Fiscal headwinds heighten need for spending reductions in Ontario

Nobody said governing was easy. On fiscal policy, the Ford government has learned this lesson the hard way, as it inherited a daunting budget deficit and faces headwinds that will make eliminating that deficit harder. The scale of these problems, however, are no cause for defeatism—the Ford government can still eliminate the deficit quickly if it moves to reform and reduce provincial government spending.

First, let’s consider the challenges. The new government has made a convincing case that its predecessors understated the size of the province’s budget deficit. After a review of the books, the government now forecasts a $11.3 billion deficit this year—far larger than had been advertised by Premier Wynne’s government on its way out the door.

And it’s not just the size of the deficits that’s daunting—debt interest payments are forecasted to keep growing. The last budget showed debt interest payments climbing by 4.3 per cent annually over the course of the government’s fiscal plan. Unfortunately, there’s not much the government can do about this in the short term (though the government’s choices could greatly influence debt interest payments in the long-term), but this reality will certainly make it that much harder to make progress on the province’s bottom line.

There are challenges on the revenue side as well. It’s a little known fact that in their ultimately unsuccessful efforts to eliminate the deficit during the recovery from the 2008/09 recession, the governments of McGuinty and Wynne had an awful lot of help from Ottawa. The province received equalization payments during this period for the first time in its history, which peaked at $3.3 billion in 2012/13. Indeed, from 2005/06 to 2015/16 transfers from the federal government to Ontario (in nominal terms) almost doubled, increasing by 87.8 per cent.

The Ford government is unlikely to benefit from similar largesse (and nor should it). Indeed, Ontario will not receive any equalization payments this year for the first time since the 2008/09 recession.

These are the realities the Ford government faces, but these realties should be used as excuses. The government has repeatedly promised to clean up the fiscal mess it inherited. And indeed, the data shows that the Ford government can eliminate the deficit quickly. One recent Fraser Institute study showed that if it freezes nominal spending, the government could eliminate the deficit in short order.

And if it reduces nominal spending by approximately four per cent annually over two years (which is not far off from the election campaign pledge), the government could not only balance the budget but create the fiscal room for badly needed tax reform to reduce the burden on businesses and households in Ontario and help the economy grow.

Unfortunately, its first budget did not present a plan for achieving these objectives in the short term but there’s still time for a change in direction.

The Ford government undoubtedly inherited serious fiscal problems. These problems can however be solved, and solved quickly, but only if it’s willing to sharply break from its predecessors by reforming and reducing government spending.