Ontario’s Budgetary Dilemmas: Exit Strategies and Neoliberalism

Economy  •  October 26, 2009  •  Greg Albo and Bryan Evans

The financial panic that consumed U.S. mortgage markets two years ago quickly became a global economic crisis of alarming breadth and depth. No country or sector has been able to insulate itself from the turmoil. For the first time since the Great Depression, the world market as a whole is expected to register a contraction. As the economic decline stabilizes in fall 2009, a great deal of talk of ‘green shoots’ of economic recovery is pre-occupying the media, with the chatter particularly coming from firms in the financial sector. These assessments need to be looked at very cautiously. Capitalist economies periodically enter into crises of overaccumulation (most visible in the last two years in the housing, auto and finance sectors): firm investments in capital assets can no longer be valorized at existing profit rates. The economic imbalances and financial excesses that characterize the unevenness of capitalist growth become more acute and difficult to sustain. A chaotic period of forcible adjustment typically ensues.

It needs noting that although the crisis has brought a major shock to economic growth, the pattern of uneven development of the neoliberal period has also been remarkably resilient. Several central imbalances remain in place: between zones of structural trade surpluses and deficits; between growing productive capacity and the distribution of purchasing power; between fiscal demands on states and taxation levels; between the levels of indebtedness of working class people and income flows to meet interest payments (from employment but also from collapsing house prices and pension values); and between the volume of credit claims in financial markets and the amount of value being created in the productive economy.

Several possibilities are posed. If, for example, credit stops being provided to bridge the imbalances, their rapid re-alignment reinforces the economic crisis. This raises panic amongst capitalists, much as was witnessed across 2008, about a potential catastrophic turn in the crisis as a radical destruction of capital values to rebalance these relations looms. Alternatively, the imbalances might prove quite intractable: economic actors remain committed to their current strategies and invested capital (such as East Asian and German export strategies or capitalist opposition to taxation). As long as credit is still being provided, the imbalances persist, the capital is turned over and the economy stabilizes. But the blockages to sustained accumulation also remain in place. A period of prolonged stagnation then unfolds as past investments and debt obligations cannot be shed and a basis for new accumulation established.

Another course is also possible. The power of the capitalist state might be mobilized in a way that the debt generated by the imbalances is off-loaded into the state sector. The debt is effectively ‘socialized.’ Financial authorities forge new institutional mechanisms to oversee financial markets and to re-establish demand conditions. Workplace organization and class relations are restructured to improve the conditions for extracting value from workers; and industrial rationalization leads to a devalorisation of the oldest vintages of the capital stock. Accumulation, in turn, picks up, with the imbalances being reproduced in new forms. If the underlying sources of the imbalances remain, credit has to start flowing again at a rapid clip, and a new bout of financial speculation is all but unavoidable. Such an outcome is not merely hypothetical. In fact, previous financial crises that have been endemic to neoliberalism – the 1980s savings and loans crisis, the collapse of the Japanese asset bubble, and the 1990s dot.com meltdown – have met just such a reaction.

These alternate responses to the crisis should be kept in mind in assessing the emergency financial policies being implemented (the ad hoc emergency injections of liquidity by the financial authorities over the last 18 months have been particularly designed to prevent the first but have also served to blow up new asset bubbles in equity markets and housing sectors in some cases), and the way subnational states like Ontario are shifting their budgetary policies and the way class struggles are evolving. The ‘exit strategies’ beginning to be mooted by states, such as the Ontario government’s fall economic update,[1] need to be watched very closely by unions and social movements for key political struggles emerging on the horizon.

The ‘New’ Economic Policies

The speed with which the economic crisis spread left governments scrambling to find policies to stop the spiral. The onus initially fell on monetary policies. Central bank interest rates have been lowered to almost zero and locked in for the foreseeable future (the Bank of Canada saying until 2010). They have also engaged in ‘quantitative easing,’ that is, increasing the money supply by purchasing government bonds. As well, numerous measures have been undertaken to support directly the balance sheets of banks, sometimes to the point of ‘quasi-nationalization.’ These policies ‘socialize’ financial sector risk, shift huge debt loads into the public sector, and encourage financial sector consolidation.

