Another warning sign Ontario may not meet its balanced budget target

The Ontario government has dug itself deep into debt and continues to spend more than the revenue it brings in each year. While it has pledged to eliminate the deficit by 2017/18, a new report from the government’s own Financial Accountability Office (FAO) casts further doubt on the ability to deliver. A new strategy is needed to restore the health of provincial finances.

A look at the numbers reveals the severity of the problem. Ontario’s net debt has more than doubled since 2003/04, reaching $284 billion in 2014/15. That’s $20,000 for every man, woman and child.

Going forward, Ontarians can expect more of the same. In 2014/15, the province ran a $10.3 billion deficit. The current projection is a shortfall of $8.5 billion in 2015/16, $4.8 billion in 2016/17, and—fingers crossed—a return to balance in 2017/18.

But the latest report from the Financial Accountability Office, established in 2013 to provide “independent analysis on the state of the Province's finances, trends in the provincial economy and related matters important to the Legislative Assembly of Ontario,” notes there are “significant risks” to achieving the balance budget target. It highlights two primary reasons.

First, the government has not laid out a clear plan showing exactly how it will restrain spending growth. The government’s plan relies on holding program spending growth to 0.5 per cent annually between 2014/15 and 2017/18. Meeting this target requires a significant slowdown from the rate of spending growth that has prevailed in recent years. Between 2010/11 and 2014/15, spending grew by an average of 1.4 per cent per year. The plan to balance the budget by 2017/18 therefore requires holding spending growth to approximately one-third of the average rate observed over the past four years.

This is not an unreasonable target, especially given that spending ramped up dramatically in the years before and during the recent recession. But slowing down spending growth by two-thirds from recent trends requires an explicit, detailed plan for doing so, which the government has not provided.

The FAO report reinforced this point, stating that the government “has released relatively few details on its plans to restrict program spending over the next two years.” And with a “lack of disclosure on detailed measures to achieve the plan,” the report concludes there are “significant risks to the current fiscal plan, in the absence of other policy actions.”

The FAO report flagged a second serious threat to balancing the budget, namely the reliance on optimistic revenue projections. The government’s plan projects 4.3 per cent annual revenue growth between 2014/15 and 2017/18. This represents a significant increase over the past four years, when annual revenue growth averaged just 2.6 per cent. In other words, the government is hoping annual revenue growth over the next three years will be around two-thirds higher than has been the case over the past four years.

Moreover, the report notes that current revenue projections may be too optimistic since they fail to account for the fact that actual revenue growth in recent years has been slower than economic growth. If this pattern persists, revenue will be lower by more than $2 billion in each of the next two fiscal years.

Further compounding the problem is that current projections for economic growth in 2015 are considerably lower than when the 2015 budget was released back in April. The slower-than-expected growth this year alone is projected to cumulatively reduce provincial revenue by approximately $2 billion over the next three years.

These concerns about the revenue projections mean that even if the government does meet its spending targets, it may well fail to balance the budget in two years.

The provincial government is right to view balancing the budget as an urgent priority. However, the FAO’s report suggests the government’s current plan cannot be relied upon to achieve this goal. Rather than rely on rosy revenue projections that wish the problem away, it’s imperative to develop a concrete, specific plan to reform and reduce spending.