Five reasons why the Ontario budget is credible

Posted on in Governance Policy Context

TheGlobeandMail.com – GlobeDebate
Apr. 24 2015.   Don Drummond

Don Drummond is the Matthews Fellow in Global Public Policy, Queen’s University. He was the chair of the 2012 Commission on the Reform of Ontario’s Public Services.

As Ontario Finance Minister Charles Sousa declares, there is a lot more in Ontario’s 2015 budget than a report on government finances. But finances should be the focal point of attention because Ontario’s fiscal situation is dire.

It is not so much the $10.5-billion deficit for the fiscal year just ended, but the surge in the ratio of net debt to the size of the economy from 26.2 to 39.4 per cent over the past seven years. The situation cries for a credible plan to restore fiscal balance. For the first time, this budget presents one.

The 2015 budget must pass a number of tests in order to be judged to contain a credible plan to restore fiscal balance by 2017-18.

First, it must present economic and fiscal details out to that year. It does. Previous budgets gave details for only a few years and then pulled the balanced figure out of thin air.

Second, it must use reasonable economic assumptions. Judged against private sector projections, it does. The Budget’s assumptions for economic growth are slightly less favourable than the average of private sector views. That does not of course guarantee economic outcomes will not be worse.

So third, it should contain a generous contingency buffer against downside risks. At least it preserves the same contingency factor as in recent budgets, unlike the April 21 federal budget, where the contingency factor was slashed in the interest of showing a better bottom line.

The average growth rate assumption for Ontario’s nominal Gross Domestic Product, essentially the revenue base, is 4.2 per cent a year through 2017 (2.4 per cent real economic growth and 1.8 per cent inflation).

Let us suppose instead of 4.2 per cent per year it was 3.8 per cent (perhaps 2 per cent instead of 2.4 per cent real growth). By 2017-18 revenues would be around $1.6-billion lower than in the budget. With a contingency reserve of $1.2-billion, such a variance in the economic outcome would result in a very small deficit. So the budget holds together under modest deviations to assumed economic growth.

A fourth test of credibility is that revenue projections should be in line with the economic assumptions. This has not always been the case in Ontario budgets and until this budget, so little detail was given on the revenue forecast that it was difficult to judge. The presentation of the revenue outlook in Ontario’s 2015 budget is the most transparent to date from this province and perhaps from any other Canadian jurisdiction. This bolsters credibility.

Fifth, spending increases must be modest. The average increase until 2017-18 is 1.3 per cent per annum. With population increasing around 1 per cent per year, this is only a very slight rise in per capita spending, and if calculated in after-inflation per capita terms it works out to a decline of almost 2 per cent per year. The maintenance of such a low rate of spending growth since 2011 is quite frugal. Indeed, the duration of spending austerity would be more than double that during the belt tightening of Mike Harris’ government and the intensity and duration would be more reminiscent of the infamous 1990s fiscal consolidation charges of Roy Romanow’s Saskatchewan and Ralph Klein’s Alberta.

On the basis of these five tests the 2015 budget’s plan to restore fiscal balance by 2017-18 is credible. Interestingly for those who like to compare the government’s actions against the recommendations of the 2012 Commission on the Reform of Ontario’s Public Services, the balanced budget is derived by virtually the same revenue and spending numbers in the commission’s “preferred scenario”. There will no doubt still be sceptics. The lingering doubts might come because the fiscal consolidation effort doesn’t seem to be creating the same volume of noise as the efforts in the 1990s did. The Ontario government isn’t talking up the fiscal plan that much, relegating it to the latter parts of the budget documents. There have not been announcements of programs being cut left, right and center. Instead, the government says it is focusing on extracting savings from improving the efficiency of public services and holding the line on compensation. The 2012 commission saw tremendous potential for extracting savings while maintaining and even improving the quality of services by changing the way they were being delivered. The budget offers many examples of commission recommendations the government is following.

Success on the efficiency front cannot yet be tested however. If it works, then Ontario will succeed in staying fiscally balanced beyond 2017-18. If instead, the government is compressing spending without doing the underlying reforms then spending will explode, as it did after the fiscal consolidation effort of the 1990s. With the 2015 budget fiscal concerns can shift from the absence of a credible plan to balance the budget to whether comprehensive reforms are being done within spending. That is what will ultimately determine whether Ontario will experience enduring fiscal stability.

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