Central bank policies have restored, to date, a degree of financial stability as the some estimated $8-trillion globally given over to various loans, subsidies, and debt purchases, backstop financial solvency. Indeed, by mid-2009, many major banks are again profitable from the government aid. Financial markets, however, remain relatively illiquid, apart from speculative funds pouring into equity markets due to the low returns on virtually all other asset classes. Financial institutions still need to ‘de-leverage’ their balance-sheets; hence lending is cautious. And households are trying to increase their savings and cut back spending in conditions of weak employment.

The neoliberal critique of Keynesian monetary policy was that it generated inflation by accommodating ‘excessive’ wage demands. Similarly, if central banks purchased government securities, it funded ‘excessive’ public spending that would, in turn, absorb savings and crowd-out private investment. Neoliberalism thus pivoted around ‘monetarist’ policies of independent central banks, a refusal to fund government debt, inflation-targeting and liberalized financial markets. The new monetary policies breach many of these operational norms. But they do so on an emergency basis (as monetarist doctrine suggests they should); to develop a new institutional framework for the same financial activities; to re-establish private banks as the central allocator of economic surpluses; and to re-apply the brakes on wage-setting even more stringently. The power of financial capital has not been overturned from its position of dominance within the power bloc. It hardly needs stating that neither Ben Bernanke of the U.S. Federal Reserve nor Mark Carney of the Bank of Canada have burned their neoliberal membership cards.

With the severity of the crisis and monetary policy focused on ensuring liquidity and financial solvency, fiscal policy has had to play a large role in responding to the economic crisis in stabilizing effective demand and offsetting the collapse in private sector investment. The major international financial agencies have coordinated government commitments to move into budgetary deficit of 2-4 percent of GDP across the board (with pressures on China and the U.S. to go the furthest, and the Japanese already loaded up on debt). After years of neoliberal calls for austerity, tax cuts, balanced budgets and privatization, the reversal of budgetary policy seems quite remarkable (none more telling than the flip-flopping of Finance Minister Jim Flaherty on the Conservative government’s budget projections and plans over the last year).

This fiscal reversal has been heralded, by an odd mixture of right-wing pundits and social democratic economists, as another sign of a ‘return to Keynes’ and a new economic agenda emerging. This claim needs – like that of a break in monetary policy – closer scrutiny.

Ontario’s Budgetary Policy

As Canada’s largest province and the centre of Canada’s financial and industrial sectors, Ontario’s budgetary policy is particularly revealing. In Canada’s decentralized federation, moreover, the bulk of welfare state expenditures, and the weight of industrial policy, lies in the provinces jurisdictions. Ontario is also, after the NDP government turn and the Harris Common Sense Revolution of the 1990s, Canada’s pre-eminent neoliberal province. The Ontario state radically cut income supports, shifted away from taxes on capital, marketized public expenditures and shifted toward market-driven industrial policies. The current Liberal government of Dalton McGuinty has eased expenditure restraint, but left the core of the neoliberal policies intact.

Tracking the sharp downturn in the world economy, Ontario real GDP growth has fallen from 2.3% in 2007 to –0.5% for 2008 to a projected decline of between 2-3% for 2009. According to recent estimates, growth for 2010 is projected to push back up to about 2%, an optimistic projection, based on a strong surge in U.S. growth and imports (which is even more dubious with the surge in the value of the Canadian dollar).[2] As a result, official unemployment is now pushing toward 9% (of course, understating the huge numbers of involuntary part-time workers and other labour reserves). Recent immigrants and workers of colour have been faring far worse in terms of both wages and employment. With productivity and the working age population each growing at about 1 percent a year, economic growth in Ontario must be greater than 2 percent just to stay even in the labour market.

These developments have blown a huge hole in provincial finances. The March Budget introduced by Finance Minister Dwight Duncan moved from a surplus to a deficit of $6.4-billion for 2008-09 to a projection of $14-billion for 2009-10 in the spring budget and now a projection of a deficit of $24.7-billion in the fall economic statement. Deficits are projected to continue for the next seven years.

