Monthly Archives: April 2019

A Familiar Ring to the Fiscal Aspirations of the 2019 Ontario Budget

 

Will history repeat itself?

Let us begin with a quiz.

Below are the summary figures from the 2012 and 2019 Ontario Budgets.

Which figures go with which budget?

Budget #1.

  • Return to a balanced budget in 6 years
  • Average revenue growth over the 6 years of 3.7 per cent
  • Average program spending growth of 0.6 per cent

Budget #2. 

  • Return to balance in 5 years
  • Average revenue growth over the 5 years of 3.0 per cent
  • Average program spending growth of 1.0 per cent

The question is not easy because the figures are similar.  That is the point.  As they depict the fiscal figure of Ontario, the 2012 and 2019 Budgets set out very similar visions.

The answer is Budget #1 is 2012 and Budget #2 is 2019.

While the 2019 Budget may appear more ambitious in striving to balance the budget in 5 years compared to the 6 years in the 2012 Budget, it should be pointed out that the prior year budget deficit facing the 2012 Budget (2011-12) was $15.4 billion whereas the prior year deficit facing the 2019 Budget (2018-19) was $11.7 billion.  Comparing the projected average annual deficit reduction, the 2012 Budget shot for $2.6 billion whereas the 2019 Budget strives for $2.3 billion.  So again the fiscal aspirations of the two budgets are uncannily similar.

We can think of the 2012 Budget as being a 12-year plan in two installments separated by a long hiatus and a change from Liberal to Conservative Governments.

Reality unfolded differently than envisioned in the 2012 Budget

 Time, or more to the point, policy, were not kind to the aspirations of the 2012 Budget.  For a while it appeared the Government was achieving the vision.  The level of program spending declined in 2012-13.  But the will to stick to the course quickly faded and over the next 3 years program spending grew 2.7, 2.3 and 2.9 per cent, respectively.  Any illusion of tight fiscal restraint was finally broken when it was revealed a good deal of the apparent restraint flowed from accounting conventions that were deemed by the Auditor General of Ontario to be inappropriate.

Recently, the accounting was revised.  Below we compare the projections in the 2012 Budget with what actually happened, as depicted in the current portrayal of Ontario’s finances.

  • Instead of balancing the budget in 6 years, it remained in deficit by $3.7 billion in 2017-18.  But as the changes in accounting conventions fully kicked in for 2018-19, the deficit shot up to $11.7 billion.  So Ontario remains far from a sustained, balanced budget position.
  • Revenue growth averaged 4.4 per cent over the 6 years, compared to the projection of 3.7 per cent. In part the stronger revenue growth reflected one-time asset sales that were not planned at the time of the 2012 Budget.  On its own, the revenue windfall relative to projection should have led to a lower deficit
  • But program spending growth averaged 2.7 per cent, compared to the projection of 0.6 per cent, a tremendous difference. Looked at from a different perspective, the 2012 Budget projected program spending would decline around 2 ¼ per cent per annum on a real, per capita basis whereas in reality, spending on that basis hardly declined at all.  Put more dramatically, instead of severe spending restraint, the end result was a neutral spending policy

The fiscal aspirations of the 2012 Budget were not even close to being realized.  This was not because the economy or some other influence beyond the control of the Government destroyed the plan.  Revenue growth was stronger than projected.  Instead it was because the Government did not adhere to the tight spending regime it spelled out.  As a consequence, the deficit last year, 2018-19, was $11.7 billion, not that much lower than the $15.4 billion of 2011-12.  More seriously, the debt burden,

measured as net debt relative to GDP, rose from an already high 36.7 per cent to the dangerous level of 40.2 per cent.  

Will the 2019 Budget aspirations be realized?

 Assuming the economy performs at least as well as assumed in the budget, the question of whether the 2019 Budget achieves its fiscal goals comes down to whether the Conservative Government adheres to the plan it set out.  In particular, will it restrain program spending growth to a very modest pace?  Not just for a year or two.  But for 5 years.

Program spending in Ontario was restrained to an average growth rate of only 0.4 per cent from 1995-96 to 2000-01.  At the federal level, program spending growth was only 0.5 per cent per annum on average from 2009-10 to 2014-15.   So there are some, albeit very limited precedents for the sort of sustained spending restraint envisioned in the 2019 Ontario Budget.

