Fraser Forum

Despite likely balanced budget, Ontario’s deficit dragon not dead yet

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Finance Minister Charles Sousa will deliver Ontario’s spring budget on April 27 and the expectation is that Ontario will deliver a balanced budget for the first time since the onset of the Great Recession. Ontario has now run nine consecutive deficits accumulating $91.6 billion in deficits and increasing the province’s net debt from $156.6 billion in 2007-08 to an expected $317.9 billion in 2016-17. While the prospect of a balanced budget is welcome news for Ontario, there are reasons to treat this development with some caution.

To begin, since 2009 Ontario has actually seen its revenues grow faster than expenditures and improvements in the province’s economy over the last year have accelerated this phenomenon. Between fiscal year 2010-11 and 2016-17, provincial government total revenue has grown at an average annual rate of 4.7 per cent while total expenditures have grown at only 2.4 per cent. Thus, Ontario’s budget balancing strategy has been heavily reliant on boosting revenues, a strategy that also included one-time asset sales.

Moreover, a substantial portion of this revenue growth has been via the generosity of the federal government as federal cash transfers to Ontario over this period have grown at an annual average rate of 4.4 per cent. It should be noted that total federal cash transfers to the provinces have been growing at just under 3 per cent making Ontario’s transfer growth above average.

It’s unlikely Ontario can continue to grow its federal transfers at over 4 per cent annually given that its improving economy will reduce the equalization entitlement it acquired since 2009. Equalization to Ontario peaked in 2013-14 at $3.2 billion and is expected to be $2.3 billion in 2016-17 and $1.4 billion in 2017-18. Health transfers will also not grow as fast as they were under the Health Accord escalator and as a result total federal transfers to Ontario will decline from $21.3 billion in 2016-17 to $21.1 billion in 2017-18.

Second, even with a balanced budget Ontario faces the prospect of increased spending to service its public debt given that debt will continue to rise as a result of capital spending and the possibility that interest rates may rise. Even at historically low interest rates, the massive volume of Ontario debt means that debt charges are already one of Ontario’s fastest growing expenditures. Since 2009, Ontario’s annual debt charges have grown from $8.7 to $11.4 billion. Program spending has grown at an average 2.3 per cent annually since 2009 while debt interest has grown at nearly 4 per cent.

Third, the announcement of a balanced budget for 2017-18 with an election on the books for June 2018 means the pressure will build for new spending. Already, the talk at Queen’s Park is that Ontario’s first balanced budget since the Great Recession will include increased health spending, a new public transit tax credit for seniors and more investment in the “innovation sector.”

The health sector in particular will be the first in line for “re-investment” given that its expenditure growth has been kept at about 2 per cent. Indeed, health spending has been the major source of provincial government spending restraint and it’s difficult to see the province keeping a lid on health spending indefinitely.

Meanwhile, Ontario mayors have been lobbying for more social assistance spending while Toronto’s mayor has been articulating his own massive list of priorities including billions for subways, light rail, social housing and repairing the Gardiner expressway.

In the end, balancing Ontario’s budget will remain a work in progress with the risk that given the pressure for new spending, the gap between spending and revenue may re-open almost as soon as it has been closed. On April 27, Ontario should hold the applause and resist celebrating the slaying of the deficit dragon because it’s not dead yet.


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