A fiscal tale of two provinces

Ontario is left with no option but to follow Quebec’s recent budget and implement expenditure restraint

THUNDER BAY, ON, Jun 6, 2014/ Troy Media/ – Ontario and Quebec account for 62 per cent of Canada’s population but only 57 per cent of Canada’s GDP. Their economic dominance of the Canadian federation has gone into decline in recent years, as central Canadian manufacturing has borne the brunt of the economic adjustment since the 2009 recession. Real per capita provincial GDP growth over the last decade was lowest in Ontario with Quebec as the second lowest. This poor economic performance has taken a toll on public finances.

Ontario and Quebec have both run continual deficits since the 2008-09 fiscal years and accumulated substantial public debt. According to the Federal Fiscal Reference Tables, Quebec and Ontario were the most indebted provinces in Canada with total net public debt in 2012-13 of $176.6 billion and $252.1 billion respectively. In terms of debt to GDP ratios, Quebec has the more serious problem with a provincial net debt to GDP ratio in 2012-13 of about 50 per cent while Ontario’s was just below 40 per cent.

The relatively more serious nature of Quebec’s government debt combined with the political advantage of a new majority government explains why Quebec’s recent budget has proposed a more ambitious program of fiscal restraint than Ontario’s election-triggering budget.

Ontario’s 2014 budget projected a deficit of $12.5 billion – up from $11.3 billion the year previous. This addition to the public debt means that debt service costs will rise to $12 billion by 2015-16 and to $13.3 billion by 2016-17. Ontario is still banking on revenue growth as its salvation, with provincial government revenues expected to grow 2.8 per cent in 2014-15 and 4.7 per cent in 2015-16 and expenditures 2.7 per cent and 1.3 per cent respectively.

Despite the warnings of the 2012 Drummond Report, little in the way of expenditure restraint has been implemented. The situation in Ontario has been exacerbated by a minority government where, until recently, two out of three parties have usually been able to agree on any solution that results in more spending. The polls going into the June 12 vote suggest another minority government is likely, which implies that little progress is going to be made anytime soon with respect to Ontario’s public finances.

Yet, the only responsible option for Ontario now is expenditure restraint. The Ontario government needs to freeze total expenditure growth for at least two years and allow revenue growth to close the gap and halt the deficits, which have piled up to give Ontario Canada’s highest provincial net debt. Not taking action now means the deficits will continue, the net debt will grow, and restoring fiscal balance will take even longer.

In contrast, Quebec’s government appears to have embarked on a serious belt-tightening path in part because of the strength of a majority government that aims to balance the budget by 2015-16 – nearly two years ahead of Ontario’s last forecast. The projected deficit for 2014-15 is expected to be $750 million lower than 2013-2014 at $2.35 billion as opposed to $3.1 billion.

Provincial expenditures are expected to grow by 1.9 per cent in 2014-15 and 1.5 per cent in 2015-16 while provincial revenues are expected to grow 2.9 per cent and 3.5 per cent. While Quebec, like Ontario, is relying on some revenue growth to balance its books, a key difference is that Quebec’s restraint measures are more front-end loaded with a lower rate of expenditure growth in 2014-15 by almost a full percentage point compared to Ontario. Quebec is doing this by placing a general freeze on staffing levels in the public sector and spending controls within government departments, bodies and enterprises.

Quebec is using the political environment afforded by a new majority government to tackle its fiscal problems early on in its mandate. Ontario has dithered over the last two years because of a minority government situation, which has lead to difficult fiscal decisions being placed on the back burner.

If, after June 12, there is another minority government, Ontario will find it difficult to make the difficult decisions needed to correct its fiscal situation. Indeed, the governing Liberals have already stated that they will re-introduce their 2014 budget as is if they form the government. Ontario seems determined to continue on with business as usual.

Livio DiMatteo is Professor of Economics at Lakehead University.

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