We must also, however, look at the aftermath of these 2 prior episodes of rigorous spending restraint.  From 2000-01, Ontario’s program spending growth rebounded to an annual average of 7.6 per cent to 2007-08.  At the federal level, program spending averaged 6.2 per cent per annum from 2014-15 to 2017-18.  We cannot infer in these two cases that the rapid spending growth following restraint was caused by pressures that built from the extended, parsimonious spending regimes.  There were new governments involved over some of those years in both Ontario and Canada.  However, there is little doubt that some spending pressures were pushed forward rather than being extinguished by the periods of restraint.  So the historical record offers some comfort that spending can be tightly restrained for an extended period.  But it also serves as a cautionary tale that the restraint must be accomplished in a way that does not create “catch-up” spending pressures.  This will be particularly important for Ontario.  By the time the budget is expected to be balanced in 2023-24, the net debt-to-GDP ratio will still be a lofty 38.6 per cent.  Ontario’s fiscal challenges will still be long from over and while the degree of spending restraint could be relaxed by the mid-2020s, there would be no fiscal scope to blow the lid off.

Tough actions will be required to achieve the spending restraint in the 2019 Budget

Of course only time will tell whether the 2019 Budget plan is successfully implemented.  The Budget provides some illustrations on how fiscal restraint will be applied.  But many more actions will be required above and beyond what is specified.  Indeed, many of the actions in the Budget make balancing the books more difficult; the extent of this is likely greater than it acknowledges.  There is no mention that the Budget allows for the middle-income person income tax cut that featured in the Conservatives election campaign.  Yet the budget projections show a marked slowdown in personal income tax revenue growth in 2020-21 (2.1 per cent) and 2021-22 (2.8 per cent); the likely explanation is an (unspecified) assumption that a tax cut comes into effect in 2021.  An outright decline in other tax revenue in 2021-22 may conceal the assumption of a cut in the gasoline excise tax.

For those who understand “budget speak”, there is a clue in the Budget that the future tax cuts are incorporated in the projections.  There is a reference that commitments are “fully costed”.  This seems like a tip-off that the costs are embedded in the revenue tracks.  The Budget is largely silent on this, it would seem so the Government will have something to announce later on.  In this case, the stage is being set to announce tax cuts to be effective in 2021.  Hiding the tax cuts in the revenue projections increases the confidence in the projections but draws a low grade for budget transparency.

While we cannot answer ex ante whether the spending restraint will be realized over the next five years, we can provide some context that suggests it will be very difficult to keep program spending as low as is projected in the 2019 Budget.  This is not to say it is not feasible.  Only that it will require a lot of hard work on the part of the Government and that some of the actions flowing from that work will likely test public support. To minimize the risk of losing support it will be essential to achieve spending restraint through enhancing effectiveness and efficiency as opposed to simply cutting.  In other words, serious reform of many programs will be required.

The spending profile in the 2019 Budget is quite tight

Average program spending growth of 1.0 per cent per annum may not seem all that tight.  Indeed it is faster than the pace laid out in the 2012 Budget.  Mind you, that pace in the 2012 Budget was not close to be achieved.  The spending growth in the 2019 Budget seems tighter if one considers it is about a 2 per cent decline annually in real, per capita terms.

The spending restraint applies to all major spending components; some are to face sharp reductions in the level of spending.  The average 5-year growth rates in spending for the major components are as follows:

Health                                            1.8 per cent

Education                                      0.7 per cent

Post-Secondary Education         0.7 per cent

Children’s and Social Services  -1.7 per cent

Justice                                           -1.2 per cent

Other programs                            1.7 per cent

Details for some of the smaller spending categories are only provided for one year, but we can see that some are to be cut significantly.  For example, Economic Development, Job Creation and Trade (total) is to see its budget slashed from $968 million last year to $782 million this year, almost a 20 per cent cut.

While there are not full details on how the spending restraint will be accomplished, compared to the 2012 Budget plan, there are more details in the 2019 Budget and they are provided for more years.

At almost half of government program spending, much will be riding on whether health care costs can be kept down to 1.8 per cent per annum.  Health care costs were restrained for a while following the 2012 Budget.  They grew 2.2 per cent per annum from 2011-12 to 2016-17.  But many of the things that were done to keep spending down have turned into spending pressures.  Capital spending was cut for several years and now many of the health sectors such as hospitals and long-term care have capital deficiencies.  Physician compensation was unilaterally cut in 2015.  Referring to fees and physician compensation, the Ontario Government’s press release on the 2019 arbitration award with the Ontario Medical Association indicates “restoration of the previous government’s cuts (approximately 3.5 %)” and “average annual fee increases of 1 % per year over four years”.  Additionally, the arbitration ruling puts no hard cap on the physician services budget, so one route to limit to budget increases for physician compensation is off the table.

