At a quick glance, the fiscal situation has improved significantly from last year. Estimated at $9.8 billion, the deficit for 2012–13 is $5 billion better than had been projected. However, much of this improvement was the result of one-time measures that will not carry forward into future years. A detailed analysis of the budget leaves little doubt that the fiscal situation in Ontario remains critical. The government’s fiscal austerity program is back-end loaded, with each year of restraint being more ambitious than the last. Next year, the deficit is expected to rise by $1.9 billion to $11.7 billion as program spending rises by 3 per cent. In the following two years, the deficit will improve slowly as the government attempts to hold program spending growth to 1.1 per cent and 0.4 per cent. In fiscal 2015–16 (the final year of the government’s detailed fiscal plan), Ontario will still have a $7.2 billion deficit. To balance its books in 2017–18 as promised, the government will have to freeze program spending in 2016–17 and cut spending by almost 1 per cent in 2017–18—a difficult task, for which few details are provided. (See chart.)
Of the $5-billion improvement in the deficit in 2012–13, $1 billion is attributed to the elimination of the contingency reserve that went unused and to other one-time savings that will not carry forward to future years. The elimination of banked sick days for teachers reduced education spending by $1.1 billion, as the government booked the unneeded liability against this year’s numbers. Corporate income taxes were also $1.2 billion higher than expected due to one-time assessments for years prior to 2011 and a higher tax base in 2011. Outside of these one-time factors, revenues and expenditures were only slightly better than in the 2012 budget’s projections. Ontario Power and Hydro One together generated an additional $313 million in profits, thanks to lower costs and higher transmission revenues. On the expenditure side, health spending came in almost $600 million below budget, thanks to a tightly restrained hospital sector. Interest payments were also $234 million lower due to the impact of lower interest rates.
This year, the government plans to increase program spending by 3 per cent. Adjusting for the effects of the sick day liability removal, which reduced spending in 2012–13, program spending is slated to increase by just 2 per cent in fiscal year 2013–14. This will mark the third year of significant spending restraint, and it stands in stark contrast to average annual increases of 6.1 per cent between 2000 and 2008. The most difficult challenge facing the government is its plan to constrain spending on health care. Health spending consumes 42.2 cents of every dollar in revenue and is slated to grow by just 2.3 per cent in fiscal year 2013–14, compared with average growth of 7.4 per cent annually between 2000 and 2008. Although growth in health spending was held to just 2.8 per cent last year, much of this was achieved through a wage freeze. Moving forward, more structural changes will be required—especially given the increasing demand for health care from the province’s aging population. The budget has listed some good ideas for efficiency improvements in health care, such as moving hospitals from a lump-sum payment model to a pay-for-patient-and-activity funding model and increasing investments in home care. Another measure included in the budget is the introduction of means testing for prescription drug payments, under which higher-income seniors will pay a greater share of their drug costs. Despite these proposed measures, achieving the required degree of spending restraint without overly affecting the quality of care will be a challenge.
Outside of health care, spending will be similarly restrained. Social services will see the highest growth this year due to a promised increase in social assistance rates. Excluding the liability adjustment, spending in education (including post-secondary) will rise by 2.9 per cent, an increase that includes the cost to complete the rollout for full-day kindergarten. The only other major recipient that will see any growth will be the justice department, which is slated to see its spending grow by 2.5 per cent. Excluding health, education, social services, and justice, spending will be cut by 2.7 per cent.
Unfortunately, unless revenues surprise on the upside, the government will be forced to tighten its belt even more in 2014–15 and 2015–16. Health and education will see below-inflation increases, spending on justice will be frozen, and all spending outside of health, education, and social services will be reduced by an average of almost 5 per cent per year. The only spending category slated to receive any meaningful growth in funding will be social services, reflecting the government’s planned increases to social assistance and its plan to increase the Ontario Child Benefit in 2013 and 2014. These tightly constrained spending numbers leave the government with no new funding available for any public sector wage increases over the life of the plan.
If the government sticks to its current plan, the province’s net debt, which includes operating and capital expenses, is projected to rise by $51.1 billion over the next three years. As a result, debt-servicing costs will rise from $10.4 billion in 2012–13 to $12.2 billion in 2015–16. In 2017–18, when the government is scheduled to balance its books, debt-servicing costs will be $14.5 billion, consuming 10.8 cents of every dollar in revenue.