The Ontario Budget
The Empire Club of Canada Addresses (Toronto, Canada), 25 May 1993, p. 22-32
Laughren, The Hon. Floyd, Speaker
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The Ontario budget for 1993. Expenditure reductions, social contract, tax and revenue increases. Focus on concerns for health care and education. Deficit reduction.
Date of Original
25 May 1993
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Full Text
The Hon. Floyd Laughren, Deputy Premier, Minister of Finance
Chairman: Isabel Bassett
President, The Canadian Club of Toronto

Head Table Guests

The Hon. Floyd Laughren, MPP, Minister of Finance for Ontario and Deputy Premier; Frederic L. R. Jackman, Ph.D, President, Invicta Investments Incorporated and President, The Empire Club of Canada; Peggy Sum, Vice-President, Asian Markets Personal and Commercial Financial Services, Bank of Montreal; Iman Abdul Hai Patel, Islamic Co-ordinating Council of Imams; Keith Patterson, Partner, Deloitte & Touche and a Director, The Canadian Club of Toronto; Betty Notar, Minister's Chief of Staff, Ministry of Finance; Ronald Goodall, F.C.A. , Partner, Goodall & Peacock and Past President, The Empire Club of Canada; Eleanor Clitheroe, Deputy Minister of Finance for Ontario; Diana L. Chant, C.A., Treasurer, The Empire Club of Canada; John Madden, Assistant Deputy Minister, Office of Treasury, Ministry of Finance; Elizabeth Wilson, Assistant Dean and Director of Development, Faculty of Management, University of Toronto and a Director, The Canadian Club of Canada.

Floyd Laughren

I appreciate the opportunity to discuss this year's budget with you.

Of course, you've seen the headlines and heard the commentaries. People are unhappy about taxes. Others are unhappy about spending cuts. And some are concerned about how the social contract will impact on them. That's not unexpected. I know this was a tough budget. It was meant to be.

In this budget, we intended to deal head-on with the fiscal and economic challenges facing Ontario. We implemented a balanced and fair fiscal package. It's a package that asks all Ontarians to share in the solution. It's a package that protects the most vulnerable in our society. It's a package that preserves the public services Ontario has spent generations building--like health care and education.

But all the fiscal responsibility in the world will only amount to a half-hearted effort to support the economy if we let fiscal targets be the sole focus of our work. That is, if we said lowering the deficit was the only thing we had to do to support Ontario's economy, we would be taking a simplistic view of this province.

That's why a very important part of this budget package invests in Ontario's economy through infrastructure investment, training and community-development initiatives. These investments, along with fiscal responsibility, are the key ingredients to securing a stronger Ontario.

I believe very strongly we've made the right choices for Ontario in this budget--by providing a firm foundation for economic recovery; by making government more efficient and affordable, preserving those public services that benefit all our citizens; and by asking those who have the most to contribute the most. And by not leaving the tough decisions for another day.

I was very encouraged to hear last Friday that Moody's Investors Service of New York, one of the key rating agencies, confirmed Ontario's double--A credit rating. Moody's confirmed the rating following a review that began earlier this spring and concluded with the budget. I quote from their comments:

"The pace of debt accumulation should stop beginning next fiscal year, as government action, combined with modest improvement in the economic climate, is likely to promote a gradual narrowing of the budgetary imbalance. The government's budgetary measures demonstrate a commitment to reducing, over the medium term, the structural imbalance between its revenue-generating capacity and its expenditure base."

In other comments, they note that cutting into the expenditure base "reflects a comprehensive cost-control strategy being implemented by the province."

I have learned over the past 2-1/2 years not to take anything for granted, especially when it involves forecasting. We have been hammered in our revenue projections by an economic downturn that went longer and deeper than any analysts predicted.

Moody's and others have noted potential vulnerabilities in our deficit plan, such as some asset sales. We are aware of the potential for slippage and we are prepared to deal with it.

