The Ontario government is planning to run significant fiscal deficits over the next few years. That decision should not come as a surprise. In the past, Ontario governments have consistently chosen to do so when facing challenging economic circumstances. Rather than focusing on the entirely predictable decision to run a fiscal deficit in 2024-25, we need to pay more attention to the government’s plan to balance the budget over the medium term — and on long-run fiscal sustainability.
“The deficit this year is estimated to be $9.7 billion, up from $3.0 billion last year.” This is a quote from the Ontario budget — not the budget delivered last week, but the one presented in April 1991 by New Democratic Party treasurer Floyd Laughren. A keen-eyed reader might have been tipped off by the fact that Finance Minister Peter Bethlanfalvy is planning for a deficit of $3 billion and $9.8 billion in 2023-24 and 2024-25, not $3 billion and $9.7 billion. Regardless, it is remarkable that the near-term deficit outlook is within a rounding error of that presented in the first NDP budget, 33 years ago.
And how about this one? "To protect key public services and make the short- and long-term investments required, Ontario will experience a deficit." While that is also entirely consistent with the narrative of the most recent budget, it comes from the document delivered in April 2009 by Liberal finance minister Dwight Duncan.
The point here is that the current Ontario government response — run deficits rather than raise taxes or cut expenditures to balance the budget — is entirely consistent with those in the past from parties of all stripes. Given the potential economic consequences of taking extensive action to balance the budget, this was an appropriate decision each time.
The real question now (as it was then) involves the path back to a balanced budget. This has been the real failure of provincial government finances, as Ontario has balanced its budget just six times in the past 33 years while the debt level continues to rise.
Ontario’s plan to eliminate the $9.8 billion deficit assumes a solid rebound in economic and revenue growth combined with a slowed pace of provincial expenditure growth. The plan for expenditure growth (averaging 2.4 per cent annually) is ambitious: it is well below the projected increase in the service-delivery cost implied by the outlook for rising population and prices (averaging a combined 4.4 per cent annually). Attaining this expense growth rate will require fiscal restraint — roughly 2 per cent in real terms annually — over the next three years. But how? The budget does not truly explain. There should be a continued focus on efficiencies, but that won’t be enough. Further action will be needed. With a provincial election scheduled in just two years, it is hard to believe this will be a time for real expense constraints.
(Courtesy Brian Lewis)
There are also risks to the revenue outlook. Projected growth averaging 3.5 per cent annually aligns well with the slightly prudent projections for nominal GDP growth. However, slower economic growth or a recession is entirely possible, and that could throw those projections off track. Declining corporate profits could heavily impact corporate income-tax revenues. Last summer (well after the 2023 budget), the province learned about a severe degradation of personal income-tax revenues. Something similar could happen with corporate income tax. There could also be a sharp erosion in provincial Land Transfer Tax and Harmonized Sales Tax revenues related to suppressed levels of personal and commercial real-estate transactions.
The longer-term fiscal picture looks bleak as well. Legislation requires the province to deliver a long-range assessment of Ontario's economic and budgetary environment by June 2, 2024. Long-term reports released by the Ministry of Finance in the past and recently by the Financial Accountability Office of Ontario (FAO) have concluded that the trend toward an aging population will result in ongoing pressure on the province's finances. So even if the province balances the budget in three years, doing so on an ongoing basis will need further action.
A few suggestions to help bring about more sustainable provincial finances. First, avoid costly new policy measures such as the elimination of vehicle-registration fees in 2022. Second, find a way to exit from some of the current costly policy measures. For example, Ontario could implement a plan to phase out the provincial subsidy on electricity prices — an item budgeted to cost $7.3 billion in 2024-25 — gradually over the next 10 years. Third, be clear about the plan to end temporary policy measures adversely affecting provincial finances, such as the many-times-extended gasoline tax cut. Finally, reorient the review of the provincial tax system toward the long list of tax incentives, focusing on those that essentially amount to corporate welfare. Eliminate those that are not generating results.
Government fiscal planning often feels like running a local sports franchise. Unless you are selling success (a rare thing), you must sell hope. We need a path back to a balanced budget and sustainable provincial finances — but that is not the path the province or the country is on.
Hopefully, we can have a rational public-policy conversation on fixing this nationwide to ensure sustainable government finances. Meanwhile, governments such as that in Ontario can start taking serious action to address public financial sustainability. Otherwise, we are headed toward a much more painful fix when the inevitable crisis arises. The current plan is based on hopeful numbers not supported by action — and that’s not good enough.
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