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Tax Cuts: On Borrowed Money and Time – How Ontario Became a Have Not Province Pt 4

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This series has attempted to address and outline the key conditions that led to Ontario’s fiscal woes, and into it’s position today as a “have not” province.

 

This article looks at the role that the Harris PC government’s tax cuts and excessive borrowing of cheap credit had played in worsening the financial health of Ontario’s economy.

To begin with, Neville Britto authored a 45 page exposé  titled Mismanaging During Storms.  Britto remained highly critical of the Progressive Conservatives track record in Ontario.

According to the paper, Britto’s central criticism against Harris has been his policy for tax cuts, while at the same time that the province was already receiving a significantly reduced transfer payment system by the Federal Liberal Government.

Just for reference sake, the transfer payment system in Canada is a collection of fiscal equalization processes. The most prominent amoung these, are the Canada Social Transfer, the Canada Health Transfer, and equalization payments.

The Health and Social transfers must be spent on health and social services respectively.

Having said this, the tax cuts combined with a significant reduction in federal transfer payments would mean that Ontario would be receiving less revenue than normal, when taxes were historically always used as a stable stream of government revenue.

What is interesting to note, is that when Britto pointed out that when the Federal Chretian Liberals had returned to balanced books and increased provincial transfers once again, Alberta and the other provinces had slowly restored their programs and services, yet under the Harris PC government, Ontario had not.

The Harris PC’s chose not only to cut large portions of Ontario’s programs and resources, but they also reduced their tax revenue amidst mounting debt.

This serves as a slap in the face to critics who like to point out that the reduction in federal transfer payments was the reason Harris’s PC’s had to download responsibilities onto the municipalities in the first place.

If the tax revenues had been in place, municipalities could have been spared the $3 billion + in costs they endured as a result of the provincial downloading (covered more in depth in Part 3 – Metropolitan Toronto: An Amalgamated Megacity.)

 

Tax Cuts

The Ontario Federation of Labour released a fact sheet in 1999.

The fact sheet argued that the promises the Harris PC’s had campaigned on in the Common Sense Revolution were not ‘sound’ in principle.

They outlined that middle-income families lost ground  because:

  •  57% of the benefit from the tax cut goes to the highest-income 10% of Ontario households
  •  It was costing the average household $200 just to pay the interest on the money the government had to borrow to pay for the tax cut
  •  Increased university tuition fees meant that for an average family with young children who may pursue a post-sec education, the higher fees would wipe out a lifetime of benefits from the Harris tax cuts

Other points were also emphasized as well, however the OFL proposed the Ontario Alternative Budget, that listed out methods to restore public services, eliminate major user charges, and eliminate the services downloads that drove up property taxes. Refer to Part 3 for more on the downloading of services by the Province.

The alternative budget claimed it would restore public services to per-capita 1995-96 level while eliminating the deficit by 2001-02

 

Most important of all, the OFL outlined the problems with the governments claims:

  •  Reductions in income taxes of $738 for the average family will have no positive impact because provincial cuts in funding have led to increased user fees and property taxes, and other costs of at least $766. These new costs entirely wipe out the tax cut for 3/4ths of Ontario’s families
  •  If there had never been a Harris government (no public spending cuts; no tax cuts), the budget would have been balanced in the 1998-99 fiscal year anyway, through increased revenues.
  •  Nearly $2 billion has been cut from health care since Harris was elected, when inflation and population growth are taken into account
  •  Harris government policies held back job growth in Ontario. Ontario’s job performance is entirely attributable to the lower Canadian dollar and growth in the U.S. economy

On the first point, we learn from part 3, that the downloading of services onto municipalities did in fact create significant problems and did lead to an increase in property taxes.

On the last point, we learn that this in fact was true. As Part 2 points out, the weaker Canadian dollar assisted the export market and since Ontario held a vital part of the manufacturing sector for Canada, this argument definitely held true.

