Budgetary smoke and mirrors explain a significant portion of Ontario’s deficit decline

There is very little to feel reassured about when it comes to Ontario finance minister Charles Sousa’s latest budget.

Minister Sousa boasted that this year's operating deficit will be $1.8 billion smaller than planned, and repeatedly stated that his government remains committed to balancing the budget by 2017/18.

The government projects the operating deficit will be $5.7 billion in 2015/16, down from $10.3 billion in 2014/15. But did the government achieve this $4.6 billion reduction in the annual deficit solely because of strong economic performance and prudent spending as it repeatedly suggests in its budget document?

The answer is no. In reality, budgetary smoke and mirrors and less than transparent accounting practices explain a significant portion of the decline.

Consider the fact that total revenue is expected to grow 6.7 per cent in 2015/16 from the 2014/15 level. This is more than two and a half times the average annual growth rate in revenue over the previous three years (2.6 per cent).

Perhaps more importantly, it is almost double the province's rate of economic growth (3.6 per cent) in 2015. Barring big tax hikes or cuts, most sources of government revenue should be expected to grow more-or-less at the same rate as the economy. If revenue growth is 86 per cent faster than economic growth, that's a red flag that needs to be looked at carefully.

So what is going on? At least part of the answer is that the dramatic jump in revenue is partly the result of one-time injections of revenue such as from the disposition of assets including Hydro One shares, which generated approximately $1.1 billion this year. Counting this revenue in the operating budget gives a skewed sense of how healthy the province's balance sheet is in a given year.

The government should be adjusting for these one-time revenues and earmarking the funds for debt reduction rather than including them as operating revenue. Of course, this would make the operating deficit larger than it appears, and make it impossible for the government to boast it has cut the deficit nearly in half.

Looking ahead, the government is continuing to count on strong revenue growth to achieve its target of “balancing” the operating budget by 2017/18.  The budget projects revenue to increase 3.2 per cent in 2016/17 before spiking again by 5.4 per cent in 2017/18, the year the government states it will balance the budget. The possibility that these projections may not materialize represents a significant risk to Ontario's fiscal plan.

To achieve meaningful deficit reduction that will actually improve the condition of Ontario's overall fiscal position, the government should be more focused on the spending side of the ledger. Spending growth since 2003/04 is the reason for Ontario's recent massive debt accumulation, so if the government wants to address its issues, it should strike at the root of the problem. Unfortunately, the budget did not do nearly enough on this score. That will be the topic of our next post.