Ontario’s Budget: Missed opportunity

Avoiding a Crisis Fixing Ontario DeficitLes auteurs ont écrit un article dans le Financial Post et un rapport pour remédier la situation financière de l’Ontario.

Évidemment, ils sont à des années lumières face à nos politiciens, à moins qu’un jour le marché les obliges à revenir sur terre.

Le rapport est aussi valable pour le Québec, car notre situation économique est plus désastreuse que l’Ontario.

Voici les sept points majeurs du rapport.

Avoiding a Crisis: Fixing Ontario’s De­ficit

1.      Time for Ontarians to consider fundamental education reform

2.      Ontario’s easiest budget cut of all: Corporate welfare

3.      The solution to reining in public sector compensation

The average wage difference between the public and private sector workers is over
40 percent in Ontario.

4.      Improve health care and tackle the defi­cit

5.      Reforming Ontario’s Public Drug Plan

6.      Ending Ontario’s costly and misguided electricity subsidies

7.      Getting Ontario’s taxpayers off­ the hook for private pension liabilities


Extrait de: Ontario’s Budget: Missed opportunity, By Niels Veldhuis and Charles Lammam, Financial Post,  Mar 27, 2012

On Tuesday, Ontario Finance Minister Dwight Duncan had one of those rare opportunities of which politicians can only dream. With his province heading toward a fiscal crisis caused by mounting debt and out-of-control spending, an opposition sympathetic to dealing with the problem, a public that clearly wants his government to address the debt, and news outlets that understand the need for significant fiscal restraint, everything lined up for Duncan.

Call it his “Paul Martin” opportunity. Unfortunately, unlike Martin, his friend and mentor, Duncan didn’t seize the opportunity as did Martin in 1995, when he put forth a budget that proposed cutting actual program spending — not simply reduce spending growth — by almost 9% over just two years. The proposed cuts were substantial: Spending on transportation was to decrease by 51% from 1994-95 to 1997-98; natural resource sector spending by 31%; industrial, regional and scientific-technological support programs by 38%; and heritage and cultural programs by 23%.

As a result, the Liberals surpassed their goal, reduced program spending by 9.7% and balanced the budget in just two years.

What Ontario needed on Tuesday was similar action by Dwight Duncan. But while Duncan labelled his government’s fiscal plan as “Strong Action for Ontario,” it was nothing of the sort.

Instead, Duncan stuck with his original plan to run deficits for another five years (until 2017-18). Another five years in which Ontario’s debt will increase to more than $315-billion from $238-billion today — this after the debt has already increased by over 70% since the McGuinty Liberals took office in 2003.

This added debt will stifle economic growth, unfairly saddle young Ontarians with the heavy burden of debt repayment, and increases the risk of future economic slowdowns, negatively affecting the government’s finances.

Despite all the talk of deep spending reductions, as the nearby graph shows, Duncan’s plan doesn’t actually cut overall spending. Instead, Duncan chose to tinker, increasing spending but at a slower rate. In the hope of balancing the budget by 2017-18, his government is pinning its hopes on optimistic revenue growth forecasts (averaging 3.7% annually).

Exacte, ils ont pris la solution la plus facile, réduire l’accroissement des dépenses, en croyant que l’économie va reprendre à 3.7 %. J’avoue, si j’avais eu dans ma compagnie des directeurs de vente aussi optimiste, j’aurai fait faillite, les libéraux ontariens ressemblent de plus en plus à nos libéraux québécois, loin d’être un compliment soyez assurés.

On the spending side, Duncan proposes holding program spending growth to an average rate of 0.7%, less than that proposed by his government’s own commission, without enacting anywhere close to the level of reforms the commission proposed.

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But in some of the government’s big-ticket areas, spending will increase significantly over the next three years. The budget forecasts spending increases in health care of 6.3%, in K-12 education of 5.2%, and in social services an 8.0% increase.

In addition, Ontarians should be skeptical of the government’s ability to hold the line on spending. For example, in last year’s budget, it promised to hold spending growth to 1.0% for 2011-12, but then nearly tripled the growth in spending to 2.8%. Not to mention increased program spending at double the rate of economic growth from 2003-04 to 2011-12.