We've been cautious and open in our calculations. For example, we are not assuming any stabilization payment from the Federal Government. We are applying for it--we are hoping to get what we are entitled to--but we have learned to hedge our bets where Ottawa is concerned.

We're also being reasonable and responsible in the pace at which we are bringing the deficit down. We recognize we must avoid causing major dislocations in the economy and in public services. That's why we have adopted our three-pronged approach in these budget-expenditure reductions; a social contract with employees and employers in the public sector; and tax and other revenue increases.

Without the actions we took on this budget, our deficit would have been close to $17 billion. We cut that almost in half. The actions we've taken will save Ontario some $5 billion in interest charges over the next three years. Public debt interest costs as a proportion of the revenue dollar will be about 16 cents this year. According to our fiscal plan, interest costs will stabilize around 17 cents over the next two years. Our debt as a percentage of GDP will also stabilize.

We remain committed to balancing the operating budget. Our plan has it down to $2.6 billion by 1995-96. I think the medium-term fiscal plan we have in place is credible because of what we have done this year.

The first part of this year's package was an aggressive expenditure control plan which cut $4 billion in planned spending. For the first time in 50 years, operating spending by the government of Ontario--and that includes governments of every political stripe--is actually going down. Programme spending has been reduced by 4.3 per cent compared to last year. Government has taken the biggest single spending reduction--over $700 million--in its own internal operations. This is a reduction of about 10 per cent. The number of ministries has been reduced from 28 to 20 for a saving this year of $40 million in overhead costs. Expenditures for communications, consulting, travel and other non-salary costs have been chopped by 24 per cent over the past two years. By the end of this fiscal year, there will be 5,000 fewer employees in the public service, compared to two years ago. Health-care spending, which has increased by 11 per cent a year on average for a decade, was brought down last year to less than one per cent.

We accomplished what we set out to do with our expenditure control plan. But it wasn't easy. Some of our critics are saying that these are phantom reductions because many of them involved cutting planned spending for this year. I say--let them tell the people in communities where government offices and facilities are being closed down that these reductions are not real. Let them tell the municipal leaders who are not getting the unconditional grants they expected that these reductions are not real.

The expenditure reductions are a necessary part of our balanced package. But let's not pretend that they were an easy solution or the result of some kind of creative accounting. I expect there are people in this room who have gone through some pretty agonizing downsizing exercises in their businesses. Let me tell you, it isn't any easier reducing staff and doing organizational restructuring in the public sector. In fact, it may sometimes be harder because our customers--the public--have high expectations and a low tolerance for any cutbacks.

The second part of our package is the social contract. I don't think anyone would accuse the government of taking the easy way out in this area. We are the first government in Canada to even attempt such a contract with all its employers and employees. As you know, the social contract negotiations are still on-going. We've made it clear we must achieve $2 billion in savings this year. I'm optimistic that money will be found at the negotiating table. I think it's important people understand the social contract is really about two things. More immediately, it is about finding $2 billion in savings. But, just as important, it's about changing the way the public sector works. On the table are a number of items that, if agreed to, will help the public sector become more open, more accountable, more democratic, and ultimately more efficient and effective. We will report in June on how the $2 billion will be achieved. However, the $2 billion has already been identified in our budget as coming off the spending side.

The effort to achieve a social contract reflects our conviction that it's time to find new ways of working. It is based on the belief that democracy should exist in the work place and not only in the polling booth. It is based on the belief that labour and management can work together to find new, flexible and innovative ways of tackling challenges. No one said this new way of working would be easy. But certainly, it is worth it.

The third part of our balanced three-pronged package is increased revenue.

