Drummond Report: How to manufacture a crisis

Don Drummond certainly knows how to manufacture a crisis.

For several years now he has been telling us that public health care spending is out of control, and that if left unchecked, it would soon consume 70 per cent of the provincial budget. Since those projections, spending on health care has actually gone down as a share of provincial program spending, from 46 per cent to 42 per cent.

Oddly, despite a trend line going in the opposite direction, Drummond continues to maintain this forecast.

Now, as Commissioner for Public Service Reform, he is telling us that if we don’t enter into a period of extreme austerity, we will soon be the Greece of Canada.

Don’t break out the tzatziki sauce yet.

It’s true we have a deficit, but it’s likely not as much as Drummond and Finance Minister Dwight Duncan say it is.

Why do we believe this? Both Drummond and Duncan have a history of pessimistic forecasts that always come rosy on budget day. This is not magic or the result of good management – its public manipulation of the facts.

The actual deficit in 2010-11 came in 43 per cent below what Duncan had forecast a year earlier. That’s a big difference. If their forecasting is anywhere near this bad, the real deficit is likely to be somewhere below $12 billion this year.

This means Drummond’s starting point is wrong.

Second, economist Hugh MacKenzie says Drummond is forecasting a much higher interest rate on Ontario’s debt – in fact Drummond expects interest rates to almost double. What is the justification for this, especially when the U.S. has already committed to keeping interest rates low until at least the end of 2014?

With historic low interest rates, Ontario is paying no more to service its debt now than it was a decade ago. As debt bonds mature, new bonds will be issued at a much lower rate of interest, driving debt service charges even further down.

Start off with the wrong assumption, estimate higher than reasonable interest rates, then let compounding do the rest and, voila, you have built a crisis.

Drummond also likes to breed fear by comparing apples to oranges, reflecting “real” growth rate projections against “nominal” government expenditures. What does this mean?

Nominal is the actual dollar value. This figure always appears higher than “real” growth projections because real growth subtracts the rate of inflation.

For example, Don Drummond can talk about a 3.2 per cent increase in program costs (nominal) while the economy grows by only 2 per cent (real) to illustrate how unsustainable our current situation is. This is what he has been doing in the media for the last few weeks.

However, if inflation is running at 2.5 per cent – as was reported this morning – and real growth is 2 per cent, that means the nominal increase in the economy is 4.5 per cent. Things look very different under that scenario.

Government revenues never grow less than the nominal growth in the economy.

In fact, it’s not uncommon for government revenues to rise slightly above the nominal rate of growth.

Now here’s the real challenge: economic growth comes from two sources – the private sector and the public sector. For every dollar the public sector spends, it usually creates a ripple effect in the economy of about $1.50. If the public sector sheds jobs too quickly, the private sector has to make up for it or run the risk of recession. This is called fiscal drag. If Drummond’s recommendations to limit spending are accepted, according to economist Jim Stanford, this could reduce economic growth from between 1.6 per cent to 2.8 per cent over the next four years. That’s a huge obstacle for the private sector to overcome.

If we go into recession, government revenues fall further, creating the need for another cycle of cuts. At that point we can break out the tzatziki.

How much of this is self-inflicted?

While the government talks about all of us having to make sacrifices, they have only hinted at suspending the last phase of their corporate tax cuts, even though our rates are already more than competitive.

Are you really making a sacrifice by not helping yourself to another cookie from the jar?

A real sacrifice might involve asking the corporate sector to put back the cookies they got in the last two years, raising another $2.4 billion in taxes. That would go a long way to offset the deficit.

In all, the Harris-McGuinty tax cuts add up to $16 billion less in revenue for the Ontario government every year.

$16 billion – hey isn’t that what Drummond and Duncan say is the present deficit?

Clearly there are better options. As one observer astutely put it, the Drummond report was written by the 1 per cent for the 1 per cent.

The rest of us need to engage now if we don’t want to see our province vandalized for the sake of the few.