Different perspectives can be brought to the health budget.  In one, it can be considered that at 1.8 per cent average growth per annum, the budget will grow.  But from another perspective, that growth seems very low relative to the “natural” pressures on the health budget.  A number of studies have attempted to calculate the “status quo” growth in the health budget, how fast spending would grow without concerted efforts at reform or restraint?  The answer is usually around 5-6 per cent per annum.  A typical estimate is composed of 1 percentage point for population growth, one percentage point for ageing, 2 percentage points to cover general inflation, ½ percentage point to cover the historical premium in health cost inflation over general inflation and; 1 percentage point from trend increases in the intensity of health care utilization (a total of 5 ½ per cent average annual growth).  From this perspective, it is obvious that much reform and restraint will be required to hold growth to an average of 1.8 per cent.  In addition, that growth figure must accommodate the Budget’s announcement of additional funding for hospitals and mental health.  Finally, the fairly benign period of modest drug cost growth in the mid-2010s is likely over as new, high priced tailored pharmaceuticals come on stream.

The processes underway to improve the effectiveness and efficiency of health care in Ontario will need to pay off mightily in order to achieve the envisioned spending restraint in light of the pressures.

Children’s and social services are targeted for declines in the level of spending.  In part this is to be achieved by simplified application processes and merging scattered employment services.  These are among many recommendations made by the 2012 Commission on the Reform of Ontario’s Public Services.  Half-hearted efforts have been made in the interim.  Now the reforms will actually have to be pulled off.

The projected decline in spending on economic development is one of the harshest.  And rightly so.  Many of the economic development programs, or subsidies as they should be called, have at best ill-defined purposes and would not pass a stringent benefit-cost test.  This too was pointed out by the 2012 Commission. It was again highlighted by the 2018 Ernst & Young line-by-line review of Ontario’s spending.  But little has been done to redesign programs or to rein in spending.  This too will now need to be done.

How does the 2019 Budget Stack Up Against Fiscal Policy in the “Harris Era”?

Mike Harris was Premier of Ontario from June 26, 1995 to April 14, 2002.  During his tenure, the Ontario Conservative Government turned an $8.8 billion deficit in 1995-96 to 4 modest consecutive surpluses 1999-00 through 2002-03.  While it may seem from today’s perspective that the starting point for this fiscal turnaround was more favourable than that in 2011 or 2019, a different perspective is gained if one looks at the deficit as a percent of GDP.  The 1995-96 deficit was 2.7 per cent of GDP.  A 2.7-per-cent-of-GDP deficit in 2011-12 would have been $17.8 billion (actual was $15.4 billion) and in 2018-19 it would have been $23 billion (estimate of the actual deficit is $11.7 billion).  So relative to the size of the economy (and a rough proxy of the capacity to rein in the deficit), the deficit facing the previous Government in preparing the 2012 Budget was somewhat smaller than in 1995 while last year’s deficit was half what the Harris Government faced in 1995.

The deficit reduction campaign got a strong, supporting role then from revenue growth.  From 1995-96 to 2000-01, revenues grew an average of 4.5 per cent per annum.  This was similar to the actual revenue performance for the 6 years after the 2012 Budget (4.4 per cent).  It greatly exceeds the pace of revenue growth predicted in the 2019 Budget of only 3.0 per cent.  For the most part, the strong revenue growth in the late 1990s came from Ontario’s economic performance rather than policy initiatives.

The post-1995 average annual program spending growth of only 0.4 per cent over 5 years was slightly tighter than projected in the 2011 Budget (0.6 per cent) but much tighter than the actual spending performance (2.7 per cent average annual growth over 6 years).  It was somewhat tighter than projected in the 2019 Budget (0.4 per cent compared to 1.0 per cent).

On budget day, a Globe & Mail article (Tim Kildaze, “Despite Doug Ford’s vow to get Ontario’s books in order, this isn’t a Mike Harris budget”, April 11, 2019) proclaimed in the headline “this is not a Mike Harris budget”.  Of course we cannot compare the specific actions taken by the Ford Government to return to balanced budget with what the Harris Government did because, as argued above, in order to hit the spending targets, the Ford Government will have to do a lot that has not yet been specified.  It is fairly certain that in 5 years the Ford Government will also have taken some bold cost-cutting measures.  Or it will have missed its spending and likely deficit targets.

