In normal times, tax cuts have certain predictable effects: government revenues go down, for starters, and that can lead to either a deficit or reduced spending. But they also lead to a lower tax burden on residents.
But these are not normal times. According to Peter Weltman, the province’s financial accountability officer — who was asked by NDP leader Andrea Horwath to look at the impact of Premier Doug Ford’s decision to cancel the Liberal-introduced cap-and-trade system — Ontarians are looking at less spending, a larger deficit, and higher taxes.
In his first report to the legislature since taking the job in April, Weltman indicates that larger deficits are projected for two big reasons: First, cap-and-trade revenue was, in part, being used to fund large infrastructure bills that were being accounted for over decades, so cancelling that spending has only a small year-to-year impact, while the revenue loss is immediate. Second, the government hasn’t actually cancelled all the spending that was being funded by cap and trade. (The government hasn’t publicly stated which spending it will maintain, but the FAO was allowed to see cabinet documents on the condition that it would not disclose them publicly.)
Add it all up, and Ontario is looking at $3 billion in additional deficits by 2022 — assuming the government doesn’t make further cuts to spending or find new revenue.
Rod Phillips, minister of environment, conservation and parks, defended the government’s move, saying that, deficit or no, the government is reducing the burden on taxpayers.
“Yes, obviously, when you cut a tax — particularly a tax that’s not effective, as the cap-and-trade program was not — it’s going to reduce government revenues,” Phillips told reporters at Queen’s Park. “We’d rather see that money in families’ pockets, and that’s what we did.”
Minister of Finance Vic Fedeli didn’t dispute the FAO’s numbers but said the government would make “no apologies” for cutting cap and trade, adding that the public will get a better idea of how the Tories plan to balance the budget when Fedeli presents the fall economic statement.
The NDP warned that as the Tories try to bring the province’s books back into balance, they may use higher deficits to justify making more service cuts.
“That’s one of the fears we have,” said NDP energy critic Peter Tabuns. “They’ve reduced their revenue; they now have expenses that need to be covered. And we’ve been saying for a while that we’re worried there will be cuts to health care and education — that seems to be part of their agenda.”
(There was good news for the government in Tuesday’s report, as well: the FAO’s office agreed with the government that only $5 million in compensation will need to be paid to firms that participated in the cap-and-trade system but were left holding deadweight costs by the Tory decision to wind it down.)
But — and this is where things get interesting — Ontarians are still going to pay a carbon price, just not to Ontario. The federal government has said that, starting January 1, anyone not covered by a compliant provincial carbon price (British Columbia or Quebec are, as was Ontario until the Tories scrapped cap and trade) will have to pay $20 per tonne of carbon dioxide emitted. And that price is going to rise to $50 a tonne by 2022, well above what Ontarians would have paid under the Liberal cap-and-trade plan.
Conservative voters can choose to blame the Liberals for this if they like, but this was always in the cards: indeed, Ford’s predecessor as PC leader, Patrick Brown, made joining the federal carbon “backstop” price the key feature of his fiscal plan. The Tories could have kept the burden of a carbon price in Ontario lower simply by doing nothing; they chose to scrap cap and trade with plenty of warning that the federal government would impose its own higher carbon price.
When the federal carbon tax kicks in next year, Ontarians will pay roughly what they were paying under cap and trade: about $260 per household. What happens next will depend a great deal on whether the federal Liberals can rack up two wins: convincing the courts — probably the Supreme Court, at least eventually — that their carbon price is legal and constitutional (multiple provinces, including Ontario, are now on the record arguing that it’s not), and winning the 2019 election (the Conservative Party of Canada has pledged to dismantle the federal carbon backstop and replace it with its own plan, although no replacement plan has yet been made public).
The FAO notes that if the federal government decides to refund carbon revenues directly to taxpayers (it’s reportedly planning to do this, though nothing’s been made official), households in Ontario will get a cheque for $355 next year. The Liberals could even borrow a page from the Conservative book of cynical election ploys and mail the cheques out later in the year, closer to election day.
This could be both a popular move and one that would help preserve a national climate policy, but it would do nothing for the Ontario government. The Tories could, of course, try to make peace with the federal Liberals after the election and then try to persuade Ottawa to start sending that cash to Queen’s Park instead of to taxpayers — but that’s an unlikely outcome for a host of reasons, not least of which is that they literally haven’t managed to meet in the same room this week.
So that leaves Ontario with larger deficits and a higher carbon tax than would otherwise have been the case — and with a Tory government that’s committed to a balanced budget and will need to find new revenue or more cuts to get there.
Correction: An earlier version of this article mispelled Peter Weltman's surname.
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