Published Sunday, Feb. 19, 2012

We looked Saturday at the financial crisis enveloping Greece and asked if something of the sort could happen in Canada. A shocking new report commissioned by the Ontario government suggests it is certainly possible.

According to former TD Bank economist Don Drummond, Ontario's financial management plan is on the verge of collapse. In the aftermath of the downturn four years ago, the government went heavily into debt.

Ontario Premier Dalton McGuinty and his cabinet were gambling that once the business sector picked up again, the treasury would recover. But that presumed a return to pre-recession levels of growth. Financial analysts increasingly believe this won't happen.

Instead of balancing the budget, Ontario is on track for a staggering $30-billion deficit. Unless corrective measures are taken immediately, the hole will be too deep to escape from. And the measures required are grim.

For the next seven years, government spending must be kept basically flat. Allowing for inflation and population growth, that translates into a real cut of 16 per cent.

To achieve this scale-back, kindergarten programs will have to be closed, school class sizes increased and 10,000 non-teaching positions eliminated in the public school system.

University funding must be slow-walked, and there will have to be a selective narrowing of program offerings.

Budget increases for health care can't be allowed to exceed 2.5 per cent - far short of the six per cent range in recent years. Patients will have to be relocated from hospitals to outpatient clinics, and the model of care shifted from high-cost providers like physicians to cheaper alternatives such as nurse practitioners.

If enacted, these would be the most sweeping cutbacks ever experienced in Canada. No federal or provincial government has ever flattened down spending for the better part of a decade. None has even tried.

Yet the predicament facing Ontario awaits other provinces as well. Since the recession, governments across the country have been following essentially the same path.

Look where B.C. stands. In 2009, Gordon Campbell's Liberals amended their own balanced-budget legislation to permit deficit financing. The government excused this about-face by promising a return to surplus budgets in just two years.

Later, those two years became four years. And now the Finance Ministry is saying the current year's shortfall will be $2 billion worse than expected. Clearly, we're not out of the woods.

So what happens if the economy doesn't recover on schedule? Do we take Ontario's medicine?

A provincial election is due next year, and the Liberals are well behind in the polls.

Would an NDP government face the kind of spending cuts recommended by Drummond? Almost certainly not. The public-sector unions and other groups that support the NDP wouldn't stand for it.

Might they raise taxes? Perhaps. But that only postpones the recovery.

At first glance, the most palatable option might be more borrowing. Yet how feasible would that be?

The meltdown in Greece, and potentially some other European countries, is having a chilling effect on capital markets. The days of easy borrowing for governments may be nearing an end.

This is the real threat that confronts us. Our politicians are living in the past, even as a different reality takes shape all around us. They quote the original advocate of deficit financing, economist John Maynard Keynes, as if he was still alive. The man died more than 60 years ago.

We'll see on Tuesday when the B.C. budget is delivered how Premier Christy Clark means to deal with these challenges. We will also find out what NDP leader Adrian Dix thinks should happen.

It is hoped they'll both have some new ideas. For one thing is crystal clear: Governments that rely on borrowed money are living on borrowed time.