We can, as done above, compare the actual spending record over the Harris years (0.4 per cent growth per annum over 5 years) with the 2019 Budget (1.0 per cent).  Yes, the Harris outcome is tighter than the 2019 Budget aspiration.  But they are not all that different.  In both cases spending growth is far below that registered over any other period.  If we put it in real, per capita terms, spending fell about 2 ½ per cent per annum 1995-96 to 2000-01 whereas it needs to fall around 2 per cent per annum over 5 years in the 2019 Budget.

Abstracting from relatively small differences, we can state that the fiscal experience over “the Harris era” was broadly similar to what the 2019 Conservative Government envisions with the 2019 Budget.  The main issue is that we are comparing here what the Harris Government actually achieved to aspirations of the Ford Government that may or may not be realized.

We can also say that the 2012 Budget, as presented, is even closer to the actual fiscal record of the Harris Government.  But the fiscal performance actually realized bears no resemblance.

In the same Globe & Mail article it is stated that the 2019 Budget target for future program spending growth of a 1 per cent average over 5 years “reflects a strategy the Liberals adopted for a number of years”.  As shown above, the reflection is only of what the Liberals said they were going to do.  There is no reflection to what the Liberals actually did as spending was restrained for only one year (2012-13) and grew on average 2.7 per cent over the 6 years following the 2012 Budget.

Conclusion:  The 2019 Budget aspirations are admirable if not familiar; it remains to see if aspirations will be realized this time

 The fiscal aspirations in the 2019 Budget are called for by Ontario’s economic and fiscal circumstances and are admirable.  A return to a balanced budget within 5 years through spending restraint which in turn is underscored by reforms to enhance effectiveness and efficiency is necessary.  But this Budget is largely an aspirational document.  It does little itself to realize the spending restraint and reforms it aspires to accomplish.  Indeed, the Budget adds many new pressures against Ontario’s fiscal position.

The aspirations set out in the 2019 Budget are uncannily similar to those laid out by the previous Government in its 2012 Budget.  That Budget did not have a happy ending because with a few exceptions the Government did not pursue program reforms and within a few years abandoned the pursuit of spending restraint.  As such, the 2019 Budget seems like a second installment of the 2012 Budget, following a hiatus of several years.

Will things turn out differently with the 2019 Budget?  Only time will tell.  One thing is certain.  A lot of work will be required to keep spending growth as low as set out in the Budget and not result in serious hits to the quality of Ontario public services.  If the fiscal targets are hit, one suspects that in 5 years the Ford Government’s fiscal correction will go down in history as being quite similar to the Harris Government correction.

The 2012 Commission on the Reform of Ontario’s Public Services laid out a blueprint to return Ontario’s finances to balance without impairing public services.  The previous Government decided to leave many of the more challenging recommendations on the shelf.  Now would be a good time to dust them off.


Don Drummond, Stauffer-Dunning Fellow, Queen’s University

Improving Healthcare’s Productivity

 

For many years the high cost of healthcare, estimated to have been 11.3% of GDP in 2018, has worried Canada’s provincial/territorial governments that carry most of the fiscal freight. Particularly worrying has been the continued rate of growth in healthcare’s cost beyond that of core inflation and of its approaching 50% share of provincial/territorial spending. Ontario’s governments have announced in successive budgets their aspiration to restrain that growth, an aspiration that has not been fulfilled, apart from a brief period in the late ‘90s, after which growth rebounded sharply, and another from 2011-16 when capital spending was cut and doctor’s fees were frozen in 2015; both are back with a vengeance as current cost pressures.

The 2019 budget is remarkably similar to that passed in 2012 by the previous government. Both state an intention to eliminate the deficit in 5 or 6 years primarily by constraining spending, an aspiration missed by miles in the period between 2012 and now. The then forecast balance was replaced with a deficit of $11.7 billion. The 2019 budget starts off there, with the goal of restraining growth in the healthcare budget to 1.8%, a target, as before, well below the 5 to 6 percent annual trajectory thought to be more-or-less ‘normal’ in the absence of transformational reform.

What policy changes will prevent the repetition of such failure over the next 5 years?

