Reining in Teacher Salaries: Freezing the Grid

The Star's Martin Regg Cohn has an interesting article about the McGuinty Liberals and their battle with Ontario's teachers. Probably the most interesting thing in is the difference between freezing the annual pay increase for all teachers versus freezing the grid, the increases newer teachers get as they move each year towards the maximum salary. Surprisingly freezing the annual pay increase for everyone only saves $180 million per year, versus $300 million for the grid.

According to the article only half the teachers are on the grid, the rest are maxed out so the grid freeze means nothing to them and perhaps is a way to split the union. Who gets really shafted is the teacher who has only taught one year and is frozen for years two and three at the same salary.

Of course there's no shortage of people applying for teacher jobs in Ontario, so don't feel too bad for them, considering the teachers are coming off a deal that saw most of them get four straight years of 3% raises, which I'm guessing if you compared to the average Ontarian's salary increases over that same period would look pretty grand.

Ontario Immigration Down, What's Next?

There's a Globe and Mail article about how immigration in Ontario is cratering compared to other provinces. There's various explanations, but I would say the weakness of the Ontario economy the past few years, especially the private sector economy (natives tend to lock up the public sector jobs) has been a big factor in less immigration to Ontario. No jobs isn't particularly attractive.

Less people is especially problematic for Ontario. A lot of the meagre GDP growth in Ontario of late has been population growth, not per capita growth. Take away population growth and there goes some GDP growth and the ability to pay for a ballooning deficit.

Probably the most dangerous thing for Ontario with regards to reduced immigration is reduced demand for housing. Immigration has been propping up Ontario's housing market. If population growth stalls, demand for new housing will crater and existing housing prices will stop rising and perhaps even start to drop. That's the doomsday scenario for the Ontario economy.

When Will the Ontario Provincial Deficit Surpass the Canadian Federal Deficit?

Looks like the federal budget deficit is only $17.3 billion through the first eight months of the 2011-2012 fiscal year. From the article, a guess for the total year's deficit:

"In the recent fall economic update, Finance Minister Jim Flaherty projected Ottawa would be in the red by $32.3 billion. With four months left, the government is on pace to come in with a deficit under $30 billion.

In a commentary, TD economist Sonya Gulati projected the deficit to come in at a range between $27 billion and 28 billion, with the deficit-to-GDP ratio for the year close to 1.7 per cent, a "significant" improvement from the 3.6 per cent figure at the peak of the recession beginning in 2009."

With the Ontario 2011-2012 budget deficit widely guessed as being $16 billion, that's not too far off from the federal one. Ontario is projected to have similar deficits for the next few fiscal years, while the federal one is rapidly shrinking.

That raises the question, when does the federal deficit become lower than the provincial one. I would guess the 2013-2014 fiscal year, although the preceding one will be quite close. Considering federal finance Minister Jim Flaherty doesn't seem afraid to cut, while Premier Dalton McGuinty hasn't really shown much cutting during his term in office, I think the federal deficit being less than the provincial one is inevitable.

Ontario Tories Ahead in Latest Poll

There's a Forum Research poll out saying the Ontario Tories are at 41%, the Liberals at 33% and the NDP at 20%. Not really surprising that a long in the tooth government is losing in a poll (the last election notwithstanding). The problem for the Liberals is that implementing the cost cutting recommendations in the Drummond Report in the upcoming deficit isn't going to help their numbers. Various groups are going to be pissed when either their salaries, jobs or government funding is cut. Those previously predisposed to vote for the Liberals will either not vote or vote for the NDP, leaving Tory leader Tim Hudak advantaged.

Look for the next budget to have some tentative steps at cutting the $16 billion deficit and then Hudak looking for an appropriate issue to bring down the government. Watch Andrea Horwath trying to decided whether to prop up the Liberals (which will be harder to justify if the Liberals are cutting and implementing the Drummond report) or go for her own opportunity to grab as many inner city Liberal seats as possible.

Ontario GDP Up 0.7% in Third Quarter

Ontario's GDP numbers are out for the third quarter of 2011 at the Ministry of Finance's site and they're not bad. Third quarter growth was 0.7%, or a not bad 2.7% on an annualized basis. However that comes on the back of the second quarter results of -0.2% GDP growth or -0.8% on an annualized basis.

