Sousa sticks with risky status quo plan to eliminate Ontario’s deficit
Imagine a family that consistently spends more money than it earns. The family’s debt now greatly exceeds its financial assets, and it spends 10 cents of every dollar of income on interest payments. The family’s longstanding plan to eliminate its annual budget shortfall has been to hope for generous raises. The family promises to slow its rate of spending growth, but is unwilling to actually reduce its spending level.
Does this sound like a prudent plan? Of course not, but unfortunately, it’s a reasonable analogy to the Ontario government’s approach to provincial finances.
Like our imaginary family, Ontario’s government is spending more than it takes in each year. This year will represent the province’s eighth consecutive budget deficit. The result has been a massive run-up in debt, which will nearly reach $300 billion this year ($21,000 per Ontarian). Troublingly, more than half of the province’s net debt has been racked up since 2003.
When Finance Minister Charles Sousa recently delivered Ontario's fall economic update, he projected that the province’s budget deficit will now be $1 billion less than the $8.5 billion estimated in April’s budget. But there is little for Ontarians to celebrate: the province’s fiscal position remains precarious, and there is still no clear plan to achieve the type of spending reductions needed to address the province’s mountain of debt.
The projection for this year's budget deficit has been lowered largely due to the infusion of nearly $1.1 billion in revenue as a result of the Hydro One sale. This, however, is a one-off revenue boost.
The projected revenue gains were partially offset by weaker revenue projections from some other sources, which decreased to reflect lower than expected economic growth. This underscores the fundamental problem with the government’s deficit reduction strategy: it relies on highly optimistic revenue projections to eliminate the deficit.
The update projects revenues will grow by an average of 3.8 per cent annually over the next two years. However, between 2010/11 and 2014/15 (years where historical data are available), average annual revenue growth was only 2.6 per cent. A further concern recently flagged by the government’s Financial Accountability Officer is that the government optimistically expects revenue growth to essentially match projected economic growth despite the fact revenue growth has been consistently slower than economic growth in recent years.
Instead of relying on faster revenue growth, the government should lay out a detailed, specific plan to reform and reduce spending.
Unfortunately, Sousa's update shows a $397 million increase in program spending compared to the 2015 budget projection, primarily due to the planned creation of a $325 million “Green Investment Fund.” Total spending is now projected to increase by 2.6 per cent from last year (up from the 1.9 per cent projected in April’s budget).
How could the government reduce spending?
One strategy is to reform government employee compensation. Government workers in Ontario receive 11.5 per cent higher wages, on average, than comparably educated, skilled and experienced private sector workers. This premium accompanies more generous non-wage benefits (pension coverage, job security, early retirement) that the government sector also likely enjoys. Bringing compensation levels more in line with private-sector norms would help the government reduce spending.
Of course, there are important differences between a government and a family, but one commonality is that neither can consistently spend much more money than it takes in without severe consequences. Ontario’s government needs to take decisive action to rein in its debt. That means developing an active, specific plan to reform and reduce spending instead of merely slowing down the rate of spending growth while wishing the problem away with optimistic revenue projections.
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