Bon Dieu !, ils n’ont pas encore compris la tactique, magouillé les chiffres dans le budget.

Had Duncan actually seized the opportunity to balance Ontario’s books, he could have done so in just two years — the same time horizon achieved by the federal Liberals in the 1990s. In fact, if Duncan emulated Martin and actually cut program spending by 9.7% over two years, projected program spending for 2013-14 would decrease from $117-billion to $103-billion and the projected $13.3-billion deficit would be erased.

This, however, would require bold reforms that asked tough questions, like whether government involvement in specific areas is actually necessary.

If Ontario’s Liberal government was willing to face the truth

·         Duncan should have eliminated or significantly cut business subsidies that cost Ontario taxpayers and successful businesses approximately $2.7-billion per year.

·         He should have cut Ontario’s costly electricity subsidies, which cost taxpayers an estimated $1.1-billion a year.

·         Rather than freeze wages for a narrow group of public-sector workers, executives and teachers (and for only two years), he should have committed to aligning overly generous public sector pay with wages and benefits paid in the private sector, saving Ontario taxpayers $3.8-billion annually.

·         He could have changed hospital funding to encourage competition and looked at other health policies that are common in other nations with universal access health care.

Unfortunately, none of these happened.

To avoid a crisis in Ontario, significant action is needed. With $10-billion in increased spending, five more years of deficits, and $77-billion in added debt, Duncan needs to find the same resolve Paul Martin did in 1995.


Avoiding a Crisis: Fixing Ontario’s De­ficit

Ongoing deficits into the foreseeable future will result in a dramatic expansion in government debt. And investors have already put Ontario on notice. Late last year, Moody’s Investors Service, a prominent credit rating agency, warned that Ontario’s credit rating could be downgraded if the province fails to get its fiscal house in order.

Ontario has no choice but to fundamentally reform public services or face grave fiscal threats and potentially outright crisis in the not-so-distant future.


Time for Ontarians to consider fundamental education reform

It is useful to summarize the status quo in Ontario. Like many jurisdictions, Ontario still anachronistically restricts access to public schools based on the location of residence. However, uniquely within Canada, Ontario possesses four separate public systems of K-12 education— an English public system, an English Catholic system, and their French counterparts.3

In 2009-10, the most recent year for which comprehensive, comparable data is available, the Ontario government spent $20.6 billion on K-12 education covering some 2.1 million students. Roughly calculated, that translates into approximately $9,990 per student.

An alternative model: British Columbia

British Columbia maintains one public system of education that covers roughly 89 percent of the students in the province (2009-10).

The remaining 11 percent of students attend 347 independent schools  that receive varying levels of support from the BC government (British Columbia Ministry of Education, 2010).

Et savez-vous pourquoi seulement 11 %, à cause de la pression des syndicats, ils sont toujours dans nos pattes, ceux-là ?

Specifically, British Columbia maintains four classes (or groups) of independent schools that receive different levels of support for operations. (There is generally no capital funding provided to independent schools).

Group 1 – These schools employ BC certi­fied teachers, have education programs consistent with ministry guidelines, and employ the provincial curriculum. ey receive 50 percent of their local board’s per student operating grant. is group is the largest category of independent schools in the province, representing 77.6 percent of the students attending independent schools.

Group 2 – These schools meet the same requirements as Group 1 but only receive 35 percent funding because their per student operating costs exceed the ministry grants provided to local school boards.  It is the second largest category of independent schools in the province covering 20.2 percent of the students attending independent schools.

Group 3 – These schools receive no funding from the province and are therefore exempt from requiring BC certi­fied teachers and ministerial guidelines for curriculum and education programming. In 2009-10, the most recent year of data, there were 19 Group 3 schools with 544 students (0.8 percent).

Group 4 – These are also non-funded schools that largely serve non-provincial students. There were 10 Group 4 schools in 2009-10 with 943 students (1.3 percent of independent school students) (British Columbia Ministry of Education, 2010).

One of the key considerations, given Ontario’s increasingly dire fiscal state, is cost. British Columbia spent $4.6 billion on K-12 education in 2009-10, representing roughly $8,150 in per student costs.