Since the provincial fiscal year begins with the second quarter, just a simple calculation shows that growth for the first six months of this fiscal year (second and third quarter 2011) growth was around 0.5% or 1% on annualized basis. That's not going to be good for the provincial deficit, especially considering there's a lot of provincial labour contracts that are rising a lot higher than 3% (i.e. physicians and teachers).

Another issue with that 1% growth over the first six months of the fiscal year is that the Canadian population grows at approximately 1% a year (yeah I need to source this, but I read it yesterday and need to look for it). So using a guess of Ontario population growth of 0.5% over the first six months, that means the GDP growth per capita over that term is pretty feeble making people feel poorer.

Hopefully GDP growth over the last two quarters of the fiscal year will be higher, otherwise consider the widespread estimate of the $16 billion deficit to be on the low side. Also expect Ontario to get a lot more in equalization payments.

Moody's Puts Ontario on Credit Watch

Not a huge surprise, but bond rater Moody's has put Ontario on a credit watch. Ontario's credit rating is still Aa1, but one wonders how long it can stay there. The next provincial budget should be very interesting.

Quebec Deficit on Track for Elimination in 2013

Surly Hamiltonian has been going on about Quebec's better deficit performance than Ontario for a while. This article has more evidence of just how much better Quebec is doing:

"The happier news is that this has enabled Quebec to remain on course toward its ambitious goal of balancing the provincial budget by 2013.

So far in the current fiscal year, which ends March 31, Quebec is on course to reduce its deficit to $3.8 billion, or about 1.1 per cent of the province’s total economic output.

That’s better than the average of 1.8 per cent among all provinces.

It’s far lower than in Ontario, where the estimated deficit remains uncomfortably high at about 2.5 per cent of provincial output and where budget balance isn’t predicted before 2017."

Admittedly elsewhere in the article the Quebec government is doing this by raising taxes significantly. However the Quebec deficit is remarkably close to disappearing, even in challenging economic conditions. Ontario unfortunately is continuing to lard on debt, with not a lot of relief in sight. Even sadder is that the mainstream media in Ontario is not making these comparisons.

Ontario Bad Economic News Train Kept A Rolling

Uh oh. More bad economic news for Ontario. From this Bloomberg article:

"The paychecks of non-farm payroll employees rose 1.1 percent from a year earlier, the least since October 2009"

Well obviously that's not great and the world economy has been honking lately so what can you really expect. What about Ontario's number individually?


"Wages in Ontario, Canada’s most populous province, fell 1.3 percent in September from a year ago, Statistics Canada said today."

Wow, that really, really sucks. No wonder government revenue isn't doing well. Also that means the rest of Canada isn't doing that bad when you factor out Ontario's complete sucking.

What's even worse is what the private sector number must be. Teachers and physicians are in the middle of deals with 3% annual increases in cold hard cash and sure there's a few wage freezes out there for other public sector workers, but most other public servants are still getting small increases, so if you take the public sector workers out of the equation, the wage number for the private sector must be abysmal. Time to start shorting Ontario bonds?

The Drummond Report Will Fix Everything!

Here's a good Adam Radwanski piece in the Globe about the Drummond Report (a review of government spending in Ontario by former TD Bank honcho Don Drummond) asking whether it can live up to the Liberals expectations.

I'll be curious to see what the report says, but ultimately have low expectations. I can't imagine what can be recommended to close the $16 billion (ha!) without service cuts (or five year salary freezes) that make Mike Harris look like an insanely generous man. No doubt Drummond is a smart guy, but he can't wish away the deficit.

Ontario Brings in Less Tax Money

Here's a Canadian Press article saying the government will bring in $778 million less in revenue this year than expected. Interestingly, the province claims the 2011-2012 budget deficit will still be only $16 billion:

"Finance Minister Dwight Duncan’s fall economic update confirms Ontario will post a $16-billion deficit for 2011-12."

I'm pretty skeptical. Especially if growth is weak this quarter and next quarter, the last in the fiscal year due to all the European craziness.

The article also contains this tidbit:

"Duncan also says the government will consider a recommendation to limit overall spending increases to 1 per cent a year until the deficit is eliminated by 2017-18."

I don't really see how that's possible without a multi-year salary freeze for civil servants, teachers and doctors without some crazy cuts. The next two years will be ugly and after the teachers and doctors' current deal runs out, expect some fireworks.