The Ontario Alternative Budget also proposed to increase revenues coming into the government, in order to restore public services and balance the budget by 2000-2001. They outlined they would do this by restoring the tax cut that was given to the highest-income 20% of taxpayers, returning tobacco taxes to pre-1994 levels, and eliminating the tax breaks for business

Of course, nothing ever happened of this Alternative Budget.

 

In 2001 the Canadian Centre for Policy Alternatives published a paper titled:  Ontario’s “Made by the Harris Government” Fiscal Crisis.

The author Hugh Mackenzie wrote, that the “fiscal drag created by those cuts played a significant role in choking off the economic recovery that had begun in 1994. Thanks in part to Ontario’s fiscal strategy, the Ontario economy did not get back to its 1994 growth rate until 19999.”

He argued that the 1996 slowdown in the economy was part of the government’s economic record that it wanted to hide.

He presented the following graph, depicting the rates of growth from the early 1990s to the present.

 

However later in the same government document, a different graph was revealed. One that depicted more context, and over a longer period of time. This graph is depicted below.

 

Now the picture demonstrates an entirely different circumstance. In the first picture, the years between 1996-2001 were lumped together, yet in the second graph, it was depicted in an annual format.

The second graph demonstrates, that there was an economic recovery in Ontario quite a bit before the Harris PC’s had even been in office.

This definitely had to do with the monetary policies of the Bank of Canada, where they had began significant easing in interest rates, beginning in 1992.

The second graph also depicts the economic downturn that took place just after the Rae NDP government had taken office in 1990.

Mackenzie argued that the record demonstrated that you could not cut your way out of a recession which is what the Harris PC’s policies were doing.

To an extent he is correct, however you cannot spend your way out of a recession either, as Rae had done before him.

Mackenzie also argued that Harris PC’s claim that there was “no alternative” to the budget cuts was wrong.

Mackenzie stated the other option was to abandon the tax cut strategy and re-focus the government’s energy on rebuilding and protecting public services that Ontarians would be depending on in times of great difficulty.

And according to Mackenzie, the Harris PC’s told citizens that Ontario’s economic expansion was “made in Ontario”, driven by personal income tax cuts.

The government denied the role played by the boom in manufacturing exports to the U.S. due to higher demand. The Harris PC’s had even stated that Ontario’s sound policies would insulate Ontario from any downturn in the U.S.

The government’s growth projections for 2001 and 2002 were reduced from 2.2% and 3.5% respectively at budget time (in May), to 1.1% for 2001 and 1.3% for 2002.

Mackenzie also contended that for 2001 and 2002, the government chose projections at the high end of current private sector forecasts.

In the forecast of 3 chartered banks that released their forecasts for Ontario, growth projections were as low as 0.8% for 2001, and 0.5% for 2002.

Mackenzie also attacked the Harris PC’s projections for a 4.3% real growth, a projection he discredited.

And with the health care budget, despite the increases in the past two years by the Harris PC’s, Mackenzie charged that the budget did not keep up with population growth, escalating drug costs, and the health care impact of the aging population.

He argued that even if the government had waited to cut taxes until the budget was balanced, the fiscal situation would have been better.

In 2001-02, more than $800 million of the revenue raised would go on to pay the interest on money borrowed to finance the early years of the tax cut program.

Indeed this was a significant point, since Harris championed his campaign on bringing fiscal conservatism, yet he was borrowing money to fund the tax cuts.

In Mackenzie’s eyes, the Harris tax cuts were the sole reason why Ontario was facing a revenue crisis.

Mackenzie said,

Without the tax cuts, there would have been no fiscal crunch, nor would there have been a health care funding crisis, or education funding crisis.

He added,

Had the government not implemented the cuts in personal income taxes and corporate taxes, annual revenues for 2001-02 would have been $12.1 billion higher. Without the tax cuts Ontario would have generated an additional 9.5$ billion in personal income tax revenue and an additional $2.6 billion in corporate tax revenue.

