The Ontario government has again promised a balanced budget by 2017-18 in its latest aspirational fiscal document but achieving its goal is based on a fervent hope that the economy will recover and revenues will grow faster than expenditures. Moreover, a rather large portion of the anticipated revenue increase hinges on the kindness of the Federal government as well as some sudden own-source revenue leaps.

Between 2015 and 2018, the Ontario government expects to see personal income tax revenues rise $6.1 billion, sales tax revenues rise $2.1 billion and corporate tax revenues rise $1.8 billion. It also expects to see grants from the federal government rise by $3.7 billion—an increase of 16 per cent. All together, the medium term outlook sees total revenue grow from $126.5 billion to $141.9 billion between 2015 and 2018 for an increase of $15.4 billion or 12.2 per cent.

Of course the curious part of the revenue picture is the rather large jump in revenue of 6.7 per cent expected in 2015-16 followed by only a 3.2 per cent increase in 2016-17. Moreover, 2017-18 then sees revenues leap from $130.6 billion to $137.7 billion—an increase of 5.4 per cent. Given the advent of Ontario’s new cap-and-trade system, which is expected to bring in $1.9 billion, one wonders if the government will use some of this revenue to balance the budget—despite its claims the money is earmarked for emission-reduction initiatives.

Indeed, given these curious revenue leaps one is left wondering if the government is being overly optimistic in its revenue forecasts from sources such as income and sales taxes or is planning yet more asset sales in their attempts to balance the budget.  Relying on one-time infusions of cash from the sale of assets such as Hydro One shares represents a short–term fix and does nothing to address the structural deficit rooted in Ontario’s spending.

As for the expenditure side, the period 2015 to 2018 will still see total expenditure rise from $132.1 billion to $140.7 billion—an increase of 6.5 per cent. In other words, revenues are anticipated to grow at almost twice the rate of spending. Once again, the government is presenting a plan for deficit reduction based on revenues growing faster than spending with the revenue outlook somewhat uncertain given the slowdown currently underway in the Canadian economy.  

What of course is the most serious issue is that when one examines expenditures, the fastest growing expenditure item is debt interest costs. From 2015 to 2018, interest on the Ontario public debt will grow from $11.2 billion to $13.1 billion—an increase of nearly 17 per cent. While total spending over this period is growing at about two per cent annually, the interest charges on the debt are growing at 5.4 per cent annually. Indeed, Ontario’s net public debt from 2015 to 2018 is expected to grow from $296.1 billion to $326.8 billion—an increase of 10 per cent.  

Balancing Ontario’s budget by 2017 will require a series of fortunate events. The real growth rate of GDP will have to stay above two per cent. The value of the Canadian dollar will need to remain low to provide the export boost that finally seems to be gaining steam. Oil prices will need to remain low—to keep the dollar low and to reduce energy costs that are inputs into Ontario’s economy. Interest rates need to stay low because even a small increase in rates when applied to a debt pile of $326 billion will drive debt service charges even higher. Finally, Ontario’s transfers from Ottawa will need to be maintained in order to ensure that federal transfers indeed grow at the anticipated rate.  

Is this realistic fiscal planning? I guess we will soon find out if there is more to Ontario’s fiscal planning than simply operating on a wing and a prayer.