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The Ontario Government Should Take Ownership For Its Serious Economic Problems

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There was an aura of complacency in Queen's Park as the Ontario government released its update on the state of provincial finances. The government remains committed to its relatively passive approach of dealing with persistent deficits, mushrooming debt, and growing interest payments. Rather than take meaningful, pro-active measures to put Ontario back on track, the government continues to delay the tough decisions.

The government still pegs the deficit for this year at $12.5 billion with deficits of $8.9 billion in 2015/16 and $5.3 billion in 2016/17 and a return to balance in 2017/18. In other words, there's no change in the deficit projections from those in the budget just four months earlier.

The current year deficit is unchanged despite a decline in expected economic growth and revenues relative to the budget. Revenues are down $509 million but total spending is $208 million lower (mainly due to lower-than-forecast interest payments). The remaining $300 million shortfall is being covered by the government's $1 billion contingency reserve.

If the government manages to balance the budget in 2017/18 -- and that's a big if -- it will have run deficits for nine straight years. And debt will have more than doubled to $322.5 billion from $156.6 billion in 2007/08 (the year before the recent string of deficits began). As a share of Ontario's economy, debt will grow to approximately 40 per cent, up from 26 per cent over the same period.

Growing debt will require larger interest payments, which will reach $13.9 billion, up from $8.9 billion. And this is in a historically low interest rate environment, meaning interest payments could increase markedly in the future.

By 2017/18, the government expects that over 10 cents of every revenue dollar collected by Queen's Park will go to servicing past debt rather than public services that Ontarians care about such as health care and education or tax relief that improves the province's tax competitiveness.

Instead of looking inward at the policy choices made by successive provincial governments, the update shoots blame at the federal government. In fact, the update dedicated a whole chapter to the so-called "vertical fiscal imbalance." Put plainly, the government is calling on Ottawa to increase federal spending in Ontario.

That is simply a distraction from the real issue at hand, which is a provincial government reluctant to take ownership of the serious economic problems facing the province.

To Ontario's credit, the provincial government has initiated a review of its programs to find savings. But the review does not go nearly far enough to have a meaningful impact. The target for annual savings is just $250 million this year and $500 million next year. As a share of program spending, these targets work out to just 0.2 per cent and 0.4 per cent, respectively.

For perspective, back in the 1990s when the federal Liberals faced a similar situation of persistent deficits, growing government debt, and rising interest payments, they initiated a much more ambitious program review. In their 1995 budget, the Liberals proposed a series of program spending reductions over two years largely resulting from the program review, which included a comprehensive examination of federal departmental spending. The actual reductions ended up being larger than proposed: 1.9 per cent in the first year and 7.9 per cent in the second.

These spending reductions, along with program reforms, paved the way for a balanced budget in 1997/98 and surpluses thereafter that helped create the fiscal room for a series of pro-growth tax cuts.

The program review of the current day Ontario Liberals is mild by comparison. And the government still plans to increase spending over the fiscal horizon.

By delaying the difficult choices, the government will continue to hamstring the provincial economy. The sooner Ontario gets its fiscal house in order, the sooner it can start enacting policies that truly set the foundation for stronger growth. This includes following through on stalled corporate tax reductions and enacting a multi-year plan to reform personal income tax rates. Complacency simply won't cut it.

This piece was co-written by Milagros Palacios, Senior Research Economist, Fraser Institute.


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