Ontario government’s big budget gamble

Troy Media business columnist Livio Di Matteo dissects the Ontario budget

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THUNDER BAY, ON, Apr 24, 2015/ Troy Media/ – Ontario’s 2015-16 budget projects a deficit for the coming fiscal year of $8.5 billion, which is down from the previous year’s $10.9 billion deficit. Spending will grow from $129.5 to 132.9 billion in 2016/17 while revenues will grow from $118.5 to 124.4 billion.

Moreover, debt service costs will grow from $10.7 to 11.4 billion and the net debt will climb from $284.1 to 298.9 billion. However, by 2017, the net debt is projected to reach $319.5 billion and the servicing costs will reach $13.2 billion annually.

Ontario government insists it is on track to eliminate deficit

The government insists it is on track to eliminate the deficit by 2017/18. An examination of the budget projections suggest that this is going to be done largely by increasing revenues faster than expenditures. Between 2014 and 2017, revenues are expected to grow from $118.5 to 134.4 billion – an increase of 13.4 per cent. Meanwhile, expenditures including the contingency reserve are anticipated to only grow from $129.5 to 134.4 billion – an increase of 3.8 per cent. Factoring in inflation, this means that expenditures will actually decline in real terms.

The provincial government is planning to hold average annual growth in total government spending at 1.3 per cent while revenue is expected to grow an average of 4.5 per cent annually. Health and education are expected to only grow at 2 per cent a year and postsecondary education and training will essentially be frozen. These three areas together now account for over 60 per cent of provincial government spending.

Ontario government
The Ontario government is gambling that its projections will work out

As for the remainder, justice is scheduled to grow at 1.5 per cent annually while children and social services will grow at 2.9 per cent. All other programs are expected to shrink at 5.5 per cent annually. Overall, program spending will grow at just under 1 per cent annually but debt service costs will grow at about 6 per cent.

On the revenue side, personal income tax revenues are expected to grow an average of 5.7 per cent annually while corporate income tax revenues are expected to rise 8.1 per cent and sales tax revenues 5 per cent annually. Even federal grant revenues are expected to rise at about 4.7 per cent annually. However, the revenue performance from government business enterprise such as lotteries is expected to be weaker.

The government plan to balance the budget seems as follows. Restrict public expenditure growth and allow for the effect of a low dollar and low oil prices to generate economic growth and grow revenues without raising taxes. To provide an added boost to economic growth, the government will sell off assets – such as Hydro One – to generate funds for transit and infrastructure investment designed to boost employment and income through construction activity.

It is a calculated gamble that may work. However, there are several variables at play here. The government’s own outlook for the economy suggests that real GDP growth will rise in 2015 to 2.7 per cent but then decline each year thereafter, reaching 2.1 per cent by 2018. Exports – which are a key driver of the Ontario economy – are expected to surge 5 per cent in 2015 but then only grow 3.5 per cent the year after and only 3.2 per cent by 2018. Ontario’s economy will need to maintain a reasonably high level of performance if it is to generate the expected tax revenues.

Little light in sight for the Ontario government

As for restricting expenditure growth below the rate of inflation, especially in health and education, the provincial government will face considerable opposition from these sectors. Added to all this is the fact that even if the provincial government is able to restrict program expenditure growth to 1 per cent, the debt service costs are rising at a much faster rate given the mountain of net debt that will reach almost $320 billion by 2018. Short-term interest rates are expected to rise from 0.6 per cent in 2015 to 3.4 per cent by 2018 while 10-year government bonds are expected to rise from 1.8 to 4.2 per cent.

The Ontario government is making a concerted effort to balance its budget by restricting the growth of expenditures below the rate of inflation while allowing revenue growth to fill the fiscal gap. However, the net debt and its associated debt service costs have grown to the point that they threaten to overwhelm the government’s efforts should the economy falter. There is not yet light at the end of the fiscal tunnel.

Livio Di Matteo is Professor of Economics at Lakehead University. He writes on Ontario’s Business for Troy Media every two weeks.

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