Ontario’s upcoming budget must take the long view
Ontario’s Finance Minister Charles Sousa recently indicated that this year’s budget could be tabled early due to the upcoming election. He suggested a condensed budget timeline may be helpful to give Ontarians more time to consider the government’s fiscal plan before voting.
In addition to his remarks about timing, Minister Sousa made wise comments about the purpose of any government’s annual budgeting exercise. Specifically, he stated that “every budget is long-term in scope” and noted that a government must think “beyond election cycles” when budgeting.
Minister Sousa is absolutely correct that governments should think about the long-term when drawing up fiscal plans. Decisions about how the government raises and spends money in a particular year can have an impact on the choices available to future governments and the lives of citizens for a long time.
If a government spends too freely, this can limit the future availability of resources. If it racks up debt quickly, taxpayers must pay interest in the future. If it raises revenue through burdensome and economically inefficient taxes, a government’s budget can slow down economic growth with negative long-term implications.
Ontario’s recent fiscal history illustrates these realities. During the first decade of this century, Premier Dalton McGuinty’s governments implemented significant spending increases nearly every year. From fiscal year 2003 to fiscal year 2007, program spending in Ontario (all spending aside from debt-service payments) grew at an average annual rate of 7 per cent. This was far more than was necessary to offset the effects of population growth and inflation and also faster than the rate of economic growth.
The negative consequences of this spending growth were not fully felt right away. Revenue growth during the same period was relatively strong, so large deficits did not immediately materialize. However, the government was growing spending as though strong revenue growth would continue forever, which, of course, it did not. When recession did hit the province in 2008 and revenue fell, the government found itself at a spending level it could not afford and massive deficits emerged. As a result of these deficits, the provincial debt began to increase quickly, nearly doubling from $157 billion in 2007/08 to $301 billion in 2016/17.
In short, spending decisions made several years earlier came back to haunt Ontario when the recession hit, with severe consequences for taxpayers.
In the following years, the government was able to slowly reduce the deficit thanks to strong revenue growth, some help from the federal government, and modest spending restraint.
This year, however, the Wynne government has pivoted away from its modest fiscal restraint and once again began walking down the path of large spending increases that caused Ontario’s fiscal mess in the first place.
This year, the government plans to increase program spending by 5.5 per cent, an increase more closely aligned with pre-recession trends. As before, the government is counting on strong revenue growth to pay for its increased spending. But also as before, the government’s spending decisions are creating real fiscal risks that may only be felt when an inevitable future fiscal shock hits, a large deficit opens up, and the pace of debt accumulation once again accelerates.
Minister Sousa spoke wisely when he said that government budgets must consider long-term impacts. If he aims to protect the province’s finances, he should consider his own words and craft in this year’s budget a restrained and responsible spending plan.