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You have to give Tim Hudak credit. He’s presenting Ontario voters with a very clear policy choice this time.

On one hand there’s the Progressive Conservative party (PC), which would commit to eliminating the deficit in three years through deep spending cuts. On the other, there’s the Liberal party, which is expanding the budget in the short term but “targeting” for deficit elimination within four years.

Ontario has a fiscal problem — not a fiscal crisis. Currently, the deficit sits at 1.4 per cent of provincial GDP — not a large number. Ontario is often criticized for being over-taxed and for electing over-spending governments. In fact, in 2012-13, revenues as a share of provincial GDP were lower in Ontario than in every province other than Alberta. The same was true for program expenses.

The real fiscal problem is the upward trend in the debt-to-provincial GDP ratio, which has risen steadily from 27.1 per cent in 2002-03 to 37.4 per cent in 2012-13, and is forecast to rise to over 40 per cent. This trend must be reversed.

Mr. Hudak’s plan is to halt the growth in the debt burden by eliminating the deficit through the imposition of severe austerity over the next three years. He plans to lay off 100,000 public sector employees; the plan is vague as to how this would be done. His plan also ignores the potential impact this austerity might have on output and employment during this three year period and beyond, despite evidence in other countries suggesting these effects could be quite large and long-lasting.

Mr. Hudak’s strategy, in short, is what we’ve referred to in previous articles as “self-levitation”. It is based on the hope that, as the government downsizes, the private sector would immediately ‘levitate’ itself so that there would be little or no loss in output and employment.

Mr. Hudak is so sure levitation will work that he says his plan would create a million jobs over eight years. Just to help it along, however, he is promising a 30-per-cent cut in corporate taxes — despite the evidence that cuts in the federal corporate tax rate beginning in 2008 only led to companies stocking up cash balances, what former Bank of Canada governor Mark Carney called “dead money”.

Of course, Mr. Hudak’s claim that his austerity strategy would have no effect on output and employment, and would create a million jobs, is ridiculous on the face of it. But to make his commitment even more far-fetched, the PCs have released precise estimates of the number of jobs they see being created as a result of restraint actions. For example, the reduction in the corporate tax rate, we’re told, will lead to the creation of exactly 119,808 jobs. The elimination of 100,000 jobs in the public sector will lead to the creation of 43,184 jobs in the private sector. No credible economist would ever make such projections.

Why did Mr. Hudak commit to eliminating the deficit in three years? There is no economic or empirical justification for a deficit elimination period of three, or four, or even five years. The answer is obvious: Since the Liberals were already promising to eliminate the deficit in four years, Mr. Hudak could hardly promise to do it in five.

When the federal deficit is eliminated it will have taken the federal government five years to bring it down to zero. The International Monetary Fund (IMF) even suggested to the federal government that if employment growth remained weak, the date of deficit elimination should be delayed a year. The IMF has changed its tune a lot over the last few years; it realizes now that fiscal consolidation must be supported by economic growth.

Over the first three years of Flaherty’s deficit elimination strategy, total expenditure restraint amounted to only $7.2 billion — less than one-third of what Hudak is proposing to impose on Ontario alone.

According to the Hudak plan released last Wednesday, program restraint “adjustments” of $1.8 billion in 2014-15, rising to $6.5 billion in 2015-16 and $7.4 billion in 2016-17, would be required to eliminate the deficit in three years.

These numbers are actually wrong. The PCs botched the math, underestimating the size of the fiscal adjustments required to eliminate the deficit in three years by double-counting in at least two areas.

First, the largest restraint measure in the Hudak plan is a two-year wage freeze on the public sector. However, the Liberal’s 2014 budget plan already proposed that departments and agencies absorb any wage increases over the next two years in their existing budgets. In other words, Hudak was announcing a “fiscal adjustment” that was already in the budget.

Second, the Hudak plan also proposes a program review exercise, which is to yield savings of $300 million in 2015-16, $400 million in 2016-17 and $500 million in 2017-18. But the 2014 budget already included a program review exercise, generating savings of $250 million in 2014-15 and $500 million ongoing.

Adjusting for the double-counting of the 2014 budget measures implies that Hudak would need to find additional restraint “adjustments” of $250 million in 2014-15 and $2.6 billion ongoing. So eliminating the deficit in three years would require restraint “adjustments” of $2.1 billion in 2014-15, $9.1 billion in 2015-16 and $10.0 billion in 2016-17.

A $10 billion cut in 2016-17 would be equivalent to 1.3 per cent of provincial GDP. Cumulatively, over the three years, the amount of restraint required would be $21.1 billion. These are big numbers. Imposing such a large amount of restraint in a short three-year period, on an economy with a manufacturing sector that’s already struggling to compete, would seriously reduce economic growth and employment.

Compare the Hudak “austerity” strategy with the Flaherty “austerity” strategy, initiated in the 2010 budget. In the first year of Flaherty’s plan, total expenditure cuts amounted to only $452 million; in the second year $880 million; and, by 2012-13, $5.9 billion. Over the first three years of Flaherty’s deficit elimination strategy, total expenditure restraint amounted to only $7.2 billion — less than one-third of what Hudak is proposing to impose on Ontario alone.

Finance Minister Joe Oliver should wake up and take a close look at what Mr. Hudak is proposing for Ontario, and what it would mean for his federal budget. Ontario accounts for roughly 40 per cent of total GDP, much of it in the manufacturing sector. A severe drop in output and employment, because of extreme austerity, would seriously undermine federal revenues and expenditures. The almost certain effect would be smaller projected surpluses for the 2015 budget.

The Liberal strategy is focused on supporting economic growth while “targeting” deficit elimination in 2017-18. This objective is based on the assumption that the government will hold the annual growth of program spending to 1.1 per cent. This is the most vulnerable part of the Liberal strategy — their track record is not good.

A strategy to support economic growth must be complemented with a firm and credible commitment to halt and reduce the government’s debt burden. Expenditure control is absolutely essential and there can be no backsliding on this target. Ontario cannot continue to record a rising debt burden. This is what happened federally in the 1970s and 1980s and it led to a fiscal crisis in the early 1990s. This cannot be allowed to happen in Ontario.

If a new Liberal government were to fail to restrain program spending, then the fiscal credibility of the government would be permanently damaged. Much more severe fiscal adjustments would then be required.

Credibility is hard to earn and easy to lose. Once it’s lost, it’s very hard to get back.

Scott Clark is president of C.S. Clark Consulting. Together with Peter DeVries he writes the public policy blog 3DPolicy. Prior to that he held a number of senior positions in the Canadian government dealing with both domestic and international policy issues, including deputy minister of finance and senior adviser to the prime minister. He has an honours BA in economics and mathematics from Queen’s University and a PhD in economics from the University of California at Berkeley.

Peter DeVries is a consultant in fiscal policy and public management issues, primarily on an international basis. From 1984 to 2005, he held a number of senior positions in the Department of Finance, including director of the Fiscal Policy Division, responsible for overall preparation of the federal budget. Mr. DeVries holds an MA in economics from McMaster University.

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