surprises” when the year-end numbers come in.  This manipulative, inherently conservative gimmick had no place in an NDP platform in the first place.

Nevertheless, that small self-inflicted wound is easily cured with a public correction and a band-aid. And the whole incident has focused more attention on the Tories’ much larger, unanswered fiscal questions.  Hence the math error will do more good than harm for the NDP.

And that’s a nice bit of poetic fiscal justice, as the province hurtles toward a historic election on June 7.