Wynne government places big bet on revenue growth

Printer-friendly version
Appeared in the Ottawa Sun, August 23, 2017

This year, Ontario’s operating budget is balanced for the first time in a decade. Of course, Ontario remains heavily indebted and is adding billions of dollars in new debt every year from capital spending that isn’t fully accounted for in the operating budget.

Under the circumstances, the government should consider a balanced operating budget as a small first step in addressing the province’s fiscal challenges rather than the end of the process.

It’s therefore worrying that this modest preliminary step, which the government took so long to take, may soon be undone. A new report from the government’s Financial Accountability Office (FAO) shows that the government’s fiscal plan relies on several optimistic assumptions of tax revenue. If those rosy assumptions don’t come to pass and the government proceeds with its spending plans, the province is at risk of quickly returning to operating deficits.

The FAO report notes that the government’s fiscal plan relies on tax revenue growth averaging 5.5 per cent annually between 2016 and 2019—that’s a lot to hope for. For context, tax revenue growth has averaged 3.3 per cent since 2004.

The government’s projections for tax revenue also look optimistic when you compare them to economic growth. In short, Queen’s Park expects tax revenue to grow considerably faster than the economy. But economic and tax revenue growth are closely linked. And the gap between the two metrics in recent years has been much smaller than the government forecasts. Counting on this type of rapid tax revenue growth exposes the province to several risks.

First, as demonstrated in a separate FAO report, if Toronto’s housing market continues to cool there would be substantial negative implications for provincial revenues.

A softer housing market would result in less government revenue, not just from reduced land transfer taxes, but also reduced HST revenue. The HST is applied to the value of newly constructed homes sold and to real estate agents’ commissions and legal fees. So a cooler housing market would directly lead to less HST revenue.

Moreover, Ontario is nearly a decade removed from the 2008/09 recession, and the possibility of another slowdown or recession always exists. By relying on optimistic revenue assumptions, the government increases the size of the adjustment it will have to make to its fiscal forecasts and bottom line projections if a slowdown occurs.

None of this is to predict that the housing market will cool or that a recession will hit—it’s rather to say that a fiscal plan with optimistic revenue projections exposes the province to significant risk from these possibilities. By using more moderate tax revenue growth projections (such as those suggested by the FAO) and reducing spending plans commensurately, the government could reduce these risks.

There are a number of reasons to be concerned about the state of Ontario’s finances. The best way to tackle our challenges while minimizing the risk of returning to operating deficits is to exercise greater discipline on the spending side of the ledger.

Relying on extremely rosy tax revenue projections may make it easier for the Wynne government to delay hard spending choices, but the risks will be borne by Ontario taxpayers.

Subscribe to the Fraser Institute

Get the latest news from the Fraser Institute on the latest research studies, news and events.