Northern Economist 2.0

Friday, 12 April 2019

Ontario Budget 2019: Some Preliminary Thoughts

Well, the Ford Government’s first budget is out. Detailed analysis of the new fiscal numbers takes time but for now, some quick preliminary thoughts on what I think will ultimately be a positively received budget by the Ontario public despite the criticisms that will be leveled by both the right and left of center critics.  This positive public reception is not just because of popular new measures in alcohol, gaming and cannabis – such as earlier starts to establishments - that will facilitate consumption.

The right will argue that the move towards fiscal balance is not occurring fast enough.  Moreover, Ontario’s debt pile is projected to grow past $343 billion to reach $360 billion with an accompanying increase in debt service costs.  Meanwhile, the left will emphasize any harm to services from reductions needed to find public sector efficiencies. Indeed, the lead up to this budget has seen some particularly vociferous commentary about the “storm” coming to Ontario and the "apocalyptic" cuts coming to public services.

Yet, many middle of the road Ontarians may probably find this to be a reasonable budget that is less harsh than many expected. After all, spending is still going to be up slightly next year – from $162.5 billion to $163.4 billion and then to $165.6 billion the year after.  With signs the economy may be slowing down, the government is certainly not keen to worsen any potential downturn with a slash and burn budget.  However, the next four years may also be one of the most transformative periods in recent Ontario public finance if the government succeeds in implementing its vision to better manage Ontario’s public sector while maintaining services.

The Ford government is expected to end 2018-19 with an $11.7 billion deficit and is bringing in the 2019-20 fiscal year with a $9.3 billion deficit with plans to balance the budget by 2023-24. With respect to fiscal progress, the Ford government could have balanced the budget in about three years if it had decided to freeze nominal spending for a couple of years.  Instead, it is planning to allow total spending to grow at about one percent annually which is still very restrictive relative to the projected increases of the last Liberal budget.  Spending in Ontario is being placed on a much lower growth trajectory so that over time it will eventually match revenues.  Given that compensation is a big part of public sector spending in Ontario, the one percent number is a signal of what wage increases can be expected in the public sector. 

After inflation, real spending in Ontario will nevertheless decline and therefore there will need to be choices made on where greater reductions and efficiencies will occur. However, some of those efficiencies will be used to fund new initiatives whether they be dental care for seniors, a new child daycare tax credit, opening new long-term care beds on a faster schedule, investments in public transit, and ultimately even some tax relief down the road.

More specifically, despite creating a new single health agency and optimizing productivity, over the medium-term health sector spending is still expected to grow an average of 1.6% annually to 2021-22. Education is expected to grow 1.2 percent annually.  On the other hand, post-secondary education and training is expected to decrease at 1% annually and while justice, and children and social services, will each decline at about 2% annually. 

In terms of efficiencies, aspects of the government plan are going to take shape via coming expert panels and task forces. Education is a key area with changes in class sizes the first step that was taken.  A task force to find efficiencies in how the four systems operate will inevitably lead to suggestions for more coordination of procurement and spending across school boards, standardization of pay scales and perhaps even some type of consolidation of facilities in declining enrollment areas as well as administrative and management functions that preserve the distinctive nature of each system.

Then there is post-secondary education where the budget has communicated a desire to tie college and university funding more to performance outcomes.  The key issue here is what those performance outcomes are going to be. Along with graduation rates and employment success, one might expect to see research output and measures of commercialization success or community outcomes as additional measures.  However, Ontario’s post-secondary sector especially at the university level is quite diverse and constructing a one-size-fits all set of measures will be politically challenging given the regional role many universities play. 

However, where the government will garner more sympathy from the public is with respect to its position on trying to do something about aging university faculty who can continue working past 65 and earn a salary and if still working after age 71 also collect a pension. However, university pensions are not like school teacher pensions – there is no province wide university pension system but each university has its own so again there is no easy one-size-fits-all solution.  The government will at minimum need to separate its thinking with respect to those universities with plans that are defined benefit-where the employer bears the risk - from those that are defined contribution – where the employee bears the risk.

And then there is health care, Ontario’s largest single budgetary expenditure.  Health care in Canada has been looking for transformative change for years and the inevitable result has been more and more spending.  The slowdown in growth rates of the last few years may ultimately prove to be temporary, driven in part by a slowdown in new drug products and postponement of capital spending. With a pledge to end hallway medicine and increase the number of long-term care beds, combined with an aging population and the arrival of new high demand pharmaceutical products, any savings found by true transformative change in Ontario will be rapidly eaten up by other spending.  This will be the area of greatest challenge.

So, there you have it.  This budget has a lot of plans for change by implementing reforms and best practices and innovation but for the moment they are just plans.  Politics is the art of the possible and the next couple of years will reveal what is possible and what is not.  Much hinges on how the economy performs, and especially whether we go into a small recession.  If the economy does better than expected and revenues are buoyant, the government will be able to shrink the deficit more than expected and spend more money.  Angst generated for media purposes and twitter universe rants aside, I think a sizeable silent chunk of the Ontario population will give the provincial government the benefit of the doubt for now.