Ontario, my home province, is startling to resemble a mini-Greece :( Moody's sends a warning shot by downgrading Ontario's outlook to negative. The Globe & Mail reports,
Moody's Investors Services has turned its wary eye from the basket cases of Europe to Ontario, revising its outlook to "negative" from "stable" and issuing a stern warning on the province's hefty debt burden.According to the 2010-2011 Annual Report for Ontario, the net debt to GDP stands at 34.9%, while net debt per capita is $16,238. Shown below are some important charts from that report.
The decision, Moody's said in a statement, reflects the risks surrounding the province's ability to meet its medium-term fiscal targets. It noted the recent slowing of economic growth.
"The negative outlook on the province reflects the softening economic outlook, Ontario's growing debt burden, and the extended time frame to achieving a balanced budget," Moody's analyst Jennifer Wong said.
In his November statement, Finance Minister Dwight Duncan revised his forecasts for economic growth for both this year and next, a significant downgrade to just 1.8 per cent in each year, compared to earlier projections of 2.4 per cent 2.7 per cent.
The government plans to eliminate the deficit by 2017-18, which will require it to rein in growth in program spending. The deficit is forecast to reach $16-billion this fiscal year.
"Expense growth leading up to the recent downturn was relatively robust, highlighting the challenge ahead. Indeed, expense growth averaged 7 per cent annually in the five years to 2007-08, with health expenses having grown at an average of 8 per cent. The fiscal plan presented in the 2011-12 budget assumed expense growth of roughly 2 per cent annually for the duration of the plan."
It's reasonable to expect the debt to go up, given the recession, but Ontario needs to bring down expenses below revenues in 3 or 4 years. Otherwise, the debt could be troublesome.
The revenue picture for the province is as follows:
Like most developed countries, most of the provincial revenue comes from personal income tax, sales tax, or federal transfers (transfers can be thought of as personal income tax collected for provincial activities). In most developed countries, most of the personal income tax is paid by the wealthy, while most of the sales tax (as well as property tax for municipalities) is paid for by middle class and working class people.
People who never look at government income never realize this but coporate taxes don't usually account for much of the government income. This is just the provincial (state) level but the scenario is similar at the federal level. For Ontario, corporate taxes only contribute 8% of the total revenue. The small contribution by corporate taxes are one reason some radicals have suggested cutting corporate taxes to zero (I don't support this view presently).
In terms of expenses, the picture is as follows:
If you ever wonder why governments have been running persistent deficits for decades, it can be summed up by the big slice in this chart: healthcare! The problem plauging developed countries is largely due to the skyrocketing healthcare expenses. Canada has a more efficient healthcare system so its costs aren't as high as the US, but nevertheless, the costs are massive.
In Ontario, 40% is spent on healthcare. At the rate that healthcare is growing—faster than GDP and the Baby Boombers haven't even retired en masse yet!—it is possible that healthcare will be more than 50% of the province's spending. When that happens, the province might as well rename itself as an HMO (health maintenance organization), or Hospital of Ontario. If employees were correlated to spending (which it necessarily isn't), then, in such a scenario, half of Ontario's public workers will be healthcare workers. Furthermore, if government lawmaking was correlated with spending, then half the debates and the bills in government will be about healthcare. Such a world would be ridiculous and a disaster-in-waiting. You just cannot have 50% of the spending on healthcare when the province is responsible for police, education, courts, and so forth!
The out-of-control healthcare costs need to be solved one way or another. A positive scenario is one where some advances in medicine or biotechnology or healthcare information systems lead to cost reduction. A negative scenario would be the whole system collapsing on itself after too much money is spent on healthcare rather than longer-term investment like education or children's services.
Reforming healthcare or bringing costs down is a difficult challenge. Most of the voters in wealthy, developed, countries are the elderly—in countries like Canada and USA, the so-called Baby Boomers outnumer the younger generations—and these people will be against cutting healthcare. After all, the vast majority of healthcare costs are expended during the last year of one's life and who wants to cut spending when they become old. You are already seeing this conflict in the US, where the elderly are against cutting any healthcare expenses but are perfectly ok with cutting everything else including education, child services, and physical infrastructure — precisely the areas that create future prosperity.
Like north-eastern US, Ontario has been suffering the collapse of manufacturing and if it were to recover prosperity, it needs to develop some new industries. It remains to be seen how successful it will be. Tags: Canada, government