April Lindgren
CanWest News Service
October 31, 2003

Toronto: Faced with a $5.6-billion deficit left by the previous Tory government, Dalton McGuinty yesterday abandoned his election promise to maintain an electricity price freeze, hiked tobacco taxes and reiterated his pledge to cancel several Tory tax cuts.

"We’re going to do what needs to be done," the new Ontario Premier said a day after the release of an independent report that shows Ontario headed for a massive deficit this year rather than the balanced books promised in the Conservatives’ spring budget.

"We’ll bring responsible management to the government’s finances. We will act quickly and decisively," the Premier told the Economic Club of Toronto.

In a move applauded by the private sector and energy analysts, Mr. McGuinty said Dwight Duncan, the Energy Minister, has 30 days to recommend a higher, fixed price for electricity to replace the 4.3 cents-per-kilowatt-hour rate instituted last year by the Tories.

Although the Liberals voted in the legislature to support the freeze and in the recent election campaign matched the Tory pledge to keep it in place until 2006, Mr. McGuinty insisted yesterday the subsidy is unaffordable.

"Since the Tory price cap was put in place a year ago, it has cost all of us more than $700-million – that’s almost $2-million every day," he said. "Now, it is one thing to take this sort of approach when the province is in surplus and it is quite another to do that when we find ourselves bleeding red ink and compromising our ability to adequately support our schools and our system of health care.

"I want a price regime that better reflects the cost of electricity. . . . This may not be popular – it may not be in our immediate, self-serving political interest," Mr. McGuinty said. "But we firmly believe it is in the public interest."

Neither the Premier nor Mr. Duncan would comment on what the new price will be. Mr. McGuinty said future electricity prices will be determined by an independent body rather than politicians.

"The people of Ontario are intelligent, rational people who understand that we have to have a realistic price regime and they will support us," the Minister said.

Mr. McGuinty, who told reporters "the world changed" with the news that Ontario’s finances are a mess, made it clear during his speech that addressing what he called the "Tory deficit" is his priority for the moment. Costly election pledges to reduce class sizes for young children, hire 8,000 nurses and freeze university tuition for two years were not mentioned.

Instead, Mr. McGuinty, who during the recent election campaign warned voters of a multi-billion-dollar deficit, announced "immediate restraints on discretionary spending" and the continuation of a hiring freeze on public servants put in place by the Tories.

He also said the government will offset part of the 2003-04 deficit by fulfilling its campaign promises to hike tobacco taxes to the national average and cancel certain Tory tax cuts.

Senior Liberals said they do not yet know whether a $2-per-carton increase in the tobacco levy will be introduced in the economic statement expected later this fall or in a budget next spring.

If it is implemented before Christmas, the tax hike could generate $50-million in revenue in what remains of this fiscal year. Over the course of a full year, it would add $140-million to revenues.

The Liberals have promised to raise the tobacco tax by $10 per carton over time to generate an additional $700-million in annual revenue.

Mr. McGuinty also vowed to fulfill other money-saving election promises when the new legislature gets to work, likely on Nov. 20. In particular, he said he will move quickly to:

Roll back corporate tax cuts that have already been partially implemented by the Tories. Cancel personal income-tax cuts scheduled to go into effect on Jan. 1. Cancel the seniors’ property tax credit legislation passed by the Tories just before the provincial election. Cancel the tax credit for parents who send their children to private school, another measure that has been partially implemented. Eliminate partisan advertising by government ministries.

These and other measures, according to Liberal sources, are expected to save the government about $850-million in the months remaining in this fiscal year, far short of what is required to balance the 2003-2004 budget. Next year, the initiatives are forecast to bolster the provincial treasury by $2.8-billion.

Mr. McGuinty said he will not raise taxes to solve the province’s financial dilemma: "We’re going to hold the line on taxes," he told the business crowd. "Ontario families and businesses didn’t create this mess – the Conservative government did."

Speaking to reporters later, the Premier insisted this year’s deficit will be a one-year wonder.

"With respect to next year’s budget, I am absolutely determined to balance that budget," he said.

Tory MPP John Baird, the former Tory energy minister, accused the Liberals of not living up to their word.

"It took Mike Harris four years to earn the reputation as a man who kept his promises, it’s taken these guys four days to earn a reputation for breaking their promises," he said, referring to Mr. McGuinty’s decision to hike power prices. "Is there any promise they won’t break?"

Others gave the Liberals better reviews.

John Williamson, Ontario director of the Canadian Taxpayers’ Federation, lauded the Grits for "coming out of the gate with a real bang.

"I think the word of the day is responsibility — these guys are trying to fix the public finances as quickly as possible and they are doing it in a way that pushes off spending, controls costs and deals with the deficit. This is a Premier who has made priority number one deficit reduction and that’s good news."

Don Drummond, chief economist for the TD Bank Financial Group, said he doubts Mr. McGuinty can balance next year’s budget. "That’s not a likelihood based on the actions we’ve heard about so far. There will have to be some expenditure cuts."

He praised the Liberal leader, however, for moving to raise electricity prices.

"If you are willing to take on that and take the political risk … a lot of other things in my mind become possible. I’m much more confident that they will take the tough actions that are necessary because they have shown their bona fides on the electricity pricing."

Tom Adams, executive director of the watchdog group Energy Probe and a vociferous critic of the Tories’ electricity price freeze, also welcomed the announcement.

"It’s definitely good news but it’s not a solution if they don’t go back to the full, real price," said Mr. Adams, adding that investors will return to Ontario’s electricity sector only if the Liberals succeed in removing the politics from energy-pricing decisions.