Austerity costly to UK economy – is Ontario headed the same way?

The McGuinty government is big on British policy imports, from the costly public-private partnerships to his recent mania for austerity.

If you want a preview of what’s going to happen in Ontario, look to Britain.

This week it became official. Britain is back in recession after having two consecutive quarters of negative growth.

Since the austerity-minded Cameron government came to power in 2010, net growth in the British economy has only been an anemic 0.4 per cent. During the last two quarters Britain’s economy has shrunk by 0.2 per cent – this at a time when they had been predicting modest growth.

While cutting taxes at the top end of the scale, Cameron’s belief in “trickle-down” economics has led to considerable criticism of his economic policies, Cameron himself described as “speaking for the few.”

Like Ontario, Cameron’s government is implementing the harshest public sector cuts in a generation.

Sound familiar?

Last week OPSEU released a paper commissioned from the Centre for Spatial Economics (C4SE), number crunchers that do economic forecasting for clients that include eight governments, among them the Province of Ontario.

Looking at the provincial budget – which includes a freeze on base hospital funding – C4SE says the consequences of provincial austerity could subtract as much as 0.7 per cent of gross domestic product in 2014 and 0.6 per cent in 2015. The impact will remove $20 billion from Ontario’s economy each year by 2015 – which in turn will remove $2 billion a year in tax revenue.

“While the ability to tax is not without limits, raising taxes rather than cutting spending imposes lower costs on society in terms of reduced jobs and GDP while achieving the government’s objective of reducing the deficit,” the C4SE study states.

Prior to a last-minute agreement with the NDP to implement a modest surtax on the wealthy, almost all the province’s budget plan had been to slash public spending, not adjust taxation.

C4SE estimates the budget will kill 105,000 jobs in 2015 – 65,000 of those jobs coming from the public sector, the remaining 40,000 from the private sector. According to C4SE, 36 cents of every dollar of public sector spending on operations is used to purchase goods and services from the private sector. About one in five construction jobs are reliant on the public sector. Overall employment is not expected to rise until after 2015.

The report notes that Ontario’s weaker economy will discourage in-migration and encourage out-migration – something very familiar to the health care world which in recent years finally saw an in-migration of doctors and other health professionals as the McGuinty government reinvested in health care.

If you were hoping that the surtax on the wealthy would ease the cuts, you may be disappointed. While the surtax will bring in $300 million more this year, and $600 million a year after that, all of that money will be used to pay down the deficit, not fund hospitals, schools or used to reduce inequality. Once the deficit is gone, so will be the surtax.

Robin Somerville, who conducted the C4SE report, notes that Don Drummond, the province’s own commissioner on public service reform, states that “spending is neither out of control nor wildly excessive. Ontario runs one of the lowest-cost provincial governments in Canada relative to its GDP and has done so for decades.”

There are one million public sector employees in Ontario, or about 17 per cent of all jobs. With close to one in five experiencing restraint and fearful of job loss, this does not bode well for economic growth in the province, especially when the manufacturing sector has already been hit by competition from China and a strong Canadian dollar as federal economic policy tilts Westward towards Alberta’s oil fields.

McGuinty’s austerity plan also coincides with Prime Minister Harper’s austerity plan, which will have the impact of taking another 19,000 federal jobs out of the mix over the next three years, most of them in the National Capital Region.

The C4SE report does not attempt to look at the value of public sector investments, such as the impact of a new road or a new hospital on economic development.

Are we headed in the same direction as Britain? You decide.

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