Besides the move into deficit, the claims of a departure from neoliberalism depend upon a few incredibly modestly redistributive measures in the 2009 Budget. One is the decision to speed up by two years the phase-in of the Ontario Child Benefit (OCB) with a near doubling to $1,100 per child beginning in July 2009. This measure was and remains a quite poor substitute for the lack of universal childcare or the poverty levels of single mothers.

Similarly, the additional $245-million added to the provincial budget to build more affordable housing, repair existing social housing stock, as well as additional support to provincial rent banks, could be tallied on the positive side of the ledger. But the money allocated to affordable housing remains paltry, and the lack of national and provincial housing remains scandalous after more than two decades of reports pointing this out.

But this modest boost to marginalized workers’ incomes is more than offset by Ontario’s tax cuts, estimated at $1.2-billion in personal income tax cuts and $2.3-billion in corporate tax cuts. Such cuts are thoroughly neoliberal: untargeted, favouring high income earners, weaken the long-term capacity to deliver public services and rebalancing fiscal capacity.[3] Similarly, the move to harmonize Ontario’s retail sales tax with the GST, forming a more uniform value-added tax, increases the tax burden on low-income workers, but provides only locks in modest income tax credits to offset the impact on poorer workers. This continues the neoliberal logic of the competitive lowering of taxation between jurisdictions.

The continuity with neoliberal distributional norms in Ontario’s budgetary plans frames the budget. On the one side, there is a complete failure to do anything substantive with respect to social assistance rates. Given the mounting job losses, the 2 per cent increase in the rates leaves little to celebrate. The Ontario Federation of Labour quite rightly argued that rates were already “dangerously low.”[4] The McGuinty government has done next to nothing to reverse the Harris government benefit cuts of more than 21 per cent in 1995.

For employed workers in danger of entering the ranks of the unemployed, there is little social protection afforded by Ontario’s budgetary plans. With less than one-third of laid-off workers in Ontario eligible for Employment Insurance (and about one-fifth in Toronto), and workers moving onto social assistance expected to deplete all savings, any number of policy adjustments could have improved this situation. Similarly, budgetary plans do almost nothing for re-training of laid-off workers; a ‘wage protection fund’ to offset bankrupt companies failing to pay workers owed wages and severance still has not been re-established.

Industrial Strategy

Ontario’s Budget’s have often introduced the framework for the province’s industrial policies. Given the immediate crisis in Ontario’s resource, manufacturing and social sectors, and the longer term relative economic decline of Ontario, some re-thinking of market-led policies might have been expected. Ontario’s budgetary strategy reveals, however, just how thoroughly neoliberalism has gutted state planning capacities.

Ontario infrastructure spending, for example, is to increase substantially, in line with Federal plans, growing from $7.6-billion in 2008-09 to $14.8-billion by 2010-11. But this money often has to be further leveraged at the municipal level where offloading and the crisis has produced a fiscal crisis (and for which McGuinty has refused to rollback the Harris reforms). In effect, other parts of the municipal budget related to welfare or service provision have to be squeezed to come up with the funds for infrastructure spending (thus contributing to the strikes in Toronto and Windsor). Moreover, with virtually no planning capacities at either the provincial or municipal levels, the main possible usage of the moneys is simply to address the huge backlog of upgrading existing road and infrastructural systems without rethinking transit strategies, water use planning, energy usage and local sourcing. Indeed, any linkage of the infrastructure spending to building ecologically-responsible production capacities is purely incidental.

Similarly, the huge subsidies and loan bailouts provided to the auto sector by the Ontario government have not come with any particular production guarantees,[5] community controls over investments, increased planning capacities in the Ontario state over transport, and so forth. Plant shutdowns and restructuring are occurring across all sectors, but closure legislation, job and community planning boards, and any hint of a coherent industrial policy are not to be found from the McGuinty government. (All this is compounded by the even greater policy and administrative incoherence of the Build Canada infrastructure spending, with its emphasis on political expediency, P3s, and short-term projects.)

