Ontario budget: spending growth responsible for province’s fiscal mess

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Appeared in the Globe and Mail, February 25, 2016

On Thursday, Ontario will table its 2016 budget with all signs pointing to more red ink. This is par for the course, given that the province has run deficits in 10 of the past 13 years, averaging $9.7 billion annually.

The big question is why Ontario has run these deficits and racked up so much debt, particularly since 2003/04? A popular narrative from Queen’s Park holds that factors beyond the control of policymakers are to blame, including slow revenue growth resulting from global economic forces that have hampered Ontario’s economic performance.

This narrative, however, does not withstand scrutiny. The fact is that revenue growth in Ontario since 2003/04 has averaged more than four per cent annually—that’s more than enough to offset the cost pressures resulting from price changes (inflation) and a growing population.

So if global economic forces and weak revenue growth aren’t to blame for Ontario’s fiscal woes, what is?

The answer lies on the other side of the ledger, namely provincial government spending.

Since 2003/04, program spending in Ontario (which excludes interest payments on government debt), has increased at an average annual rate of 4.7 per cent. This rate of spending growth greatly exceeds relevant economic metrics. For example, over this same period, the provincial economy has grown at an average annual rate of 3.2 per cent.

In other words, government spending has grown at an average annual rate that is approximately 47 per cent faster than the provincial economy over a 12-year period. The result: provincial finances have suffered a major blow, with the government consistently spending more than it takes in while racking up debt at a dangerous pace.

To illustrate this point, consider an alternative scenario where the government increased spending (since 2003/04) but at the same growth rate as the provincial economy. Under this scenario, Ontario would actually be enjoying a budget surplus of approximately $10.7 billion this year, instead of a projected deficit of $7.5 billion. Furthermore, instead of 10 budget deficits since 2003/04, Ontario would have run just one during this period.

Ontario’s persistent deficit spending has caused rapid erosion in the province’s financial position. Consider that in 2003/04, Ontario’s net debt stood at $139 billion, equal to 27 per cent of the provincial economy. In 2015/16, debt is projected to reach $298 billion, or 40 per cent of the provincial economy. Today, Ontario’s provincial debt amounts to more than $21,600 per Ontarian.

Indeed, a large majority of this economically damaging run up in debt could have been avoided if the province had restrained spending increases.

In very recent years, the provincial government has finally begun to exercise greater spending restraint, as Premier Wynne’s government has slowed the rate of spending growth compared to what it was under her predecessor Dalton McGuinty. Unfortunately, the steps taken so far have been inadequate to resolve Ontario’s fiscal problems, which is why the province continues to rack up debt at an alarming rate.

The Ontario government now confronts a self-inflicted fiscal mess that has been years in the making. Spending growth over a long period of time—not insufficient revenue—is the reason for the province’s perennial deficits and rapid debt accumulation. Hopefully the government will recognize the cause of its fiscal problems in next week’s budget and lay out a credible plan to strike at its root by reforming and reducing government spending.

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