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Ontario Government's 2005 Budget - Feel Good Fiscal Discipline

Release Date: May 11, 2005
Financial analysts require eagle eyes to discern the true nature of changes in programs and financial circumstances in government budgets. That is as true for Ontario’s latest effort as it is for any other level of government in Canada – and perhaps even for those abroad.

For example, the key fiscal claim of the budget is that the deficit has been “cut in half”, from $5.5 billion last year to $3.0 billion in 2004/05. A pedantic point is that this is less than a 50 percent reduction. More seriously, last year’s budget anticipated only a $2.2 billion deficit this year – and so the outturn is actually a one-third rise in the measure. The deficit is actually worse than predicted but the government is claiming credit as a responsible fiscal manager.

Compounding this failure, the government is now planning on taking an extra year to balance the budget – now conveniently scheduled for one year after the next election in the autumn of 2007 - thus adding an extra $3.9 billion to net debt. Try finding those facts in any of the budgetary text or spin.

Looking at the coming fiscal year 2005/06, revenues are up $1.8 billion from last year’s budget expectations, almost all of it due to larger federal transfers. Program spending is leaping $3.8 billion against last year’s forecast and the only saving grace is a billion dollar windfall from lower interest rates and debt servicing costs.

This spending pressure is the main reason why we are seeing less effort expended on deficit reduction. In a more modest replay of the Bob Rae NDP government’s policy of running deficits to fight the recession of the early 1990s, this government has chosen to ramp up spending on health and education by putting the increase on taxpayers’ credit cards.

A boost to post-secondary education spending is the main driver. Following on the recommendations of the Rae review of this area (yes, him again), the province is forecasting an extra $1.3 billion in spending on student and institutional grants by 2007/08. Universities will also now be able to tap into OSIFA, a $2.1 billion-and-growing loan program for municipal infrastructure that is not consolidated into net debt and that is also being expanded to cultural, tourism and recreation projects. If this sounds like the federal government’s boche court support of the early 1990s, then you understand the essence of how this program will work.

Ontario has also caught the federal government’s disease of forecasting programs well beyond the current government’s mandate. Ontario now has a commitment to four-year fixed terms and so any budgetary decisions that extend past the fourth quarter of 2007 are suspect, including the balanced budget policy.

There are three areas of restraint that are needed even to reach the now delayed point of budgetary balance. Unfortunately, each of them is wholly unlikely to occur.

First, and most importantly, health care must rise at very slow growth rates. Last year, the government expected to see a 2 percent increase in health spending for 2005/06. Now, with the help of federal transfers, it is actually going up 8.6 percent. Looking out to 2008, the average growth expected is 4.4 percent. How that fits with trend rates near 8 percent is anyone’s guess.

Second, the formal capital budget (excluding loans) must shrink. It is forecast to fall from $2.9 billion last year to $2.1 billion in order to balance the budget. Transportation accounts for half of this and health and municipalities are large line items. Who will go without when the inflation-adjusted budget drops by one-third? No wonder the government has announced a new initiative to encourage Ontario pension funds to invest locally.

Third, every ministry budget outside health and education must remain flat-lined in aggregate. This was not achieved even over the past year. And looking at 2005/06, this budget anticipates total spending in these areas of $22.1 billion, while last year’s budget forecast only $20.8 billion. That is an overrun that is surely going to reoccur in 2006 and 2007, given a general inability of this government to hold the line with its employees, transfer partners and vested interests.

So, Ontario remains in an unsatisfactory and unstable fiscal condition. Debt is mounting, spending pressures are not being well-restrained and the tax burden remains at historical highs. This is not a recipe for enhanced economic prosperity, though it may be sufficient to win the next election. Politics wins again against more beneficial economic policies. And the losers are taxpayers and the citizens of Ontario.