Fraser Forum

Why Ontario won’t balance its budget

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In what is perhaps the longest running example of faith-based fiscal policy, Ontario’s government continues to insist it will balance its budget by 2017-18. It’s unlikely to deviate from this mantra as it readies to release its budget this week.

From a deficit of $10.3 billion in 2014-15, Ontario’s 2015 Economic Outlook and Fiscal Review projected a drop in the deficit to $7.5 billion by the time 2015-16 wraps up and then $4.5 billion in 2016-17 before finally getting to a balanced budget in 2017-18.

How will this feat be accomplished? Own-source revenues are expected to grow from $96.8 billion to $110.5 billion between 2014-15 and 2017-18—an increase of 14.1 per cent. Federal transfers are expected to grow from $21.7 billion to $24.8 billion—an increase of 14.3 per cent. Total expenditures are projected to grow from $128.9 billion to $135.3 billion—an increase of approximately five per cent. In other words, the plan is to grow revenues at over twice the rate of expenditures.

Of course, this has been a constant theme in the Ontario government’s fiscal planning over the last decade with budget after budget projecting optimistic revenue scenarios that then crash upon the shore of fiscal reality. The Ontario government is afflicted with a structural imbalance that has continually managed to see its spending grow faster than its revenues. This is easily seen in the chart below, which plots total provincial government revenues and expenditures from 2000-01 to 2014-15 and then also includes projections for 2015-16 to 2017-18.

The chart shows the two series eventually meeting in 2017—a balanced budget. However, actual Ontario government revenues and expenditures to date are really two ships sailing on divergent paths and based on past performance seem unlikely to meet anytime soon. Over the period from 2000 to 2014, revenues have grown at an average annual rate of 3.6 per cent while expenditures have grown at a rate of 4.2 per cent. While the growth rate of spending in Ontario since 2010 has slowed and fell below the revenue growth rate, it has not cut spending to compensate for the growth prior to the recession.  

Even the Financial Accountability Office of Ontario in its October 2015 report has noted that to balance the budget by 2017-18, the pace of deficit reduction needs to accelerate sharply. As the report noted:

“if program spending continues to rise at its recent pace and if revenue growth is somewhat more moderate than projected in the budget (but still faster than the past four years), a deficit of approximately $3.5 billion in 2017-18 would be expected, in the absence of other policy actions.”

Based on this type of performance, how Ontario’s government can continually advance its fiscal projections on assuming revenues growing faster than spending, when the opposite has often been the case, is difficult to comprehend.

Of course, the government will point to its efforts to rein in expenditures net of debt service costs, which are expected to rise from $118.2 billion to $122.5 billion between 2014 and 2017—an increase of 3.6 per cent. However, there’s the inconvenient truth that debt charges have embarked on more rapid growth. From 2014-15 to 2017-18, provincial government debt service costs will grow from $10.6 billion to $12.9 billion—an increase of 22 per cent.  

With a provincial net debt that will soon exceed $300 billion, Ontario’s fiscal chickens have indeed come home to roost.  


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