Ontario’s fiscal situation is critical. The province’s deficit is large—2.4 per cent of GDP. And Ontario has run substantial deficits in each of the last four years. With total debt rising from 28 per cent of GDP in 2007–08 to 40 per cent this fiscal year, it is clear that substantial changes are needed before debt downgrades and spiralling debt costs threaten the quality of social programs. According to the budget estimates, if the government were to continue on its current course, the deficit would reach almost $25 billion in 2014–15. To address this challenge, the Ontario government has laid out an ambitious plan of program restraint and revenue measures. If it succeeds in carrying out its plan, the government will have presided over the kind of fiscal austerity seen only in a few provinces back in the late 1990s.
For the fiscal year just ending, the province will post a deficit of $15.3 billion. That is $1 billion lower than predicted in the 2011 budget. However, most of this improvement is due to the unused contingency fund and a saving of $200 million in debt-servicing charges as a result of lower-than-expected interest rates. In addition, total program spending is now projected to be $200 million below budget.
With the deficit at such a high level, it is imperative that the province begin to control program spending immediately. In that regard, the budget doesn’t disappoint. The government plans to limit overall spending growth to an average of just 0.6 per cent over the next six years. While the restraint is somewhat back-end loaded (growth averages 1 per cent over the next three years but just 0.3 per cent over the final three years of the plan), that compares with average annual growth of 6.3 per cent over the five-year period from 2003–04 to 2008–09. And even that high rate of growth came before the stimulus spending associated with the 2008–09 recession kicked in and sent the deficit soaring. These numbers speak to the ambition of the plan. (See chart.)
With total health care spending currently consuming 43 cents of every dollar in provincial revenue, containing health care budgets must be a vital part of any expenditure restraint package. The government plans to slow annual growth in public health care spending sharply—from the 7 per cent pace experienced over the last decade to just 2.1 per cent per year beginning in 2012–13. Achieving such a scaled-down growth path for health care spending will be challenging, given the increasing demand for health care from the province’s aging population and the internal cost-drivers of the health care system.
Slowing the rate of growth in spending on other programs won’t be much easier. Total spending excluding health care is slated to rise by just 0.2 per cent per year from 2011–12 to 2014–15. This includes spending on social services, education, and other programs. Given that the government plans to increase spending on social services at a pace slightly below 3 per cent per year and to hold growth in education spending to just below 2 per cent, spending on other programs will have to be cut sharply to meet the overall target of 0.2 per cent per year. Indeed, to achieve its overall spending target, the provincial government would have to cut all other program spending (i.e., all program spending except for health care, education, and social services) by an average of more than 3.5 per cent per year over the next three years—a difficult feat indeed! Yet, given the outlook for health, education, and social services, the cuts in these other areas can only accelerate in the final three years of the austerity program.
The expenditure savings will be coming from three main sources: removing duplication and improving efficiency of services delivery, restraining the growth in compensation of public sector employees, and curtailing costs across the broader public sector. The Ontario government is committed to bringing compensation costs, which currently account for around 30 per cent of total program spending, under control. As a result, the government is proposing a two-year wage freeze for teachers and will extend a wage freeze for executives at Ontario’s hospitals, colleges, universities, school boards, and agencies for an additional two years. The government will pursue a very similar mandate with other public sector employees, including physicians.
Almost half of the $4.4 billion in additional revenues will come from delaying further cuts to business tax rates until a balanced budget is achieved. More specifically, the corporate income tax rate, which had been scheduled to drop to 10 per cent by 2013, will be maintained at 11.5 per cent. As well, the business education tax rate will remain where it is for now. Furthermore, additional revenues will come from improved profitability of Crown corporations and increased fees for some public services.
Even if the government does manage to balance its books by 2017–18, the province’s debt (which includes operating and capital expenses) is still projected to rise by $56.6 billion over the next six years. As a result, debt-servicing costs will increase from $10.1 billion in 2011–12 to $15.4 billion in 2017–18, by which time they will consume 11.3 cents of every dollar of revenue.