By Nicolas Van Praet, Financial Post
When Mike Harris, a math teacher and ski instructor from North Bay, was elected premier of Ontario in 1995, he faced a swath of choices in his bid to wipe out the province?s then $11-billion deficit.
He decided to reduce social assistance. He implemented a ?fair share? health care tax on the wealthy. And he fired several hundred hospital workers, comparing their fate to that of Hula Hoop factory workers in the 1960s when the popularity of the plastic product faded.
He also wanted to sell off several government-owned businesses, notably Ontario Hydro and the Liquor Control Board. But there was little public appetite for that. In the end, the only major money-raising deal was the long-term lease out of Highway 407.
Today, Mr. Harris?s successor, Liberal Dalton McGuinty, faces a deficit roughly twice as large. And potentially far fewer options and little will to tackle it. Politically, his government has been hobbled by a string of spending scandals, most recently at eHealth and the Ontario Lottery and Gaming Commission. Financially, health care costs are climbing fast while the corporate tax receipts that normally help pay for them have dropped by more than $6-billion.
The McGuinty Liberals are on the ropes facing a population still reeling from the recession. And critics say they will be forced to shed their largely sleepy, caretaker attitude if they want to set things back on course.
?This is now a government where now, even they have to admit, Dalton McGuinty has lost his teflon raincoat,? says Peter Shurman, the Conservative critic for economic development. ?I think they?re really under the gun.?
Dwight Duncan, Ontario?s finance minister, Thursday will outline the government?s latest deficit projection for fiscal 2009-2010.
Economists expect a number of $20-billion or higher ? a shortfall equal to about 20% of revenues. Considered another way, the deficit represents about 3.2% of the province?s total gross domestic product.
?That?s about the worst in Canada. But not surprising, their economy is also about the worst in Canada,? says Robert Kavcic, an economist with BMO Capital Markets in Toronto. ?The only way out of it is to restrain spending.?
The picture of financial pain and prosperity across the province is nevertheless as varied as its landscape of lakes, forests and farmland.
In Thunder Bay, laid off mill workers are worried they won?t be assisted in finding new jobs if their local employment centre shuts down. But the Bombardier plant will start work building new streetcars to fill a $1.2-billion order.
In Toronto, the city?s five major banks avoided bailouts and are posting multibillion dollar profits. King St. and Queen St. eateries are packed with financial services employees swilling pints of beer. Home prices are now higher than last year and bidding wars are common. But unemployment is still 11.3% at last count and welfare caseloads are climbing.
Along the 420-kilometre auto manufacturing corridor stretching from Oshawa to Windsor, the sands are still unsettled. The province?s six major carmakers have been pummelled by a drop in demand in the United States, where they ship the bulk of their output. Five months after Ontario helped save General Motors Co. and Chrysler from death with a $4-billion aid package of loans and equity, factories are still producing 19% fewer vehicles than a year ago. Both Toyota and Ford are looking to implement labour concessions.
According to industry consultant Dennis DesRosiers, the next decade will be very lean in auto manufacturing, largely because people will scale back their driving as the vehicles themselves last longer. Result: Demand for new vehicles in North America will fall 13% to 16.2 million units. ?I like the chances for many of these small suppliers,? Mr. DesRosiers says. ?[But] I fully understand that a lot of them are going through a whole pile of hurt right now and many will not survive to see any upside.?
The potential ramifications of this new auto ice age to Ontario?s revenues are significant. Auto making is the heart of the province?s manufacturing base, employing about 100,000 people directly at last count and generating $18-billion in goods and services ? just over 3% of the provincial economy. Sure it helps if Chrysler adds a shift at its Windsor minivan plant, as it recently did. But when the longer term trend is people needing fewer vehicles, that doesn?t look good for government receipts.
In the near term, even when the recovery takes hold, government revenues may not be as beefy as hoped. Corporate tax revenues will be dampened by tax-loss carry-forwards racked up by businesses during the recession, TD Bank economists argue.
So where does this leave Mr. McGuinty and Mr. Duncan? Making targeted cuts to lower profile but expensive programs where organized defence of them is minimal, says Greg Inwood, associate professor of politics at Ryerson University. Public support for the government, while still largely positive and helped by people?s relative unfamiliarity with the opposition leaders, appears to be waning, he says. That suggests the Liberals will be hesitant to rock the boat any more than the minimum to balance the books.
?Polling data over the last few years supports the idea that this government is moderately inoffensive to most people,? Mr. Inwood says. ?They haven?t made a big, splashy mess of things. They haven?t done everything humanly possible to have a perfect government either. But then nobody does.?
The test will come when the recovery takes hold more solidly in other parts of the country, Mr. Inwood says. ?[People] might feel like ?OK, Ontario?s always been the economic engine of confederation. We should be rebounding as quick or quicker than anybody else.? And if that doesn?t show concrete signs, then it could affect the popularity of the government.?
Nelson Wiseman, a political scientist at the University of Toronto, says the McGuinty government has so far been characterized by a general lack of aggressiveness in steering the bureaucracy.
?They come in. They style themselves as pragmatists. In a broad sense, they don?t really have an agenda. Their idea is ?We?re sailing on a sailboat here. And if it?s sunny and we get some good winds, we?re going to do well. And as waves come up, we?re going to attack them.??
Mr. McGuinty won the last election by lying low and letting his opponents falter, Mr. Wiseman says. This time, he will be forced into the spotlight.
Mr. Wiseman says the real wake-up moment for Ontarians will be when they realize that the government will tally deficits for several more years to come, potentially putting them behind other Canadians.
He also he expects confrontation with unions as the cuts are implemented. Foreshadowing that fight, Ontario?s Public Service Employees Union Wednesday urged the McGuinty government not to slash public services, arguing any reduction would be ?catastrophic? for children and families.
The last time a party in power at Queen?s Park sliced deeply into public services was during Mr. Harris?s tenure. The fallout was a significant display of public indignation by a sizeable portion of the population. Labour leaders and social activists railed against capitalism. Bruce Cockburn sang songs urging people to ?kick against the darkness until it bleeds daylight.? Riot police were a frequent sight.
No one expects a repeat of those days. As Mr. Wiseman notes, the premier is not the ideologue Mr. Harris was.
But that doesn?t mean there won?t be a reckoning ? in the streets, on newspaper opinion pages or at the polling booths.
?This is a government which has done some really big things right,? like tax harmonization, says Finn Poschmann, director of research at the C.D. Howe Institute. ?But when it comes to spending control, regulation, environmental policy, electricity and energy, there are big, big problems. And they?re going to come home to roost.?