The last couple of days have seen two reports – one by Statistics Canada and one by the Ontario Financial Accountability Office – which taken together provide the best picture yet as to why Ontario faces a big fiscal challenge in resolving its deficit and debt issues. First, the Financial Accountability Office (FAO) in its Spring 2019 Economic and Budget Outlook under its baseline projection projects that Ontario’s budget deficit decreases from $11.7 billion in 2018-19 to $7.3 billion in 2020-21 and improves rapidly over the following three years, reaching balance in 2022-23 and a relatively large surplus of $6.4 billion by 2023-24.
Yet, the FAO notes that the 2019 Ontario Budget projects smaller deficits over the next two years due to the government’s more optimistic outlook for revenue growth. However, beginning in 2021-22, the 2019 budget incorporates provisions for unannounced revenue reductions and spending measures. This would lead to higher deficits and add to Ontario’s debt. The Province should still achieve a balanced budget by 2023-24, due to its plan to significantly restrain the growth in program spending. The 2019 budget will see program spending grow at just 1 percent annually over the next five years bringing per capita government spending from $10,494 in 2018-19 to $9,391 – a decrease of 10.5 percent. Per capita government spending in Ontario is already the lowest in the country and this additional decline would widen the gap even more.
So why is Ontario unable to provide provincial government program spending closer to the national average? The answer to that lies in another report by Statistics Canada titled Income Growth per Capita in the Provinces since 1950 which examines GDP per capita and real GDI per capita over a 66-year period to provide insight on which provinces experienced the most growth over the course of this period, and how this affected per capita income levels across provinces. The news for Ontario is pretty grim in terms of economic growth rates. Whereas in 1950, Ontario had the highest GDP per capita of the ten provinces – followed by British Columbia and Alberta – by 2016 it was down to 4thplace with Alberta, Saskatchewan and Newfoundland and Labrador in the top three positions. More startling is the growth rate of per capita income – which places Ontario at the bottom of all the provinces over this period (See figure).
So, Ontario in a sense over the last 50 years has spent beyond its means in an effort to keep up with the other provinces in terms of the provision of public services but that has still not been enough. It now has the lowest per capita spending of the ten provinces, the largest provincial total public debt, the second highest per capita public debt, and is engaged in an effort to balance its budget which will widen the program spending gap further with the other provinces. Now some may point to the factor here as a revenue problem driven by the unwillingness of Ontario to raise taxes. Ontario indeed has the lowest total revenue per capita among the ten provinces but it has the third highest per capita tax revenue – after Quebec and Newfoundland. Ontario’s relatively higher per capita tax revenue is offset by lower revenues from resource royalties, federal transfers as well as all other revenues when compared to other provinces. No, it is not a tax revenue problem.
The problem is three-fold: First, Ontario has had a weaker economic growth rate relative to the other provinces and needs to boost its productivity and economy to grow faster thereby expanding its tax base. Second, Ontario has not had has a resource sector boom that has enabled provinces like Alberta and Saskatchewan to leap ahead in terms of income and ultimately government spending and nor is it likely to get one from northern Ontario resources anytime soon given the slow pace of development. Third, as a result of its strong tax base - all things considered – Ontario is still a source of federal government revenue and ultimately transfers to other parts of the country which allow those regions to maintain a higher level of spending. While balancing the budget by 2022-23 will resolve Ontario’s fiscal situation, it remains that the long-term pressures driving its fiscal imbalance are still there.
