Ford government must prepare for post-COVID spending cuts

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Appeared in the Ottawa Sun, May 5, 2020
Ford government must prepare for post-COVID spending cuts

Recently, RBC Economics published new estimates of this year’s deficits and debt accumulation for all 10 Canadian provinces. The news was predictably grim. According to forecasts, all provinces will run large deficits this year. And Ontario’s deficit this year (relative to the size of the provincial economy) will be larger than at any point in the last 25 years.

When the COVID public health and economic crisis ends, the Ford government will face an even worse fiscal situation than when they took office. How bad is Ontario’s fiscal outlook?

The Ford government published its budget in mid-March, forecasting a $20.5 billion deficit, the largest nominal deficit in provincial history. Unfortunately, that was overly optimistic. Now, according to new forecasts, the government will collect about $5 billion less. The Ford government’s fiscal plan, however, included substantial contingencies (an accounting buffer), which would partially offset lower-than-forecasted revenues. Subsequently, RBC Economics now estimates Ontario’s deficit could exceed $21 billion this year.

With its buffer gone, any further bad news on the revenue side—or additional unplanned spending—will cause Ontario’s deficit to grow even larger. But the bad news just keeps coming. In addition to a larger deficit, Ontario potentially faces a steep recession. According to recent forecasts, Ontario’s economy will shrink 4.2 per cent this year. These two factors combined—a large deficit and a recession—mean Ontario’s long-standing fiscal mess will quickly get much worse.

Consider this. Ontario’s debt-to-GDP ratio (the best measure of debt sustainability) is forecasted to grow from 40 per cent to 46 per cent, the highest level in provincial history.

These problems can’t be solved overnight, especially during a pandemic and recession. The Ford government’s top priority should be helping the province weather the COVID public health and economic crises. However, once these have passed, Ontario’s government must exercise fiscal discipline—for a long time—to repair the damage.

Which raises the key question. Will the Ford government actually do the hard work to reduce Ontario’s debt burden when the recession ends? Only time will tell. But if it does, Ontarians will see be a marked change from the policies of this government’s predecessors.

In the years following the 2008/09 recession, when Ontario’s deficit ballooned, the McGuinty and Wynne governments allowed large deficits to persist, which caused government debt to accumulate quickly. In the wake of today’s recession, to not repeat recent history, the Ford government must take active steps to reform and reduce government spending.

If, however, the Ford government—like its predecessors—continues to steadily increase nominal spending while hoping for larger revenue gains to shrink the deficit, it will likely produce similar results, namely more red ink.

The Ford government is not responsible for the current recession nor its effects on provincial finances. Still, once the recession is over, it will be the Ford government’s responsibility to clean up the mess. Doing this—quickly—will help the province prosper in the long-run and will reduce the size of the debt burden to be passed along to future generations of Ontarians.

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