The failings of Ontario infrastructure and industrial policy planning stem from the lack of any strategy to address the province’s economic development. Since NAFTA and the collapse of the NDP effort to develop a high value-added strategy in the mid-90s, a complete reliance on market-driven growth has formed Ontario’s policy approach. This has a few main components: auto sector exports to the United States; the financial sector of Toronto; strong commodity prices for Northern Ontario resources; and demographic growth from net migration flows. Ontario’s economic plans in the Budget makes small gestures toward support for green conversion and the new media sector, but these are largely ad hoc subsidy and incentive programmes with no longer planning behind them. The massive underfunding of universities and alternative energy development are to continue. From Ontario’s budgetary plans, it is clear that the main approach will be utterly neoliberal: broad based tax cuts to make Ontario a relative low-tax zone for capital; and a series of specific tax, cultural and subsidy incentives to favour the so-called ‘creative classes.’[6]

Exit Strategy

A great deal of conjuring is required to conclude that Ontario’s Budgetary policy is a planned – or even inadvertent – break from neoliberalism. The Budget’s emergency measures to boost demand are a policy response to an economic crisis internal to neoliberalism. The clamour for an ‘exit strategy’ to return to neoliberal budgetary norms is building. Indeed, the government’s long-term budgetary policy, both in the March budget and the fall statement, lays such a strategy out.

Looking ahead to the next seven years, Ontario budgetary policies signal a period of protracted public sector austerity. The plan is to restore a balanced budget by 2015-16. This is to be achieved by underfunding public services. Five ‘elements’ to the plan are as follows:

1. the annual growth rate in public expenditures will be constrained to less than the average annual growth rate in total revenue;
2. a $1-billion ‘efficiency target’ in 2011-2012;
3. maintaining a ‘prudent’ [meaning falling] debt-to-GDP ratio;
4. a fiscal plan going forward that will be guided by cautious assumptions; and
5. a reduction in the size of the Ontario public service by 5% over the next three years.

Based on various assumptions respecting growth in GDP and government revenues, growth in public expenditures is to be constrained to 2.3 per cent. Given expectations of inflation, nominal GDP growth, demographic growth, Ontario’s public services will again be moving toward a significant period of retrenchment.

The Fall Economic Statement and the Deficit Hysteria

The fall 2009 economic and fiscal update presented by Finance Minister Duncan on October 22 provides further evidence that Ontario is entering another period of fiscal austerity. Duncan liberally peppered his speech to the Legislature with references to the global context of the economic crisis. A crisis, he noted, in which Ontario is but one jurisdiction among many, who share the same problems as well as solutions. This point is not without merit, but Duncan leaned heavily on this crutch as a means to evade a series of critical points about the budget.

For 2008-09, the projected deficit of $24.7-billion is about 4.3% of Ontario’s GDP. Proportionately, this is comparable to the $11-billion deficit incurred by the NDP government in 1993. But there the comparison should stop. This deficit, and the projected deficits going toward 2012, is likely somewhat exaggerated. First, the Ministry of Finance acknowledges that its forecasting assumptions are “more conservative than the average private sector forecasts.” The fall economic update projects Ontario’s economic growth will be negative 3.5% in 2009; 2.0% for 2010; 3.0% for 2011; and 3.3% in 2012, all weaker than the average of private sector forecasts for the years 2010 and 2011 and 0.2% lower in 2012. In other words, economic growth may well be modestly better than projected and thus government revenues better. Also, the 2008-09 deficit of $24.7-billion is inflated by $4-billion as a result of the one-off $4-billion auto bailout that Ontario participated in. In relative terms, Canada’s and Ontario’s government deficit levels, and especially debt levels, are quite modest as a proportion of GDP, and near the bottom amongst the advanced capitalist countries.

While the economic crisis has meant weaker revenues from takes in the order of $5.8-billion, the other side of this story is tax revenues that have been lost as a consequence of the government’s own fiscal policy. Duncan pointed to the 48.1% decline in corporate tax revenues as emblematic of the depth of the crisis and the consequences for public finance. Duncan left out was the tax cuts introduced in his last budget, including the elimination altogether of certain capital taxes.

