Slaying Deficits: Timing is Key for Ontario and Ottawa: C.D. Howe Institute

TORONTO, July 23, 2014 /CNW/ - Ontario should not delay fiscal consolidation, while Ottawa should take a more gradual approach than planned, according to a report from the C.D. Howe Institute. In "User Discretion Advised: Fiscal Consolidation and the Recovery," author William Scarth calls on the Ontario provincial government to address its long-term sustainability challenges before it embarks on any major new expenditures, while stating that the federal government should delay its final stage of deficit reduction.

"Ontario's decision to delay attention in reducing the province's budget deficit is a risky strategy," states Scarth. He adds that "it undermines the government's own goal of addressing other challenges such as the infrastructure deficit."

With the devolution of spending from the federal government to provincial governments during the 1990s, provinces are now bearing more financial risks. Additionally, "given that fiscal policy multipliers are smaller at the provincial level, it is not a good idea for provincial governments to initiate intended-to-be expansionary measures at this time." The report suggests that Ontario simply cannot afford further delays in its consolidation plan. "Skepticism concerning Ontario's plan to implement spending cuts will be accentuated as the start of the hard decisions are delayed."

In contrast, Scarth finds that the payoff of a slightly delayed fiscal consolidation at the federal government level clearly exceeds the cost. "If its deficit-to-GDP ratio is held at one-half of one percentage point for three years before reducing it to zero, it is estimated that the nation's unemployment rate would be four-tenths of one percentage point lower during this three year period." He says this opportunity to help working Canadians should not be passed up – especially when the cost in terms of reaching the government's debt-ratio target of 25 percent by 2021 is so small. 

The author concludes that "the suggestion for slightly slower fiscal consolidation at the federal government level should not be rejected on the grounds that proponents of postponed consolidation are to be ignored since they always advocate for postponing." However, he finds that it is "worth reiterating that recommendations to postpone consolidation at the provincial level should be rejected."

The C. D. Howe Institute is an independent not-for-profit research institute whose mission is to raise living standards by fostering economically sound public policies. It is Canada's trusted source of essential policy intelligence, distinguished by research that is nonpartisan, evidence-based and subject to definitive expert review. It is considered by many to be Canada's most influential think tank.

For the report go to: http://www.cdhowe.org/user-discretion-advised-fiscal-consolidation-and-the-recovery/26914 

SOURCE: C.D. Howe Institute

William Scarth, Professor of Economics, McMaster University; or Finn Poschmann, Vice President, Policy Analysis, C.D. Howe Institute 416-865-1904; E-mail: [email protected].