We only raised taxes after we made clear to the public we were serious about reducing our spending. That's why we announced both the expenditure control plan and the social contract negotiations well ahead of the budget. We did everything we could on the spending side of the ledger before asking the rest of Ontario to make its contribution to the budget. I understand nobody wants to pay more taxes. But I want taxpayers to understand some things about these tax increases: We raised the personal income tax and the surtax because it's the most progressive tax we have, based primarily on ability to pay. We did not raise the retail sales tax rate because of concern about its impact on consumer spending at a time when confidence is fragile. We found almost $4 in savings and reduced costs for every additional dollar in taxes.

The impact of the PIT changes and the limited extension of the RST mean that a typical two-income family of four earning $60,000 will pay an annual increase of less than $7 a week more. At the same time, an additional 40,000 two-income taxpayers will pay no Ontario income tax and another 10,000 will have their taxes reduced by the Ontario tax reduction programme. Since we took office, some 200,000 low-income Ontarians have been taken off the tax rolls entirely.

That's what we mean by fair. That's what we mean by protecting those who are most vulnerable. I've been told by some of our critics that I should not have asked taxpayers to dig a little deeper to contribute to the solution to our fiscal challenge.

So let's look at the alternatives. We could have engaged in further spending cuts and forgot about taxes. Not only would this cost public-service jobs, it would also severely damage the network of services Ontarians rely upon.

We've already cut public-sector spending by $4 billion this year. And we plan to take off another $2 billion through the social contract talks. Another $2 billion--in addition to the $6 billion--would be devastating for people and programmes. We estimate this would cost at least 20,000 jobs. I emphasize the words "at least." How will laying off at least another 20,000 people help Ontario's economy?

Our revenues--even with this very aggressive tax hit--are lower as a share of GDP than they were in 1989. This year revenues are 11.2 per cent of GDP. In 1989, they were 12.3 per cent. And yet, the need for public services is even higher than it was back then.

I ask those who advocate more spending cuts instead of higher taxes to identify exactly what they would cut. The usual answer is to cut the fat. Well, we have put ourselves on a rigorous diet for some time now and I think after the expenditure-control exercise, we are getting pretty lean.

More cuts this year would clearly mean more service reductions and lost jobs and not just in the public sector. That's because a lot of the almost $4 billion we spend on infrastructure goes to private-sector companies. It is private-sector companies that build our roads, sewer systems, schools and so forth. And it is private-sector companies that supply the building materials, and manufacture the equipment used on construction sites. So our infrastructure investment maintain tens of thousands of private-sector jobs and helps private-sector companies.

And surely, education and training is an investment well worth making at this time. The $9 billion Ontario spends on education and training is preparing the work force of today and tomorrow. Most of these workers will end up being employed by private-sector firms.

These are public expenditures, funded by taxes, that support economic growth and job creation. They are a major contributor to Ontario's competitiveness. I know there are those who think we should have achieved a much lower deficit--but without major tax increases. To forego the tax increases and bring the deficit lower, would, quite frankly, lead to a decimation of public services, and a tremendous loss of jobs in both the public and private sector. The economic consequences of these alternatives are the very reason we've implemented a balanced package of initiatives.

Another alternative would be to do some tax moves other than the ones we did. I'm sure it wasn't lost on this audience that the corporate income tax rate was not increased. The rate reductions from previous years for manufacturing and resource industries and small businesses, and improved R & D incentives remain in place. The Commercial Concentration Tax was abolished. Small businesses will be exempt from the new Corporate Minimum Tax and 90 per cent of all businesses will not even have to calculate this tax. The retail sales tax rate was not increased. I know it is questionable to talk about taxes you didn't raise. But I think these are a good illustration of choices we made namely to avoid as much as possible taxes that could dampen business investment and job creation at a time when so many people are out of work.

I doubt there are very many people in this hall who would support the alternative of letting spending and the deficit rise. But that argument has been made in the media and elsewhere. The argument says that the government should not cut back because withdrawal of government spending from the economy costs jobs. My answer is that we are still spending $9.2 billion more than we are taking in--in taxes and other revenues.

I'm convinced that a much higher deficit would undermine consumer and business confidence in the economy. People would know that more and more of their money is going to pay interest to bondholders, many who don't even reside in this country.

