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Service cuts funding tax cuts, not deficit reduction, FAO report indicates

May 23, 2019

3-minute read

This week on CBC’s Metro Morning, Ontario Treasury Board President Peter Bethlanfalvy defended cuts in transfers to the City of Toronto by saying that the Ontario government had to “do something immediately” because of the province’s debt. His government had inherited a “staggering amount of debt,” he said.

Hours later, Ontario’s Financial Accountability Office (FAO) shed new light on what the government is actually doing with its cuts.

The FAO’s Economic and Budget Outlook provided a reminder of the government’s plan to hold nominal program spending growth to just one per cent on average over the next five years. This would be the slowest pace of spending growth since the mid 1990s, and as a result, the real (after inflation) value of public services would be reduced by more than 10 per cent over the next five years.

Despite all the announced cuts to services—from children living with autism to public health to public education to AI research—the FAO analysis shows that the announced cutbacks and so-called “efficiencies” will cover only half of the spending reductions budgeted so far. The FAO estimates that a further $6 billion in cutbacks will be needed to achieve the 2019 budget’s spending plan by 2021-22.

To implement its budget plan, the Ford government would have to introduce further, significant cutbacks in services.

Through its analysis, the FAO also revealed, buried in the budget documents, a plan for a further $3.6 billion in tax cuts by 2023-24. That is on top of $4.2 billion in tax cuts in 2019-20 and an average of $3.4 billion a year until the end of 2023-24 fiscal year.

When confronted with the impacts of the cutbacks in services on Ontarians, Premier Ford and his ministers repeat that the deficit made them do it. In fact, the majority of these cutbacks in services will fund tax cuts rather than deficit reduction.

What will all these cutbacks do for debt service costs?

A continued refrain from the government benches concerns the cost of servicing the debt—how it is crowding out other program spending, and how Ontario is teetering on the brink of being a “failed fiscal state.”

Statements like that are patent nonsense. If Ontario were on the verge of being a “failed fiscal state,” bondholders would demand sharply higher interest rates. They aren’t. The interest rate paid on Ontario debt has fallen like a stone since the late 1980s, in concert with the general trend in interest rates. We used to pay 11 per cent on 10-year bonds in 1989; today we pay 2.45 per cent which is close to the record low of 2 per cent that we paid in mid-2016. Bondholders are accepting almost-record-low interest rates to hold our debt.

Last fall, the Institute of Fiscal Studies and Democracy (IFSD) of the University of Ottawa published the results of a study on the impact of fiscal discipline. The authors measured the impact of a province’s public debt on its borrowing costs. In particular, it measured the increase in borrowing costs associated with the difference in the debt-to-GDP ratio between provinces and the federal government.

The Ontario budget documents show that the fiscal plan will decrease the debt-to-GDP ratio by 1.6 percentage points over the next five years. This reduction in the debt-to-GDP ratio would reduce the province’s borrowing costs from 2.45 per cent to 2.44 per cent (on ten-year bonds). All of these cuts in public services, and the real suffering that will result, will save only 0.01% on interest rates. While this reduction might seem small, they are the conclusion of the best Canadian research on the topic.

To boot, the same study shows that if you increase employment you also get lower interest rates, as a strong economy also reduces the debt-to-GDP ratio. If Ontario managed to increase its employment rate to pre-2008 levels (ie. up 1.5 points), the borrowing costs would fall from 2.45 per cent to 2.43 per cent. Even if you’ve got an odd fascination with microscopic changes in the province’s interest rates, an employment approach is more effective. And it doesn’t have to be paid for with massive service cuts.

Clearly, if the government were actually concerned about preserving and protecting public services, it would reverse its decision to cut taxes. Instead, it is using the debt and deficit as cover to reduce public services and, down the road, reduce taxes further.

Sheila Block is a senior economist with the Canadian Centre for Policy Alternatives’ Ontario office. You can find her on twitter at @SheilaBlockTO.

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