The proposed cuts to corporate and other business-related taxes total $4.5-billion to 2012. This includes a radical cut in the Ontario portion of the Corporate Income Tax, set to fall from 14% in 2009 to 10% in 2012. In comparative terms, this means that the Ontario corporate income tax will be among the lowest in the OECD and would be 15 percentage points below the corporate tax rates of the U.S. Great Lakes states. This shocking undermining of public revenues will accentuate the already gross social inequalities that exist in Ontario. It is sheer demagoguery on the part of the McGuinty government to make any claims that it has a poverty reduction strategy.

While the Conservative government of the Common Sense Revolution of the 1990s was defeated electorally in October 2003, the fiscal policy framework they had constructed was left largely intact. Duncan in fact alluded to this in the fall statement when he boasted that the production and delivery of Ontario’s public services in 2009 is the second cheapest in Canada (in other words, per capita public expenditures). The Liberals consolidated – rather than roll-backed – the fiscal framework of the Common Sense revolution.

In crunching the numbers of the McGuinty government’s first budgets Hugh Mackenzie concluded that if the government increased tax revenue to the average of all the other provinces as a percentage of GDP, the result then would have been $15-20-billion in additional revenue per year.[7] Such tax rates might have even eliminated the current deficit, and addressed the structural imbalances in public funding. Indeed, the Liberals’ tax cuts being introduced will compound the structural underfunding of Ontario’s public sector exit strategy

The Ontario government fall economic statement skirted putting more flesh on the exit strategy put forward in the spring budget. But they have been regularly suggesting systematic cuts to public services as both the quality and scope of programs are eliminated and rationed.[8] The idea is a structural slowdown in spending, apart from health (although underfunding of hospitals is likely to continue), below the rate of economic growth (and thus a sharp fall in per capita expenditures in real terms when inflation and demographic growth are considered). Public sector workers might well face a protracted period of wage restraint and intensification of work, and an attempt to legislate days off without pay.[9] Parallel to the two-tiered contracts of the private sector (given an enormous boost by the concessions in the auto sector), younger, newly hired public sector workers can expect to find that their employment terms and benefits will be inferior to those of an older generation. And the neoliberal marketization of the public sector can be expected to again pick-up as user fees increase, tuition goes up, ‘alternative service delivery’ (meaning privatization) is expanded and the commercialization of public spaces extended.

Hard Lessons

A number of points can now be drawn together about this stage in the economic crisis in Ontario and Canada more generally.

First, it is far too early to proclaim that neoliberalism has come to an end. As an ideology of ‘free markets,’ the financial crisis has thoroughly discredited it; and many of its administrative principles have broken down. But finance capital has continued to assert its power through the crisis, and the power structures and distributional norms that emerged with neoliberalism are proving to be remarkably resilient. The power of the capitalist state is being used to contain the crisis, kick-start accumulation, and underwrite a credit expansion and the economic imbalances in a new form. The political and policy effort – by conservative, liberal and social democratic governments – is concentrated on reconstructing the neoliberal political project and its institutional foundations. In Ontario, after a brief pause of ‘Keynesian deficits,’ the neoliberal austerity cycle begun in the early 1990s by the right turn of the NDP government of Bob Rae is, if the government’s scenario comes to pass, restored.

Second, the strategy of the Bank of Canada at the national level (and the wider Harper government policy), and the Ontario state as representative of evolving provincial policies, are indicative of this strategy. Indeed, Canada’s version of neoliberalism – radical attacks on income assistance and unemployment insurance, fiscal offloading to balance budgets, marketization of public services (while often maintaining state ownership), state guarantees of financial sector risk-taking and guided liberalization of a monopolistic financial sector – is being touted as the model to adopt more widely.

Third, the ‘progressive’ attempt to define an alternative to neoliberalism in terms of using new governance models to leverage a high-value-added industry alternative – with ‘education-rich,’ ‘green-intensive,’ or ‘local advantage’ addendums – have proven, time and again, complete policy mirages. The most intellectually ludicrous of these strategies is the ‘creative economy’ and ‘creative cities’ strategies gaining support in the Ontario and Toronto governments. As even the most minimal alternative, they are being marginalized by the effort to re-establish finance sector led development. Public sector workers, artists and university students face cutbacks while the banks, real estate speculators and gaming companies running sweatshop software shops are defined as Ontario’s ‘creative class’ hub. These strategies are, in both ideology and practice, variations of neoliberal governance.

