ARCHIVE: INSIDE OUTLOOK
| Ontario’s Finances Squeezed by Modest Economic Growth and Health Care Costs Glen Hodgson, Senior Vice-President and Chief Economist, Forecasting and Analysis February 7, 2012 | Ontario’s economy continues to recover slowly from the 2008–09 recession. However, the recession and the lacklustre worldwide recovery have left the province with a large fiscal deficit, estimated at $16 billion in 2011–12. The provincial government’s plan to balance the budget by 2017–18 is based on restraining total growth in program spending to just 1.7 per cent annually, a significant departure from recent fiscal history. The Conference Board of Canada currently estimates that Ontario will not balance the budget until 2021–22, even if spending is controlled as outlined in its 2011 budget. The extent of Ontario’s fiscal challenge, however, is found not only on the expenditure side, but also in the revenue column. Weak growth in government revenue—a consequence of projected sluggish growth in Ontario’s potential output—plays a crucial role in the province’s fiscal outlook, as outlined in the Conference Board’s report, Ontario’s Economic and Fiscal Prospects: Challenging Times Ahead. Between 1998 and 2007, real potential output in Ontario—the highest rate of growth possible without risking inflation—grew at an average annual rate of 2.8 per cent. But real potential output is projected to expand by just 1.9 per cent per year over the forecast period ending in 2030–31. Three principal factors determine economic potential: the projected available labour force in Ontario, capital investment, and productivity growth. As Ontario’s population ages and more people retire, the supply of labour will not expand as quickly as it once did. Although investment activity will remain solid over the long term, Ontario’s manufacturing sector is in the midst of transformation brought on by globalization, competition from emerging economies, an unstable U.S. recovery, and a strong Canadian dollar. The Conference Board estimates that Ontario’s nominal gross domestic product (GDP) will grow at an average annual rate of 3.9 per cent after 2015. Since nominal GDP (economic growth plus inflation) forms the broad basis for government revenue, rebalancing Ontario’s books will hinge on keeping overall spending growth below this level. The Conference Board estimates that Ontario’s nominal gross domestic product (GDP) will grow at an average annual rate of 3.9 per cent after 2015. On the expenditure side of the ledger, Ontario pledged in the 2011 budget to restrict increases in health care spending to 3 per cent per year, an ambitious target given that health care budgets have expanded by roughly 7 per cent annually over the past 30 years. Health care expenditures already represent the biggest spending envelope, and an aging society will increase the demands on the province’s health care services. The alternative scenarios that the Conference Board presents are sobering. Even if health care spending grows at a rate that accounts only for population growth and inflation, Ontario will not balance the budget at any point before 2030–31 without other changes. If future spending growth remains near current levels to accommodate rising demand, new revenue would be required (such as a sharp increase in the provincial sales tax from 8 to 15 per cent). The outlook for health care spending and economic growth gives Ontario residents choices. If they expect continued investment in their publicly funded health care system, they will have to pay for it through higher taxes. If the public is unwilling to accept higher taxes, transformative changes will be required in the way publicly funded health care is delivered in Ontario. Related Publications
Canadian Outlook Executive Summary: Winter 2012
Provincial Outlook Economic Forecast: Autumn 2011 Related Centre
The Canadian Alliance for Sustainable Health Care (CASHC)
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