Ontario must prepare for slowdown in growth of federal transfers

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Appeared in the Toronto Sun, February 22, 2017

The Wynne government expects to finally balance Ontario’s operating budget next year (with some help from accountants on how the province treats its pensions). It would be a big mistake, however, to think the province’s fiscal challenges have been solved.

Ontario continues to carry substantial debt, and the province faces fiscal headwinds that will make it harder to shrink that debt burden, including the strong likelihood that growth of federal transfers to the province will be much slower in the years ahead than they have been over the past decade.

Despite years of complaining about being shortchanged, transfers to Queen’s Park from Ottawa have grown briskly. In fact, between 2008/09 and 2016/17, major federal transfers to Ontario increased by 61 per cent—much faster than what was necessary to offset increases in population and overall prices (inflation).

There are two main reasons for the marked growth in federal transfers to Ontario. Firstly, the province became eligible for equalization payments in 2009. Due to a persistently weak economy, Ontario has remained a “have-not” province and received equalization cash every year since. The second reason relates to federal transfers via the Canada Health Transfer, which increased significantly.

To be clear—without this rapid growth in federal transfers, the province would be facing yet another deficit in 2017/18.

Why all the red ink? The provincial government ramped up spending dramatically during the first decade of the century, a risky fiscal strategy that produced huge deficits once the recession of 2008/09 struck. Since the recession’s end, the government has failed to take meaningful action to reform and reduce program spending.

Again, thanks largely to the influx of federal dollars, the province has been able to shrink the deficit despite its spending choices. But economic weakness in Alberta, Newfoundland and Saskatchewan, means Ontario’s equalization transfers will shrink. In fact, the federal department of finance has indicated Ontario’s transfer will be significantly lower next year, falling from $2.3 billion in 2016/17 to $1.4 billion in 2017/18.

Meanwhile, Ottawa plans to reduce the growth in the Canada Health Transfer, which has been increasing by six per cent annually.

These developments will almost certainly mean a slowdown in the overall rate of growth for federal transfers to Queen’s Park.  In 2017/18, for example, the federal government forecasts major transfers to Ontario will actually decline.

Given this slowdown, maintaining a balanced budget and shrinking the province’s debt burden will require sustained spending discipline and willingness to reform and reduce provincial spending where possible. The provincial government can no longer count on big annual increases in federal transfers and will now have to address its own spending to get its fiscal house in order.

This reality appears to be lost on some in the provincial government including the premier who has signalled the province will further loosen the purse strings. Recent reports of extensions to existing collective bargaining agreements, which include pay hikes for two teachers’ unions, further suggest the province will ramp up spending.

Despite a balanced budget forecast for 2017/18, serious fiscal challenges remain. These challenges must be addressed amid a slowdown in the rate of growth of federal transfers to Queen’s Park. This will require sustained discipline. Let’s hope the province’s upcoming budget reflects this reality.

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