 

Below is the total Revenue found in the Ontario Budget for 1998-99. (Numbers represented in $ millions)

 

The most important things to notice is that the government’s total revenues rose, yet their entitlements from the Government of Canada dropped, and yet, they accomplished in paying off the deficit. Clearly, one of the strategies to reduce the deficit in the midst of the cuts in federal government transfers was the provincial downloading of responsibilities to the municipalities.

 

And the graph below summarizes the Harris PC’s 7 years of tax cuts on Ontario’s fiscal capacity

 

 

And in his closing remarks, Mackenzie concluded,

Tax cuts have reduced annual personal income tax revenue by $9.5 billion. Corporate tax cuts have cost the revenue base an additional $2.6 billion. And thanks to the fact that the first four years of tax cuts were delivered while the Province was running a deficit, the cost of carrying the debt incurred to finance the tax cuts now exceeds $800 million a year.

The Harris PC government’s strong desire for tax cuts would lead to another significant problem for Ontario’s fiscal situation – rising interest payments on borrowed money.

Borrowing for tax cuts

The Harris PC’s borrowed a significant amount in the beginning of their term in order to take advantage of low interest rates. This would significant play a big impact on Ontario’s declining fiscal health for many years after. Below is the portion of borrowing from the 1995-96 budget.

 

And here were the borrowing costs for 1998-99;

 

and 1999-2000;

 

The Ontario Federation of Labour also gave their analysis on the Harris PC’s tax cuts in their report titled: What the tax cut means for Ontario’s debt and deficit

They said, “When it was introduced, the Government announced that the tax cut would cost $4.8 billion – in 1996 dollars. Because the income tax base is growing, that number will grow to $6.2 billion by the end of the Government’s term of office in the year 2000, and to $6.4 billion by 2001-2.”

The report also charged,

But that’s not the whole story. Because the Government started out with a deficit, every cent of the cost of the tax cut had to be borrowed. Every year, the tax cut is responsible for part of the deficit. Every year, the tax cut adds to the provincial debt. Every year, we have to pay interest on the money we’ve borrowed to pay for the tax cut. And every year, we have to borrow the money to pay the interest on the money we’ve borrowed.

The report even went as far as to say, “the tax cut adds nearly as much to Ontario’s public debt as the recession of 1991-3.”

 

And the chart provided below, courtesy of Public Accounts depicts the birds-eye view of Ontario’s budget over the decades.

***Note, the deficit and the net debt are two different concepts.

A deficit (or surplus) as it applies, is used to refer to whether the government spends less (expenditures) than it receives (revenues). Thus for the budget of any year, if the government spends less than it receives then it is said to have a surplus. If however it spends more than it received, then it has a deficit.

The net debt, is the total accumulated deficits over time. Thus, if a government has to borrow money every year, than its debt will continue to grow year-after-year. This debt does not dissapear unless the government elects to pay it down, or if there is a debt jubilee that forgives the net debt that already existed. The only other way to eliminate the net debt is to default on the debt itself.

Table 22
Ontario


Year

Own-source revenues

Federal cash transfers

 Total revenues

Total program expenditures

 Debt charges

 Total expenditures

 Deficit (-) or surplus

Total financial balance

 Net debt


(millions of dollars)

