Ontario’s fiscal update: will the government present a more realistic plan?

Ontarians should look for many things when Finance Minister Charles Sousa provides an update on the state of provincial government finances this Thursday. Chief among them is whether Sousa will present a more realistic plan on how his government expects to eliminate the deficit—currently projected at $8.5 billion this year. To date, the government’s strategy has largely hinged on hoping revenues will grow robustly and eventually catch up to spending increases. This is a risky strategy.

For one thing, the government’s plan to eliminate the deficit by 2017/18 relies on very optimistic revenue projections for the future, which may or may not come true. And second, the government is projecting a marked slowdown in the pace of spending increases without providing details on how exactly it will do so.

To help explain, consider the chart below, which includes data on Ontario’s total spending and revenue from 2007/08 to 2017/18.

After two years of decline, government revenues rebounded to $107.2 billion in 2010/11, surpassing their pre-recession level. Revenues then grew by an average annual rate of 2.6 per cent up to 2014/15.

Those are the historical numbers. Looking ahead to the period 2015/16 to 2017/18, Sousa’s government projects the pace of annual revenue growth to jump from 2.6 per cent to an average rate of 4.3 per cent. These projections were made for April’s budget, but since then, private-sector forecasters have downgraded projections for economic growth in Ontario and Canada as a whole.

A slowdown in economic activity means the government will receive less revenue—this should be reflected in the updated projections. If revenues do not in fact increase as quickly as the government expects in the years ahead, it will likely be unable to balance the budget by 2017/18.

Now consider spending, which grew annually by an average of 1.6 per cent from 2010/11 to 2014/15. Going forward, from 2015/16 to 2017/18, Sousa projects total spending to increase by 1.1 per cent annually, approximately one-third less than the historical average rate of 1.6 per cent. This is not an unreasonable target, given that spending ramped up dramatically in the years before and during the recent recession. But significantly slowing spending growth requires an explicit plan, which the government has not provided.  

As Sousa unveils the latest numbers on Ontario’s finances, it’s critical that he presents a detailed and realistic plan for how his government will balance the budget and begin to rein in government debt. Wishful thinking will not cut it.