It’s time for Ontarians to consider real education reforms based on proven successes in other parts of Canada.


Ontario’s easiest budget cut of all: Corporate welfare

Ontario’s Corporate welfareHowever, before taxpayers buy into the notion that politicians can magically create jobs through redistributing tax dollars from one person or business to another, it’s worth asking if such attempts to create jobs actually work.

Peer-reviewed research on business subsidies does not support political or recipient claims that corporate welfare is responsible for widespread economic growth. The World Trade Organization (WTO) notes that even when considering the most celebrated examples of assistance to business—industrial policy in East Asia—at best, the results indicate that industrial policy made “a minor contribution to growth in Asia” (2006). At worst, as the literature overwhelmingly concludes, there may not be a demonstrable positive impact upon the economy, employment, and tax revenues because of the substitution effect; that is, where hiring at one company, or tax revenues in one locale, merely displace jobs and tax revenues elsewhere, but with no new employment or revenues created overall).

However, peer-reviewed literature does suggest that the best means to encourage a strong business sector for governments to ensure their jurisdictions have the most attractive investment climate possible. (see Lammam et al, 2010).

Recommendations

In the context of cutting Ontario’s massive deficit, the straightforward and logical recommendation is to immediately end its $2.7 billion annual corporate welfare bill. A more neutral policy—lower tax rates for all businesses—has been shown empirically to foster business investment and economic growth (see Lammam et al., 2010). With the money saved on corporate welfare the Ontario government could continue reducing its general corporate income tax rate and help erase the rather substantial provincial deficit.


The solution to reining in public sector compensation

Public sector compensation makes up roughly half of the province’s budget so any credible plan to balance the books must tackle the thorny issue of public sector compensation, to help bring public sector wages in line with the private sector.

Public sector wage premium

In Ontario, like other jurisdictions in Canada, public sector workers enjoy a significant wage premium.

That is, public sector workers typically receive higher wages than their private sector counterparts for comparable work.

Without accounting for personal characteristics such as age, education, and experience, the average wage difference between the public and private sector workers is over 40 percent in Ontario (table 1, fourth column).

Ontario’s public sector wage premium varies by occupation. Those in protective services receive a premium of nearly 50 percent whereas nine occupations out of 22 analyzed, including those in management occupations (not including senior managers), clerical occupations, and childcare and home support workers enjoy a premium of about 20 percent.

Nettement mieux que notre rapport bidon par l’ISQ, qui dit que nos employés d’États sont moins bien payés que le secteur privé.

Ontario, average hourly wages for 25 occupations, Labour Force Survey, April 2011

Extracting higher than normal compensation from the government

­The main drawback of the current structure is that public sector workers are employed by the government whose services (health care, education, public transit) do not face competitive pressures and are not driven by profitability objectives.

When governments have a monopoly on service provision, it enables the public sector unions to extract a significant wage premium by threatening to strike. If they strike, the public has no alternative to the monopolized services, services nobody else can legally provide.

C’est pour cette raison qu’ils ont obtenues des retraites dorées insolvables.

In the private sector, in contrast, where there is competition, a strike simply means that the public has to choose from many other alternative products or services. That is, a strike in the private sector does not result in significant inconvenience to the public.

Moreover, in the private sector both the employer and union have an incentive to settle their differences quickly. Unions know that excessive wage demands will make the firm uncompetitive and result in a reduction in employment. Employers, on the other hand, face trade-offs between wage demands and a loss of market share, profitability, etc. that result from a prolonged dispute. Ultimately, parties come up with a compromise acceptable to both.

In the public sector, excessive wage demands do not typically translate into lay-offs or higher unemployment since the public sector has no profit constraint.

Simply put, the lack of competition and profit motive allows public sector workers to extract higher than normal compensation from the government.

The solution: An Ontario wage board

Given the inherent structure of the public sector, more sweeping reforms are needed to rein in the Ontario government’s wage bill.

For starters, the government should create a wage board, an independent governmental body responsible for collecting, analyzing, and setting public sector wages and benefits based on private sector equivalents. There are many benefits of this approach.