The core change appears to be recognition by the Ontario government that top-down management and one-size-fits-all policy direction have failed miserably, as has repeated rearrangement of its administrative deck chairs. The Local Health Integration Network Boards, originally intended but never allowed to create goals and objectives tailored to the province’s diverse regional needs, are gone; the LHIN staffs will be too in a couple of transitional years. The replacement ‘super agency’, Ontario Health, stands as yet rather uncertainly between the government and the public and its health service providers as a ‘politically-lite’ policy-maker vaguely reminiscent of Premier Harris’ Health Services Restructuring Commission of the late ‘90s.

Guided by the experienced members of the Premier’s Council on Improving Healthcare and Ending Hallway Medicine, the government appears also to have realized that the only way to achieve increased productivity is to ‘punt’ the responsibility to those health service providers prepared to organize themselves into teams. These Ontario Health Teams are expected to vary in their composition and the characteristics of the communities, districts, or regions they serve, within the limits of what could be described as providing ‘full-service’, i.e. the complete range of health and healthcare services required to meet the needs of those served, from hospital through home and community services, including some in the latter category recognized to be among the social determinants of health. Their governance, policy direction, and management are being left, in the first instance, to the founding team members to determine, subject only to the requirement that each OHT be “people centered”, incorporating into determination of their ethos and functions the voices of the patients and populations they serve. Their accountability will be not only to those populations but also to Ontario Health through individual agreements based on measurements, presumably of both outcomes and processes, yet to be developed, determined, and negotiated.

So, much is yet to be put in place to enhance the productivity of health/healthcare in Ontario and to link that productivity to greater efficiency measured in terms of the cost, over the coming half-decade and more, of providing the services people need to preserve their good health and restore it to those afflicted by disease, injury, disability, or other misfortune. The key question is “what’s in it for the participants in the putative Ontario Health Teams?” There is no question that there is money to be better spent coincident with preserving, indeed enhancing, the quality of health and healthcare services currently provided to the people of Ontario. But increased cost effectiveness will require changes to be made. “Change for the better is an oxymoron to the Canadian psyche[1]”and change that many will undoubtedly perceive to be for the worse will be especially difficult to make. It will require the substitution of lower for higher-cost personnel, family doctors for specialists, nurses for doctors, PSWs for RNAs, et cetera. It will require the introduction and acceptance of on-line patient-provider interactions, and re-introduction of the long-lost availability of primary care 24/7 by multi-professional teams big and diverse enough to provide it under humane call-schedules. Those changes won’t be made willingly, the way they must if they are to work, without clear benefit to the members of the OHTs making them. So far, on offer is the very attractive benefit of being rid of top-down, rule-bound, bureaucratic direction in favour of being relatively free to manage their own affairs, including the internal allocation of the resources in a single funding envelope. But there are two dark clouds on that horizon, one being the requirement in the proposed enabling legislation that the allocation of all Provincial resources be consistent with Legislative appropriations, the “votes” that created them. The second arises out of the 2019 arbitrated settlement with the Ontario Medical Association that treated the Physician Services budget as a line item separate from the other sources that collectively fund health and healthcare. Both imply that significant portions of the OHT envelopes will not be fungible but earmarked for specific purposes – a major, essentially ‘hand-cuffing’ constraint on innovative approaches to achieve greater productivity and efficiency. The bottom line is that the potential incentives for OHTs and their health service provider and community partners to take on the very significant challenge of change have neither been articulated nor intimated in the 2019 Budget. Nor is it apparent just how health policy formulation will be coordinated among the Premier’s Council, the Ministry of Health and Long-Term Care, those responsible for health-sector compensation negotiations, implementation of arbitrated settlements including that recently with the OMA and its ‘side deals’[2], and Ontario Health there at the interface with publicly-funded health service providers and the public. Clarification of that muddle remains to come.

Increasing efficiency in healthcare will also require government to grasp finally and firmly the nettle of mandating the adoption throughout the Province of a comprehensive health information management system, shareable by providers and patients alike while ensuring the personal privacy of both. This system must include robust, credible outcome measures in addition to processes, support the steadily increasing use of wearable and related health monitoring devices, and the use of algorithms and other ICT-based technologies generally in the provision of health and healthcare services.

Much yet remains to be done. Until it is, the aspiration to reduce healthcare’s spending in Ontario’s 2019 budget remains as tenuous as it proved to be on the predecessor government’s watch. In the meantime, the ominous threat of steady increase in the debt to GDP ratio continues.

[1] William Thorsell, The Globe and Mail

[2] Two groups are at work, one to propose changes to primary care and a second with set financial targets to reduce the use of unnecessary or inappropriate medical services


Duncan G. Sinclair