1981-82

13,983

3,308

17,291

17,862

1,209

19,071

-1,780

-1,842

13,755

1982-83

15,474

3,345

18,819

20,446

1,562

22,008

-3,189

-2,601

16,942

1983-84

16,797

4,161

20,958

22,031

2,080

24,111

-3,153

-3,451

20,182

1984-85

18,810

4,578

23,388

23,530

2,417

25,947

-2,559

-2,635

22,848

1985-86

21,103

4,682

25,785

25,604

2,795

28,399

-2,614

-2,863

28,919

1986-87

24,346

4,870

29,216

28,638

3,211

31,849

-2,633

-2,198

31,531

1987-88

27,174

4,984

32,158

31,171

3,476

34,647

-2,489

-1,878

34,020

1988-89

31,878

5,113

36,991

34,703

3,767

38,470

-1,479

-2,033

35,499

1989-90

35,861

5,364

41,225

37,318

3,817

41,135

90

-242

35,409

1990-91

37,130

5,762

42,892

42,145

3,776

45,921

-3,029

-3,001

38,438

1991-92

34,429

6,324

40,753

47,487

4,196

51,683

-10,930

-10,826

49,368

1992-93

34,253

7,554

41,807

48,942

5,293

54,235

-12,428

-15,524

61,796

1993-94

36,603

7,071

43,674

47,747

7,129

54,876

-11,202

-11,900

80,599

1994-95

38,432

7,607

46,039

48,336

7,832

56,168

-10,129

-10,800

90,728

1995-96

41,593

7,880

49,473

49,798

8,475

58,273

-8,800

-8,842

101,864

1996-97

43,672

5,778

49,450

47,748

8,607

56,355

-6,905

-12,464

108,769

1997-98

47,420

5,098

52,518

47,755

8,729

56,484

-3,966

-9,827

112,735

1998-99

51,271

4,515

55,786

48,772

9,016

57,788

-2,002

-12,600

114,737

1999-00

57,046

5,885

62,931

52,412

9,497

61,909

668

-10,400

113,715

2000-01

57,695

6,129

63,824

52,524

9,416

61,940

1,902

N/A

112,480

2001-02

56,132

7,754

63,886

54,413

9,029

63,442

375

N/A

112,036

2002-03

56,697

9,694

66,391

57,162

8,745

65,907

524

N/A

98,352


Source: Public Accounts of Ontario (for 2002-03: 2003 budget).
(1) Decrease/increase in stranded debt from electricity sector restructuring.

 

The graph depicts, that Rae had received a budget surplus from the previous government. (In actuality, he had already inherited a 700$ million dollar deficit as a result of monetary tightening conditions and the looming recession.

Refer to Part 3  of this series for more information on this). However, Rae’s NDP had tried to spend their way out of a recession and had managed to rack an additional 50+ billion to the net debt.

The beginning of his term had brought with it a change in monetary policy that saw very high interest rates and this naturally made the net debt grow larger than would have otherwise occurred.

In conclusion, it is argued that the Harris PC government’s tax cuts were another milestone in setting Ontario into a bleaker financial economic condition that it continues to suffer from even today.

In contrast to the highly turbulent and recessionary days of Rae’s NDP, the conditions during the Harris PC’s term were more predictable and calm.

Interest rates were low, economic markets were booming, the export market was thriving, and the Harris PC’s had initiated tax cuts at the beginning of their term. To compensate for the loss of revenue and to balance the books in the time frame they gave, the government had cornered itself in borrowing money to supplement the lack of sufficient revenues and this borrowing would  cost Ontario much more than the cheap interest rates were worth.and

Harris eventually claimed he eliminated the $11 billion annual deficit he had inherited from previous Premiers Rae, and Peterson before him, he also emphasized that his government had balanced the provincial budget during his second term in office.

Critics challenged his figures and the opposition Liberal government found this out eventually when they conducted their own audit.

Halfway through Mike Harris’s second term in power, he stepped out of politics citing personal reasons.

In his place, former deputy Ernie Eves had served as the interim premier before the next election in 2003.

It was later found that Ernie Eves had left the premier office with a $5 billion dollar deficit that would later be uncovered by the Auditor General of Ontario after the McGuinty Liberals would win power in the 2003 elections.

This will be covered in Part 8 – Value for Money Auditors Reforms.

 

Contents:

Part 1 – Bob Rae: Rainy Rae Days

Part 2 – Mike Harris: The Common Sense Beginnings

Part 3 – Metropolitan Toronto: An Amalgamated Megacity

Part 5 – Dismantling Infrastructure

Part 6 – Firesale: The Highway 407 Hijack

Part 7 – Ontario Hydro Privatization

Part 8 – Value for Money Auditors Reforms

Part 9 – The End of the Common Sense Revolution

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