A wage board would de-politicize the negotiation process on matters related to public sector compensation and better match public sector wages with the economic conditions of the times. This is a more rational approach than the status quo which can include ad hoc cycles of generous increases in good economic times and freezes or even cuts in bad times.


Improve health care and tackle the defi­cit

Our health care expenditures are 22 percent higher than in the average developed nation that has a universal access health care system

Ontarians endure relatively poor access to medical professionals and technologies, are cared for with far too many old and outdated pieces of medical equipment, and must wait for health care in some of the longest queues for treatment in the developed world

Ontario should be taking lessons from other nations that are able to purchase higher quality health care for similar or less money.

Getting more for less in health care, however, will require adopting two key health policies that are common in other nations with universal access health care:

1.      Consumer cost

2.      Sharing and competition in the delivery of publicly funded care.

Cost sharing

Cost sharing—that is, requiring patients to share in the cost of their care—is essential to providing a less expensive and more accessible universal health care system. The reasoning is straightforward: people spend their own money more wisely than they spend someone else’s. According to research and international evidence, when patients are responsible for some of the cost of their care, they use fewer resources, making more available for other patients and saving money overall, and end up no worse off in terms of health outcomes.

Competition in delivery

Another way to reduce spending and improve the state of health care in Ontario would be to change the way hospitals are funded and allow more competition in the delivery of publicly funded services.

To that end, Ontario should scrap its current “global budget” funding model for hospitals, through which hospitals receive a set amount of money each year and thus see every patient as a drain on their budget.

Instead, the province should move to activity-based funding, through which hospitals would be paid per patient. This would save Ontarians significant resources, while at the same time providing them with a greater quantity and quality of services from hospitals that would be operating more efficiently


Reforming Ontario’s Public Drug Plan

Three reasonable reforms could provide signi­ficant savings for the province, which would allow Ontario to reduce its existing de­ficit more quickly than currently expected.

1.      First, the province could achieve signifi­cant savings by allowing competition to determine prices for generic drugs.

2.      Second, the province should replace at co-payments with percentage based co-payments for public drug plan recipients. Doing this would create price-sensitivity and therefore further generate price competition among retail pharmacies.

3.      And third, the public drug plan’s aged-based eligibility criteria should be replaced with means-tested eligibility for catastrophic coverage.


Ending Ontario’s costly and misguided electricity subsidies

The Auditor General recently criticized the feed in tariff program for high rates, limited oversight, and misleading publicity.

1.      First, the Auditor points out that Ontario offered much higher feed-in tariff rates than other jurisdictions in North America that have implemented similar programs (Office of the Auditor General of Ontario, 2011).

2.      Second, the Auditor points out that the Ontario government has never conducted a proper cost benefit analysis on the program (Office of the Auditor General of Ontario, 2011).

3.      Third, the Auditor claims that the number of jobs created by the program is misleading because the government does not count the jobs destroyed through higher electricity prices due to the program and that most of the jobs created are short term construction jobs (Office of the Auditor General of Ontario, 2011).

The government of Ontario should immediately scrap the Ontario Clean Energy Benefit, thus reducing the 2012/13 deficit by over $1.1 billion. Long term solutions are needed to address Ontario’s escalating electricity prices, such as walking away from the feed-in tariff program.


Getting Ontario’s taxpayers off­ the hook for private pension liabilities

The PBGF is a fiscal albatross. The fund was initially established to protect beneficiaries of privately-sponsored Defined Benefit (DB) pension plans if the plan sponsor became insolvent and unable to meet its pension obligations.

Memberships in DB pension plans in the private sector has dropped over the past two decades, falling to 15% in 2010 from 30% in 1990, in favour of increasing enrollment in de­fined contribution (DC) pension plans.

According to the Drummond Report “the Fund is no longer sustainable in its current form as it presents a large ­scaled risk for theprovince in the event of another economic downturn” (Commission on the Reform of Ontario’s Public Services, 2012).

The fund is unsustainable because collected premiums intended to support current and future claims have been insufficient to meet those obligations.

Although Ontario is the only Canadian province with a fund guaranteeing private sector de­fined benefi­t pension plans, the problems it is experiencing are similar to those of comparable funds in other jurisdictions, including the United States and United Kingdom.