THU MAY.18,1995 PG: A17
MIDDLE KINGDOM How they'll deal with the deficit
BY THE NUMBERS / Ontario politicians certainly are willing to describe how they would balance the budget. Here's what their figures add up to. IN the vast shadow of Ontario's deficit, the budget plans of the three main parties have naturally assumed a central role in the current election campaign. It's tempting to fall into a kind of naive cynicism, assuming that there is nothing to tell the three plans apart, and no credibility in any of them. This is an especially attractive position when all three parties make the vow that they can balance the budget within the life of the next government; two of them promise to cut taxes as well. A blanket verdict of "can't be done" is the lazy way out.

This is unfair. For all their fond hopes and evasions, the three plans do represent reasonably serious attempts to sketch out the parties' overall fiscal program. They are different, and it is possible to judge the credibility of each - though different readers will bring different criteria to bear. Large as it is, moreover, Ontario's budget deficit still amounts to just 3 per cent of provincial GDP - about half as large as the federal deficit, proportionately. So it can be done.

Start with the deficit in 1994-95: roughly $10-billion, the difference between spending of $56-billion and revenues of $46-billion. Now factor in two important budget items over which the government of Ontario has very little control. Over the next four years, spending on debt interest is likely to rise by about $2.7- billion (from $8.3-billion to $11-billion). Meanwhile, revenue from federal transfers is likely to fall by about $2.3- billion (from $7.5-billion to $5.2-billion). With no other changes, there is a $15-billion shortfall to make up.

That leaves two discretionary items to work with: about $48-billion in program spending, and $34-billion in tax revenues. (Another $5-billion is raised outside the tax system: lotteries, licence fees and the like.) The wild card is economic growth. If the whole $15-billion were cut out of spending, revenues wouldn't have to grow at all. The less you cut spending, or the more you cut taxes, the faster the revenue base has to grow to compensate - or the longer it takes to balance the budget.

Suppose spending were held constant. To wipe out the deficit then, tax revenues must grow from about $34-billion to $49-billion: a 44-per-cent increase in four years, or about 10 per cent each year. A longer deficit- reduction track, say six years, reduces the required growth rate to 6 per cent, but increases the chances of a recession intervening.

That's the basic arithmetic. What then are we to make of the parties' economic plans? In simple terms, all three are pledging to cut spending by between $1- billion and $3-billion more than they would cut taxes. The NDP would leave taxes unchanged, and cut program spending by $2.9-billion over three years. The Liberals would cut taxes and spending by about $2-billion and $3.3-billion, respectively. For the Conservatives, the cuts would be $4-billion and $6-billion. That surplus, of spending cuts over tax cuts, reduces the amount of revenues that must be raised from economic growth, from $15-billion to between $12-billion and $14-billion.

Yet while the NDP and Liberal plans show the deficit on a track for zero in four years (by 1998-99, counting the current fiscal year, 1995-96, as year 1) the Tories would take six.

Why the discrepancy? Look at the assumptions behind each party's projections. The Liberals and the NDP forecast real growth in the economy over the next four years averaging 3.8 per cent, or about 5.9 per cent including inflation. That's about 50 per cent faster than the Tories' projected average of 2.5 per cent real growth, 4.6 per cent with inflation. And while the Liberal and NDP plans never project real growth of less than 3 per cent in any year, the Tories build in just 1.6 per cent real growth in 1996-97.

All three plans count on revenues growing faster than the economy. The NDP's $3-billion net impact on the deficit means revenues must grow to $46-billion, or about 7.9 per cent a year. The Tories' $2-billion net impact suggests they are counting on revenue growth of 8.4 per cent. But then the Tories are promising to balance the budget not in four, but in six years. To increase revenues before tax cuts to $47-billion in six years implies an average growth rate of only 5.5 per cent a year.

The Liberals promise to cut taxes, where the NDP would not. At the same time, the Liberals actually promise to spend slightly more than the NDP. Yet their economic assumptions are broadly similar, as are their deficit- reduction schedules. How do they do it? The difference is covered by the Liberals' projections for debt-service costs. While both the Liberals and the Tories use roughly the same average interest-rate forecast of 8.5 per cent, the Liberals' projected debt-service costs are mysteriously $2- billion less than the Tories'.

Had the Liberals and NDP used the Tories' assumptions, they too would take about six years to balance the budget. It's not the tax cut that slows the Tories down, since they would cut spending even more. It's the conservatism of their assumptions.

Of course, there's room for questioning all three parties' spending and taxation plans. The NDP's are both the simplest and the murkiest. The party has not promised to do anything: no tax cuts, and no specific spending cuts - these are to be identified only after "consultations" with the public, and after the election. Moreover, it has pushed so many items off-budget that the province's auditor general refused last year to sign the books. The government's budget plan, released last month in lieu of a budget, includes both its own version of the numbers and the "public accounts" version, which is what is used here.

The Liberals advertise a 5 per cent tax cut, to be phased in over five years. However, only 3 percentage points of that is identified in specific tax cuts. The remainder is consigned to a "tax contingency" fund, to be implemented in later years. Likewise, of the party's promised $3.3-billion net reduction in program spending (from 1994-95 levels), most is scheduled for the later years of its mandate. Moreover, about a third, or $1.2- billion, is achieved through "public- private partnerships," private construction of public works. It is debatable whether these should really be taken off the public books.

The most eye-popping feature of the Tory program is the promise of a 30-per- cent tax cut. In fact, the Tory tax cut will not reduce either taxes or provincial tax revenue by anything like that amount. The tax cut applies only to personal- income taxes, first of all, which account for just over 30 per cent of provincial revenues, or about $15-billion. So the tax cut, if implemented today, would mean a loss of revenues in the $4- billion to $5-billion range, or about 10 per cent overall.

The 30-per-cent income tax cut, moreover, is a percentage of a percentage of a percentage, since provincial taxes are collected as a share of federal tax.In reality, the Tory tax cut would reduce the top combined federal and provincial marginal rate of about 7.5 percentage points.

At that, the Tories would add a new tax on upper-income earners, called the "fair share" tax, to replace the revenue from a partial lifting of the employer health tax. The tax would start at 0.2 per cent of income at $50,000, rising to 2 per cent of income at $150,000. But that's as a per cent of all income, not just the last dollar. Indeed, the fair-share tax, as structured, would be more than just steeply progressive: As each income bracket was crossed, a taxpayer could actually wind up poorer than before.

The Tory pledge to cut "non-priority" spending by 20 per cent is both more and less than meets the eye. Since health care, law enforcement and "classroom" funding for education are declared off limits, total spending would actually fall by 12 per cent, or $6-billion, over three years. But this is in current dollars, without accounting for inflation or population growth. So the cuts in real per capita terms are much deeper, especially since the Tories also pledge to freeze total spending for another three years after that.

At a forecast rate of inflation of 2 per cent, with population growth of about 1.6 per cent per year, total spending on each citizen after inflation under the Tory plan would decline by 21 per cent over three years, 30 per cent over six. This is on top of the 7-per-cent reduction in real per capita spending of the last three years.

On the other hand, 1991-92 was the all-time peak year: Real per capita spending had been rapidly increasing for many years before that. A better measure may be to say that the Tories' three-year plan of spending cuts would roll total spending back to 1984-85 levels in real per capita terms - which, coincidentally, was the party's last full year in power. CORRECTION  The net effect of the Ontario Conservative Party's proposed 30- per-cent cut in provincial personal income taxes and proposed new fair-share levy on those earning more than $50,000 would be to reduce taxes for all taxpayers. An article yesterday may have left an incorrect impression. (Page A2, Friday, May 19, 1995)