Selling Ontario assets does not address genuine economic issues
Fire sale of assets may be way for premier to look good in next election.
by Hugh Mackenzie
Whenever there's an economic downturn, governments' fiscal balances inevitably deteriorate and "what to do about the deficit" starts to crowd its way onto the political agenda.
As hysteria about Ontario's budgetary deficit continues to mount, the economic deficit is already being obscured by the political deficit.
On one side, we have headlines and commentary reminiscent of the coverage of earthquake, wildfire or flood in their depiction of impending calamity.
On the other side, we have the provincial government casting about for a politically viable response. After musing about and then rejecting Dalton Days, the premier has turned his attention to the other old chestnut of asset sales selling off significant public assets to "pay down" the deficit.
There are two problems with this political fix. Asset sales do nothing to address whatever long-term fiscal issues Ontario may have to deal with once we have recovered from the great recession of 2008. And they impose significant long-term costs to the public interest in the province.
| || ||"As hysteria about Ontario's budgetary deficit continues to mount, the economic deficit is already being obscured by the political deficit." |
Let's look at the fiscal issues first. Economically, the fiscal issue is not that we had a deficit in 2008, or that we're going to have one in 2009 or even that we are likely still to have one in 2010 and 2011. When the economy shrinks, revenue drops, expenditures tend to increase and budget balances deteriorate. On top of that, in 2009 and 2010, budget deficits will be bigger because the federal government and the Ontario government along with every other government in the world decided to make them bigger in an effort to stimulate the economy.
The real fiscal issue is whether or not deficits will persist after the economy has recovered. And that will depend in large part on whether or not the economy grows enough to offset the fiscal holes dug by recent federal and provincial tax cuts.
Selling assets doesn't address that issue in any respect. What it might do is make it look as if the fiscal situation is improving in one or two politically important years. So just as Mike Harris had his eye on the 1999 election when he dumped Highway 407 in a fire sale to make it look as if the deficit was continuing on a downward trend, perhaps McGuinty has an October 2011 election on his mind when he starts musing about dumping public assets as a deficit-fighting measure.
The comparison with the sale of the 407 in the late 1990s is apt in another respect. The Harris government was so anxious to get the revenue in the right fiscal year that it made a bad deal, one that gave Ontario less than the asset was worth and included terms that left the province with no ability to influence the highway's operations.
With Highway 407 gone, we have a different set of possible fire sale candidates: perennial favourites, the LCBO and Hydro One; and a new potential candidate, the Ontario Lottery and Gaming Corporation.
In the first place, it is difficult to see how we could get a good deal selling these assets off. The financial collapse may be behind us but the lingering after-effects mean that potential bidders will not be in a position to pay anything like what they might have paid before 2008. More important, basic math tells you that a buyer will expect to earn a return on its money higher than the government's cost of borrowing otherwise they'd just buy the government's bonds and that extra return has to come from somewhere. And one way or another, either directly or through our government, that means it has to come from us.
| || ||"Asset sales as a deficit response don't make sense. They don't belong on the political front-burner that Dalton McGuinty has put them on. They don't belong on the back-burner. They don't belong on the stove." |
But the risk in asset sales goes beyond the money. Each of the potential sale targets has significant public policy implications. Take Hydro One. It doesn't just sell electricity, it also delivers public policy. It ensures that economically vital electrical service is reliably available everywhere in the province including areas where it may not make narrow economic sense to do so. Think we could count on a private owner to carry that on? Just ask Canadians in communities abandoned by Air Canada about that. Or the potential cable TV customers in expensive-to-serve areas who don't have access to the service.
With respect to the LCBO and OLG, we don't just operate these businesses publicly because they make a lot of money. We operate them publicly because we believe that it is in the public interest to be able to manage access to the goods and services they sell. We don't necessarily think, for example, that it would be a good thing if lottery tickets were even more aggressively marketed so as to expand sales. Perhaps better marketing and a proliferation of outlets would make it easier to purchase more alcoholic beverages. But we operate the business of the LCBO publicly so that the public gets to make the decision about whether or not that's a good idea.
And then there's the nagging question of principle. Both the LCBO and OLG have become significant sources of public revenue. Even if we retain a share of the profits, selling either of these assets would amount to contracting out the raising of public revenue. Talk about taxation without representation!
Finally, there's the little matter of the premier's (paid) "advisers" on the issue: Goldman Sachs, a financial giant and major player in public asset sales around the world. Isn't that a bit like a farmer asking Colonel Sanders what to with his flock of egg-laying chickens?
Asset sales as a deficit response don't make sense. They don't belong on the political front-burner that Dalton McGuinty has put them on. They don't belong on the back-burner. They don't belong on the stove.
Hugh Mackenzie is a research associate at the Canadian Centre for Policy Alternatives.
Links and sources
Original Toronto Star story
Posted: December 22, 2009
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