I'm sure you're aware this government made a deliberate choice in the depths of the downturn in 1991 to fight the recession, rather than the deficit. We take responsibility for that decision, and I still believe it was appropriate, given the severity of the economic decline. But we said at the time--and I came before this particular group to say it--that we would bring the deficit down over the medium-term when the economy was in recovery.

The economic recovery has begun. It is fragile, but it is real. The pace of job growth so far this year is the fastest since 1988. We learned from the experience of other governments in the 1980s that it is important to begin an aggressive deficit reduction plan as the recovery begins to take hold. We're bringing the deficit down at a reasonable and credible pace to maintain confidence in the economy, to save jobs, and to preserve important public services.

This budget deals with our fiscal challenges but it also recognizes that investments in the economy must continue. Since budget day, I've heard a lot of rhetoric about killing jobs. This government is supporting job growth in Ontario, not job loss.

We expect the Ontario economy will create, on average, 115,000 jobs per year over the 1993 to '96 period. That means renewed hope for our laid-off workers, and for our young people coming out of school and into the job market for the first time. Unemployment is still very high--unacceptably high. That is why this government is continuing to invest in jobs and people to help sustain the momentum of recovery.

I've already mentioned our investments in capital infrastructure and training. We are expanding our jobsOntario programme--which invests in job creation, strategic capital projects, worker training, affordable housing and child care for working parents. Much of jobsOntario is based on partnerships with the private sector. We expect jobsOntario training, for example, to provide jobs for

35,000 to 40,000 people in firms across Ontario this year. And an equivalent number of employed people are expected to receive training. We're launching a new jobsOntario community action programme to support economic development in communities, with a focus on local enterprise investment. For example, this programme will help get ideas off the ground by providing small-scale loans to people with viable business plans but no access to traditional financing.

We're continuing to work with the private sector through our Sector Partnership Fund, through sectoral training agreements and other initiatives.

And we're improving the way government operates--revamping our systems and processes and structures so that the public sector is more efficient and more effective. In this way we can better target and reallocate our spending to make strategic investments in Ontario.

As I said earlier, this government has taken the approach that fiscal policy is important. But it alone will not guarantee a brighter future. It is important for a government to recognize and act on the need for investments in the economy.

I am the first to admit there is only so much a provincial government can do to deal with the economic challenges that face Canada. There are others who have an important role to play in promoting recovery. I believe Ontario has done its part on the fiscal side. And today I call on the Bank of Canada to do its part. Monetary policy is still very tight. Real interest rates are very high by historical standards. Inflation is running well below John Crow's targets and shows no signs of rising. Interest rates must come down.

I believe Ontario has done its part on the investment side. And today I call on the Federal Government of Canada to do its part on the investment side. This country needs more than half-hearted efforts at infrastructure investment and labour adjustment. We need a committed federal government that recognizes its responsibilities in these areas and takes real leadership to get this country working again.

In closing, Ontario is doing what needs to be done to ensure the province's debt burden does not so overwhelm government finances that we lose the ability to make necessary investments in our economy and in our people.

We are not into debt control so that we can reduce the role of government in our society. That is not our political agenda. In fact, it is because we believe so strongly in the positive role that government can and should play in our economy and our society, that we are determined to keep the burden of debt interest from pushing important public priorities off the table. Priorities like investing in jobs, training and infrastructure for the new economy. Priorities like preserving and improving the best universal health-care system in the world.

We are doing what needs to be done to ensure that Ontario's future belongs to Ontario's children. Thank you.

The appreciation of the meeting was expressed by Dr. Frederic L. R. Jackman, President, Invicta Investments Incorporated and President, The Empire Club of Canada.

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The Ontario Budget

The Ontario budget for 1993. Expenditure reductions, social contract, tax and revenue increases. Focus on concerns for health care and education. Deficit reduction.