Fraser Forum

Ford government counting on revenue growth to outpace spending

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Ford government counting on revenue growth to outpace spending

Well, it’s been several weeks since the first Ford government tabled it’s first budget and a more detailed analysis suggests it’s a fiscally gradualist budget whose aim is to reduce expenditure growth below the rate of revenue growth to balance Ontario’s budget by 2023-24.

From actual total expenditures of $154.3 billion in 2017-18, there will be an average annual increase of about 2 per cent to bring total spending up to $174.8 billion (including a projected reserve of $1.6 billion). Total revenues over the same period are projected to grow at an average annual rate of 2.7 per cent to raise total revenues from $150.6 billion to $175.1 billion.

The deficit will gradually shrink from an interim $11.7 billion in 2018-19 to reach a small surplus of 0.3 billion in 2023-24. Meanwhile, the provincial net debt-to-GDP ratio will actually decline slightly from 40.2 per cent in 2018-19 to 38.6 per cent in 2023-24. However, based on the projected GDP growth rates and debt-to-GDP ratios provided, the provincial net debt could grow from $323.8 billion in 2017-18 to more than $390 billion by 2023-24—about $66 billion more.

The first chart below shows the estimated average annual growth rates for Ontario provincial government revenues from 2017-18 to the 2023-24 fiscal year.

While total revenues are projected to grow at 2.7 per cent annually, total tax revenues will grow at 3.4 per cent with Ontario Health Premiums growing at 5 per cent, personal income taxes at 4.7 per cent, sales taxes at 4.1 per cent and corporation income tax revenues at 2.5 per cent—all well above projected inflation rates.

The second chart shows the estimated average annual growth rates for Ontario provincial government spending from 2017-18 to 2023-24. Total spending will only grow at 2 per cent while program spending will grow at 1.8 per cent.

However, within the spending numbers there are some interesting differences across categories. Health will grow at 2.4 per cent annually from $59.3 billion in 2017-18 to $67.9 billion by 2023-24. Post-secondary education and training (as well as education) will both grow below 2 per cent with justice, children’s services and social services exhibiting negative growth.

But interest on the province’s debt will grow at 5 per cent annually from $11.9 billion in 2017-18 to a projected $15.5 billion by 2023-24.

So the plan seems to be to restrain spending to below the growth rate of revenues thereby bringing the two into line by 2023-24. This is not an obviously unreasonable strategy given that it’s ostensibly designed to close the structural gap between revenues and expenditures.

However, there will inevitably be complications. Interest rates on the government’s debt must stay pretty close to current rates. More importantly, the economic update accompanying the budget projected real GDP growth ranging from a high of 2.2 per cent in 2018 to a low of 1.4 per cent in 2019. Indeed, the average annual growth rate of real GDP until 2023 is below 2 per cent.

Ontario finances over the long-term have seen spending and revenues grow at approximately the same average rate, but that trend masks the fact that there have been periods where expenditures have soared and revenues plummeted as a result of recessions. In fact, from 1990 to 2018, Ontario has run deficits nearly 75 per cent of the time.

It remains to be seen if the Ontario government’s plan to grow spending at a lower rate than revenues will ultimately produce better results.

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