Finally, it is clear that the anti-Harris political coalition – a loose amalgam of unions, NGOs, and many social movements that has become central to Toronto and Ontario politics (and even the jockeying around opposition to the Harrisite-dominated Conservative government in Ottawa) – has reached its political limits. The Liberal McGuinty government has enjoyed a warm relationship with this coalition since the election of 2003. In a certain way, the ‘One Ontario,’ ‘creative economy‘ rhetoric of the Liberals stood in sharp – and welcome – contrast to the overt market-worshiping and ‘class war from above’ politics of the Harris Common Sense Revolutionaries.

But some of these social forces – notably the CAW, the teachers’ unions, a range of equity-seeking groups and much of the ecology movement – have adopted a semi-formal social concertation with the government as their political practice. Indeed, the Ontario labour movement as a whole has returned to ‘plain and simple’ trade unionism. For the ruling classes and the government, this has meant ‘brokering’ some social concerns – such as around raising minimum wages and increasing school funding.

This social compromise for the Ontario state has come with the gain of these forces collapsing into the ruling class consensus in how the government should respond, for example, to industrial competitiveness and the financial crisis. This is evidenced in the concessions wrung out of workers during the auto negotiations without any sustained political mobilization and with the union sounding little different from the corporations; in the failure of the CUPE strikes in Toronto, Windsor and York University to develop wider sectoral and community strategies; and in the endorsation by the main ecology groups in Ontario of the hopelessly flawed and thoroughly financial capitalist led ‘cap and trade’ system for addressing carbon emissions.

The response of the Ontario government to the economic crisis suggests that further attempts at social concertation by the coalition will yield next to nothing. Increasingly, it may well only mean negotiating the degree of social and wage austerity, contractual rollbacks and the political terms for the reconstruction of neoliberalism.

This point is noted in both the CUPE and OPSEU responses to the Duncan fall statement, particularly in their opposition to ‘Dalton Days,’ the floating of legislated unpaid days off for public sector employees, and the opposition to the agenda of further privatization and public sector cuts.[10] But this union opposition still needs to come to grips with the fact that social concertation with the Liberal government has yielded labour peace but no reversal of the Harris neoliberal revolution. This has left Ontario with the most poorly managed and most under-funded public sector in Canada.

As it stands, the balance of organized political forces in Ontario is quite favourable to the reconstruction of neoliberalism. The government will be opposed hard from the right by Opposition Conservative Leader Tim Hudak. He will have the backing in this agenda of the capitalist media and financial capital. The latter is already canvassing from a new “era of fiscal restraint,” privatization, structural reforms and shifting tax burdens away from capital. The social and financial wreckage of the last two decades of these same policies has not been enough for either the Tories or Bay Street.[11]

The NDP, for its part, will remain hampered by its own heritage of the ‘social contract’ and austerity during the Rae government years in Ontario, and by the fact that the current NDP governments in both Nova Scotia and Manitoba have ‘exit strategies’ of their own quite consistent with that of the McGuinty government. The Ontario NDP has not signaled any departures from any of these policies and, like the NDP in B.C. and the Federal NDP under Jack Layton, has helped stoke anti-tax politics with a range of opportunistic policy stances. Indeed, in its current anti-harmonized sales tax campaign, the NDP is indistinguishable from the anti-tax crusade of the Tories (in the process ignoring the pre-eminent lesson from European social democracy on the linkage between turnover taxes and welfare state funding).[12]

Neoliberalism’s end will only come from renewed forms of political struggle. The political forces and effort that pushed together the anti-Harris coalition at the beginning of this decade are now spent. Many of these forces are now politically bankrupt. It is no great insight to observe that new political alliances in Ontario will have to be constructed. The November 5th campus walkout in Ontario called for by the Canadian Federation of Students and anti-poverty groups is one effort. The November Convention of the Ontario Federation of Labour is another opportunity for the union movement to assess its own disarray and, after almost a decade of sleepwalking into political oblivion, to begin to confront the need to rebuild an independent political capacity for Ontario workers. There is no other way forward. •

Notes