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2011 Ontario Budget—Controlling Growth in Health-Care Spending Is Key to Budget Commitment to Balance the Books

by Matthew Stewart and Eric Thomson

Introduction

Among all the provinces, Ontario is in the most difficult fiscal position. The Ontario government has run large deficits over the last three years, and according to the 2011 Ontario Budget, the government will not balance its books for seven more years. Despite a large stimulus program, which pushed up program spending by almost one‑fifth over the last two years, the government will not make any reductions in overall program spending. Instead, the Ontario government plans to tightly control further growth in spending over the next seven years. Health care and education will be protected, but spending on other items will decline. The result is an additional $67.5 billion in accumulated deficits over the next seven years before the books are finally balanced in fiscal year 2017–18.

Controlling the growth in overall program spending hinges on the province’s ability to control health‑care costs, since health‑care spending consumes approximately 43 cents of every dollar collected in revenue. The government plans to hold growth in health‑care spending to three per cent per year from fiscal year 2012–13 through 2017–18, but an aging population will make this a difficult task. Over the past 15 years, health‑care spending has grown at an average pace of 6.5 per cent annually. Without a clear strategy, it will be difficult for the government to hold to its targets for health‑care spending growth while at the same time protecting the quality of the health‑care system.

Fiscal Plan

Chart 1: Taming the Health-Care TigerDeficit elimination is clearly the priority in this budget. Yet, despite the winding down of the large stimulus program, which pushed up program spending by almost 20 per cent over the last two years, the government will not make any cuts to program spending in fiscal year 2011–12. (See Chart 1.) Therefore, in order to balance the books by fiscal year 2017–18, the Ontario government plans to severely limit future increases in program spending.

In the fiscal year just ending, the province will post a deficit of $16.7 billion—equal to just over 3 per cent of GDP. This deficit is $3 billion lower than what was predicted in the 2010 budget. Most of the improvement is due to unused contingency funds and a saving of $434 million in debt‑servicing charges—a result of lower interest rates. Almost none of the improvement in the province’s finances will carry forward to future years. Total program spending is projected to be just $200 million lower in fiscal year 2011–12 than what was predicted in Budget 2010, leaving the date that the province expects to balance the books unchanged at fiscal year 2017–18.

With the deficit at such a high level, it is imperative that the province begin to curtail growth in program spending in order to improve the fiscal situation. This will require new-found fiscal restraint and continued improvement in revenue growth. The government plans to limit overall spending growth to an average of just 1.4 per cent over the next seven years. This compares with an average rate of growth of 6.2 per cent over the five-year period from 2003–04 to 2008–09, before the strong spending increases associated with the recent stimulus program. In support of this goal, the government plans to continue the salary freeze for all non-unionized public employees for two years and to reduce the size of the public service by 1,500 positions by 2014. That is on top of the 3,400 positions to be cut under the 2010 budget.

The key to constraining the overall growth in program spending hinges on the province’s ability to control health‑care spending, which now consumes 43 cents of every dollar collected in taxes or transferred from the federal government. Although the province recognizes this necessity, it will be challenging to make the changes that will be necessary to limit health‑care spending growth, given the aging population. Over 44 per cent of the total health‑care budget today is spent on caring for those age 65 and over—a group that accounts for only 14 per cent of the population. But the 65‑and‑over population is growing at a rate that is more than three times that of the overall population, putting enormous pressure on health‑care costs. It is partly because of these demographic pressures that health‑care spending has increased by almost seven per cent per year over the last five years. This year, the Ontario government plans to slow this increase to 4.4 per cent, and then reduce it further—to just 3.4 per cent in fiscal year 2012–13 and 2.8 per cent in 2013–14. (See Chart 2.) Although this will be a huge challenge, the province’s ability to balance its books hinges on succeeding on this front.

Chart 2: Program Spending Protected Despite End of Stimulus ProgramSimilar to the fiscal plans released by other provinces, the Ontario government has directed most of its limited resources toward health care. The budget includes additional funding for mental health services and breast cancer screening. Even with the planned reductions in health‑care spending growth, the government must cut from other areas if it is to meet its balanced budget target. Thus, by 2013–14, the Ontario government plans to cut $4.4 billion from other expenses, with virtually all of the cuts related to time‑limited programs and infrastructure investments. The one new spending measure of significant size included in the budget was an additional $309 million per year for post‑secondary education spaces by 2015–16.

Finally, even with a balanced budget in 2017–18, provincial debt levels are still projected to rise by $67.5 billion over the next six years. As a result, debt‑servicing costs will rise from $9.5 billion in fiscal year 2010–11 to $16.3 billion in 2017–18, by which time they will consume 11.4 cents out of every dollar of revenue.

Economic Outlook

The recession was particularly hard on Ontario. In 2009, Ontario lost 162,000 jobs, with the losses concentrated in the province’s export‑intensive manufacturing industry. Renewed export growth and government stimulus spending helped the economy bounce back strongly in 2010. But as the Ontario economy moves through its recovery over the next two years, growth in labour markets, industrial production (particularly in the manufacturing industry), and consumer activity will slow. Stimulus spending by all levels of government is also set to end this calendar year as governments begin focusing on deficit reduction.

The Ontario Ministry of Finance’s economic projections for 2011 and 2012 are consistent with the Conference Board’s economic outlook. Both forecast a general slowdown in economic growth and housing activity over the next two years.

However, in the short term, there are large downside risks to the economic outlook. The devastating earthquake and tsunami in Japan (the world’s third-largest economy) could cause a bottleneck in the supply of parts to Ontario’s automotive manufacturers. Although this should correct itself by the end of the year, automakers are currently cutting their production forecasts. Further increases in the Canadian dollar as a result of continued unrest in the Middle East and North Africa would hurt Ontario exporters. Finally, interest rates could be higher than forecast in the Ontario 2011 Budget. Bank of Canada governor Mark Carney recently suggested a rate increase may come soon after the May 2 federal election if commodity prices remain elevated. This would cause an increase in the Ontario government’s borrowing costs. The fiscal outlook contained in the 2011 Ontario Budget is thus subject to an unusually high level of risk.

Matthew Stewart Matthew Stewart
Principal Economist
Eric Thomson Eric Thomson
Economist

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