Balancing the Budget: The Ontario Plot Thickens

The Conference Board of Canada has waded into the Ontario pre-budget deliberation process with a report that says Ontario will be unable to balance its budget for a decade as a result of sluggish economic growth and shrinking government revenues.  Moreover, the Conference Board has focused on reining in health care costs as the most important factor in dealing with the budget balance – which hopefully can be achieved by 2021-22.  Aging and slower labor force growth can be expected to reduce Ontario’s economic growth and hence the growth of government revenues. 

According to a report on Global News, Premier McGuinty is disputing the prognosis of the Conference Board that Ontario will not be able to balance the budget.  I have to admit that while Ontario does have a serious budget problem, the Premier is probably right in not getting too obsessed with the Conference Board report.  The Conference Board is predicting a dismal decade of economic growth for Ontario but then it has also been predicting major upturns for Thunder Bay’s economy for at least five years and that has not happened either.  (See my post Forecasting Thunder Bay's GDP Growth).  The point is, circumstances change and predictions are revised.

Ontario has been experiencing slow economic growth for about a decade now.  During the period 2000-2011, its provincial government expenditures grew at an average annual rate of 5.7 percent while its revenues grew 4.5 percent.  For the period 2008 to 2011, expenditures grew at 6.7 percent while revenues grew at 3.0 percent.  In 2011-12, total revenue was 108.8 billion dollars and expenditures 124.8 billion for a 16 billion dollar deficit.

Let’s assume the following scenario.  For 2012-13, the Ontario government freezes total government spending at 124.8 billion dollars (note the Table is in millions of dollars).  The year after, it implements some of the recommendations of the Drummond Report and then cuts 3% in spending from the total Ontario government budget – a cut of about 3.8 billion dollars in spending.  After this, it allows spending to grow at 1 percent annually.  At the same time all of this is happening, we let total government revenue grow at 2.5 percent annually - below the average rate for 2008-2011.  The result, by 2017-18, there is indeed a balanced budget (see the Table below).  This is not a painless exercise. In real terms (adjusted for inflation) these represent real reductions in resources.  Assuming 2 percent inflation, between 2012-13 and 2017-18, total spending would rise less than 1% while prices would rise 13 percent.  In real terms, government spending would shrink 10 percent. 

The budget deficit could shrink even faster if economic growth recovers somewhat and revenues rise faster, which is not outside the realm of possibility given the slight rebound being detected in the United States to which much of Ontario’s economy is tied.  It could also shrink faster if larger upfront cuts are made.   It is certainly not going to be any fun governing in a decade like this but it will be possible to balance the budget ahead of schedule provided a government is able to set out a plan and stick to it in a disciplined fashion.