Ontario's GDP Drops 0.3% in Second Quarter 2011

Well the GDP number for the second quarter in Ontario is out (fortunately for Dalton McGuinty the number comes out after the election), and as was predicted by many, including Surly Hamiltonian it is not good at -0.3% (annualized rate -1.3%). That's not going to be good for government revenue or the deficit for the 2011-2012 fiscal year (which starts in the second quarter).

Amusingly the gnomes in the Ontario finance department were crowing earlier this year about possible growth of over 3% in 2011. Looks like that won't happen now with first quarter growth being 0.8% in 2011.

This is going to cause problems for the premier's spending plans after the election. With some public sector salary increases still locked in for this fiscal year (teachers and doctors I'm looking at you), the situation isn't going to be pretty.

Ontario Growth Predicted to be 1.8% in 2012, Uh-Oh!

There's an article in the National Post with some BMO Capital Markets predictions for provincial 2012 GDP growth. Unsurprisingly, the Western provinces lead with Alberta at 2.7%, Saskatchewan at 2.9% (too bad about the Riders this year) and BC at 2.2%. Where's Ontario under the leadership of the mighty Dalton McGuinty? Oh no, it's only 1.8%. Didn't I see a prediction from the Ontario Finance Ministry that growth would be over 3% for this year, the first time since 2000? I better screen cap that before it goes down the memory hole as it is becoming pretty clear growth this year will be weak and in 2012 it will be weak too for Ontario.

What about those contracts for the teachers and doctors that are still cranking up year after year despite weak GDP growth? Probably not good for the 2011-2012 fiscal year deficit, comically now predicted at $16 billion. Probably not good for the 2012-2013 deficit either. Uh-oh.

Ontario's $16 Billion Deficit, Would Raising HST Help?

With the election one day away and all parties not really saying a lot on how to get rid of the estimated $16 billion deficit Ontario (for the current fiscal year), taxpayers don't really have a good idea how big it is. As an exercise, I thought I would look at how high the HST would have to be raised to get an extra $16 billion.

Looking at the GST wiki, there's an estimate that the federal government lost $6 billion in revenue for lowering the GST by 2%, so that's approximately $3 billion per percentage point for the entire country (those were 2008 numbers, but we will work with them). Given that Ontario's percentage of the population is 38.1% (13.2 million out of 34.6 million), we will make another estimate that a percentage of HST is worth around $1.14 billion (some things don't have provincial tax on them, do Ontario residient pay more than the average Canadian for GST?). So to close the $16 billion deficit would require raising the HST by approximately 14%, taking the rate to an astronomical 27% from the current 13%. That's nasty and let's be honest, raising the HST to 27% wouldn't actually result in that much more revenue. The economy would tank, people would buy goods outside Ontario, black markets would take off, etc. Raising the HST to 15% to take back the 2% the feds lowered the GST would help, but wouldn't come close to getting rid of the deficit.

That's how big a problem the Ontario deficit is. Raising taxes to cover it won't be easy at all. Unless people enjoy paying sales tax of 27%.

Ontario's Deficits As a Percentage of GDP Versus Other Provinces

One often hears an explanation for Ontario's recent high deficits is because of the recession. Sure recessions hurt. But other provinces have suffered too, although resource rich provinces haven't suffered as much. How does Ontario compare in terms of deficits with other other provinces? This link has a great plot of provincial deficits as a percentage of GDP for 2009/2010, which covers the tail end of the recession.

One thing one notices is just how bad Ontario is compared to all the other provinces. Quebec which also has a lot of manufacturing and should have been hurt by the recession has a considerably smaller deficit as a percentage of GDP. I would be interested in digging in to why Quebec is better even during the recession. My guess is that they've had lower salary increases for public sector workers over the past few years. I'm guessing they haven't been giving physicians and teachers 3% increases the past few years. Also props to Manitoba. Not all NDP premiers are Bob Rae.

That was for 2009/2010. What about now? Here's a Star link saying the 2011/2012 (at least I think it refers to that) budget deficit will be $16 billion. Here's a Reuters article about the Quebec 2011/2012 deficit being $3.8 billion and the budget being balanced in 2013/2014 (which I'm a bit skeptical of). Adjusting for population and GDP, the Ontario number is still way worse and certainly there's no chance of the budget being balanced in 2013/2014.