Since releasing his report last week, economist Don Drummond’s thoughts on Ontario’s finances have become the talk of the town. From newspapers and blogs to union halls and boardrooms, rarely has a commission’s report sparked so much debate. There’s only one problem: Drummond got it wrong. Indeed, while MPPs are literally debating his proposed cuts right now, they should be considering a different type of cut: to Ontario’s long list of barriers to job creation and economic growth.
Problems with Drummond? Start with his advice. Believe the hype and you’d think that the economist’s Solomon-like wisdom has “ushered in a new era of austerity.” It’s not clear how. Take, for instance, the report’s biggest-ticket savings. They are all politically toxic, requiring that the government reverse education policies that were central to the Premier’s three election victories, including a vote-buying scheme for student and parent voters (read: a tuition tax credit), early kindergarten programs, and legislated class sizes.
The rest of the report is a grab-bag of ideas, like selling property, hiking parking fees, and cutting business and energy subsidies. Many of the recommendations are worthwhile, but will they really solve Ontario’s fiscal problem?
Consider health care. If Ontario hopes to contain future budgets with savings alone, health spending is a critical target. Drummond wants to hold five-year cost growth in health care to 2.5% annually, a feat that hasn’t been achieved in any public health care system in the OECD in recent memory.
Drummond’s health-care proposals are as tired as the magazines in your doctor’s waiting room. He wants to reshuffle regional administration. He wants to let nurses give you flu shots. He wants regional-level innovation for e-health records on the one hand, but calls for centralized IT on the other. He wants to tinker with doctor pay and promote more primary care. It’s all so familiar that Health Minister Deb Matthews could stand up and say — truthfully — that most of his ideas are already being implemented.
In prior fiscal crises, Canadian governments looked to economic growth in the fight against debts and deficits. Drummond dismisses any hope of robust growth, claiming that the province can’t beat 2% annually in the coming years.
It’s true that Ontario wastes billions, but cuts alone won’t save it — especially when this Premier hasn’t shown much will to deliver them. But Ontario’s problems are economic, not just fiscal. Drummond surrendered on further growth; he should have attacked the barriers to further growth instead.
Take just one area: lost factory sales. Ontario’s monthly manufacturing sales peaked in July 2008 at $24-billion (seasonally adjusted). Three and a half years later, Ontario still hasn’t caught up. Adjusting for inflation, December 2011 sales were 9.5% below peak.
Measured against that peak, Ontario lost nearly $154-billion worth of direct economic activity between July 2008 and December 2011 from lost factory sales alone. That’s $3.7-billion every month. Let’s put that number in perspective. Some claim that provincial austerity will destroy the economy, but $3.7-billion per month is more than the annual budget for the entire provincial Ministry of Transportation (roughly $2.3-billion).
Vehicle manufacturing accounted for 18% of the lost activity. Over 22% came from “petroleum and coal product manufacturing,” a sector that’s not on Ontario’s political radar. A staggering 27% — more than $41.7-billion in current dollars — disappeared from the metals sector. A deep recession south of the 49th parallel is part of the problem, but Ontario would be losing customers anyway, thanks to its lagging competitiveness and productivity.
Recovery is not impossible: The government recently boasted that factory sales grew 6.1% last year. Public policy can accelerate that recovery — and no, I’m not talking about another round of handouts to business.
Ontario needs a systematic attack on job-killing labour laws, time-consuming approval processes, and overly strict regulations. New manufacturing investment often depends on heavy construction and heavy infrastructure — yet Canada still has two different systems of environmental assessment, but there’s only one environment.
Policymakers need to focus on our biggest barriers to growth, our largest markets, and our biggest customers. Politicians are keen on photo-op-friendly trips to places like Libya and Israel lately. Yet the Windsor-Detroit corridor is still Canada’s largest trade route by far. After a decade of proposals and promises, a new and needed crossing to Michigan is still in limbo. Lansing should be their priority, not Libya.
We can do far more to foster a pro-growth economy in manufacturing and in other sectors. Yet when Premier Dalton McGuinty went looking for advice, he hired Drummond. What he got was an economist who told him to charge more for parking. What he needed more was an economist to explain how to get Ontario working again.
David Gratzer is a senior fellow at the Montreal Economic Institute.