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

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