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Ontario talks tough about its deficit

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Alex Carrick

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Alex Carrick is Chief Economist for CanaData, Reed Construction Data’s Canadian economic forecasting and statistical service.

Economists

Ontario has made it clear which side of the divide it stands on with respect to talking up stimulus or talking down deficits in its provincial budget for 2010-2011, which was released yesterday. The public stance is to take a supposed hard line on spending. Whether this will actually materialize, however, is a matter of conjecture as the following paragraphs will show.

Ontario has made it clear which side of the divide it stands on with respect to talking up stimulus or talking down deficits in its provincial budget for 2010-2011, which was released yesterday. The public stance is to take a supposed hard line on spending. Whether this will actually materialize, however, is a matter of conjecture as the following paragraphs will show.

For now, Premier Dalton McGuinty and Finance Minister Dwight Duncan are outlining fiscal measures to reduce the current 2009-2010 deficit of $24.7 billion to a zero balance by 2017-2018 in gradual stages. The spin speaks of radical change. The extended eight-year time frame takes away much of the immediacy.

The province is drawing a line in the sand for its workers with respect to wage increases. A salary freeze will be imposed for two years. If this is the position being taken by Ontario, with many of the worst urban labour markets in the country, expect restraint to be the order of the day in the public sector across much of Canada.

The major fiscal initiative for Ontario this year has been known for some time, the combining of the provincial sales tax with the federal Goods and Services Tax (GST) into one blended or harmonized tax known as the HST scheduled for July 1st.

The consequences for Queen’s Park will come in the form of higher government revenues longer term, more transfer of tax revenue from Ottawa and a one-time payout to firms and individuals in Ontario to help them cope with the HST’s introduction.

Spending restraint will result from wage freezes on MPP salaries and non-unionized government workers. Notice has also been given that more money will not be available to unionized workers in future bargaining agreements, nor to government agencies for their employees. This passes on the responsibility for cost cutting. If such agencies grant wage increases, they will have to find matching cost reductions in other areas.

The tough-talking stance with government workers is risky. Few will quickly forget what happened last summer when municipal workers went on strike in Toronto and there was no garbage collection for two months. Rancorous relations between the populace and striking workers nearly escalated out of control.

According to media reports, the first major unionized contract for government-paid workers is due for renewal next spring, for nurses. Most other major public agreements, (e.g., teachers and doctors), do not expire until 2012. By then, the recession may be a distant memory.

Further on the spending side, it is important to remember that provincial budgets are mostly about health care costs, with education expenses a distant second. In the 2010-11 budget, a 6% increase in the health care area is planned. The gain falls to 4.1% in 2011-2012 then 3.1% in 2012-2013.

Changes to rules governing how drug companies supply pharmacies will be one means to lower the cost of generic drugs. Other cost savings are projected to come through greater efficiencies in health care delivery. As the saying goes, good luck with that. The lead-up to passage of health care reform in the U.S. has spotlighted how difficult it is to rein in runaway health care costs.

Furthermore, spending in the medical and care-giving areas will become even more problematic in the years ahead due to the aging population and the increasingly sophisticated and, therefore, more expensive technology used in providing health care services.

As for the overall economic impacts of the budget, there is no extra relief to modify the negative implications of the HST on the purchases of many consumer goods as of July 1. And government wage restraint will act in the same manner as a tax hike for a certain proportion of the population. Plus transportation spending cutbacks remove some stimulus that had been expected.

That having been said, continuing go-aheads for work on the Spadina subway line and the Georgetown GO route, which includes the Union Station to Pearson Airport link, remain positives for the construction industry. Also, the introduction of an industrial electric power rate for northern Ontario will spur development in a region that has been especially hard hit.

The five-year postponement of several other Toronto transit projects – including Finch and Scarborough rapid transit lines - will bring the city in direct conflict with its goals for hosting the Pan Am Games in 2015. The city was awarded the Games partly on the assurance that there would be rapid transit available to and from parts of the city that are currently less accessible.

Ontario accounts for 40% of the nation’s gross domestic product. Toronto is 40% to 50% of Ontario, depending on what is being measured. The population of census metropolitan area Toronto is growing by between 90,000 and 100,000 people per year. With respect to CMA Toronto, there is little in the budget to help what is the most concentrated source of wealth generation in the country.

Given that there will be another provincial budget before the election in October 2011, expect a considerable alteration in tone coming out of Queen’s Park 12 months from now.

Alex Carrick

Find Canadian construction-related economic articles in Canadian Construction Market News and in the Economic Outlook section of Daily Commercial News. Mr. Carrick also has a lifestyle blog that can be reached by clicking here.

by Alex Carrick

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