Wynne’s Budget Fortells Biggest Ontario Cuts Since Harris

Photographer: Galit Rodan/Bloomberg

Kathleen Wynne, premier of Ontario, center, arrives to speak at the Bloomberg Economic Summit in Toronto, Ontario, Canada, on May 13, 2014. Close

Kathleen Wynne, premier of Ontario, center, arrives to speak at the Bloomberg Economic... Read More

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Photographer: Galit Rodan/Bloomberg

Kathleen Wynne, premier of Ontario, center, arrives to speak at the Bloomberg Economic Summit in Toronto, Ontario, Canada, on May 13, 2014.

Premier Kathleen Wynne is presenting Ontario’s June 12 election as a stark choice between her Liberal economic stimulus plan and her main rival’s vow to cut 100,000 government jobs.

Yet Wynne’s own budget documents show this year’s spending surge will be followed by the deepest freeze in two decades.

After boosting program spending by C$3 billion ($2.8 billion) this year, the Liberal Party leader plans to hold the line the next three years in a bid to eliminate the deficit. Given population growth, a 2017 Liberal government would drop spending by the most per person since former Premier Mike Harris won election on deficit elimination in 1995.

“She’s not talking about war with the public sector unions, but that’s what those numbers imply to me,” said Bryne Purchase, a professor of policy studies at Queen’s University in Kingston, Ontario, and former deputy minister of finance during the Harris years. “I think the reality is a lot of strikes in the public sector.”

Wynne, 61, has been walking a tightrope since becoming Premier in 2013. She relented on wage concessions Liberal predecessor Dalton McGuinty was demanding from public sector unions, particularly teachers. Meanwhile, she has pledged to eliminate the deficit after letting it grow this year to fund a fresh round of stimulus spending.

Photographer: Galit Rodan/Bloomberg

Hudak is proposing immediate and deeper cuts to balance the books. Under the Conservative platform, the deficit would be eliminated one year earlier. Close

Hudak is proposing immediate and deeper cuts to balance the books. Under the... Read More

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Photographer: Galit Rodan/Bloomberg

Hudak is proposing immediate and deeper cuts to balance the books. Under the Conservative platform, the deficit would be eliminated one year earlier.

Deeper Cuts

“We’re dealing with a situation that requires at this moment that we make investments to ensure we have the steady economic growth that we need,” she said in a leader’s debate. She has spoken little about the spending restraint that subsequently flows from her budgetary promises. The premier has contrasted her plan with Progressive Conservative leader Tim Hudak’s, who is proposing immediate and deeper cuts to balance the books. Under the Conservative platform, the deficit would be eliminated one year earlier.

Wynne and Hudak will meet at 6:30 p.m. for a televised debate along with New Democratic Party leader Andrea Horwath.

Hudak, 46, was first elected under the Harris small-government banner at a time when the province also was grappling with a large deficit. Harris cut welfare payments, fired nurses, closed hospitals and provoked a teachers’ strike.

Under his government, per capita spending fell by C$387 per person between 1995 and 1998, before adjusting for inflation, according to Statistics Canada data. When inflation is taken into account, Harris’ cuts would have amounted to C$533 per person today, the data show.

Less Draconian

The Liberal budget is less draconian yet takes the province in the same direction.

Under the Liberal plan, program spending will rise to C$119.4 billion this year and peak at C$120.2 billion in two years before returning to this year’s level in 2017-18.

The budget would reduce spending per capita by about C$179 below 2013 levels, according to Bloomberg calculations drawn from forecasts in the Liberal budget presented May 2 and the Ontario ministry of finance’s population projections.

The lower per capita spending won’t mean a reduction in services, according to Susie Heath, a spokeswoman for the campaign.

“As part of meeting our targets, we have provided no additional funding for compensation within the budget,” she said in an e-mail. “Any modest wage increases that are negotiated must be absorbed by employers within available funding and within our fiscal plan.” ​

Hudak is casting doubt on Wynne’s willingness to follow through with cuts. “That looks to me like a short-term pitch to win votes, but very poor fiscal management,” he said in a May 27 interview at Bloomberg’s Toronto office. “They simply don’t have a plan to balance the budget. They haven’t put a single idea on the table.”

Wary Unions

Ontario’s large public sector unions have largely refrained from attacking Wynne. Some are wary, though, of what will happen after the election, especially given past skirmishes with McGuinty over his efforts to tackle the persistent deficit.

“The nurses of Ontario already took a two year wage freeze, I believe we have done our duty,” Linda Haslam-Stroud, president of the Ontario Nurses’ Association, a union with more than 60,000 members, said in a May 27 phone interview. “The government that’s going to be in play is going to have to take a long hard look at how much they believe they can continue to squeeze out of the hospitals.”

Although he prefers Wynne’s spending freeze to Hudak’s cuts, James Ryan, head of the Ontario English Catholic Teachers Association, which represents 45,000 teachers, said the zero wage growth would impose a de facto pay cut thanks to inflation.

Credit Rating

“It would be incredibly unlikely that we would agree to a freeze for that long,” he said in a May 30 interview. “The government may have to change its plans in the future.”

On the other side of the equation, debt rating agencies could penalize the province for a failure to formulate and stick to a credible deficit-reduction program, creating an even bigger drain on government finances.

“Ontario has a really tough program-spending challenge to meet, and the question with their credit rating is, are they actually going to have the resolve to meet that,” Robert Kavcic, an economist at Bank of Montreal, said. “There’s basically zero public sector wage increases built into that budget.”

Ontario’s credit rating was downgraded in 2012 by Moody’s Investors Service as debt grew and the economy worsened. Now, two out of four major rating firms have Ontario at the bottom rung of the AA range. Standard & Poor’s is leaning toward a downgrade with a negative outlook on its rating.

Cost Controls

In the U.S. bond market, falling from the AA to the A range for a foreign government means borrowing costs almost 1 percentage point higher on average, according to Bank of America Merrill Lynch data. A 1 percentage point increase would cost Ontario an additional C$400 million a year in interest payments, according to budget documents.

At C$10.6 billion, interest payments on the province’s debt load accounts for the majority of the estimated C$11.3 billion deficit last year, the documents show.

The Liberal deficit-fighting strategy pairs cost controls with increased revenue from higher taxes and a stronger economy with a search for C$1.25 billion in savings over the next three years, which the party hasn’t identified yet.

The Liberals have already succeeded in making services more efficient, placing more pressure going forward on reining in wage costs, said Michael Yake, the Moody’s analyst covering Ontario.

“You can find efficiencies relatively easier at the beginning because that’s when the programs perhaps weren’t being well managed,” he said in an interview. “Once the low hanging fruit, once those easy items to identify have been captured it becomes harder where else to find efficiencies.”

With 50 percent to 55 percent of each ministry’s budget going to wages that will put more pressure for departments to chose between fewer staff or lower wages, he said.

To contact the reporter on this story: Ari Altstedter in Toronto at aaltstedter@bloomberg.net

To contact the editors responsible for this story: Jonathan Kaufman at jkaufman17@bloomberg.net; David Scanlan at dscanlan@bloomberg.net Edward Greenspon, Jacqueline Thorpe

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