Ontario Budget 2019 Economic Analysis

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Belt-Tightening for the Foreseeable Future: Achievable or an Elusive Plan?

In its first budget, the newly elected Ontario government has put forth its plan to balance the books in five years’ time. While the government’s fiscal situation needed a course correction, the road to balance will be extremely challenging. Read the Conference Board’s take on Budget 2019.

The newly elected Progressive Conservative government presented a belt-tightening budget that lays the groundwork for a small surplus in 2023–24. Budget 2019 laid out one of the most stringent spending plans in the province’s history, holding nominal program spending growth to almost zero this fiscal year and to an annual average of just 1.2 per cent thereafter. In real terms, the government is reducing spending across the board. Major sectors affected include health care, education, and social services. While some belt-tightening was clearly required, this plan will be extremely challenging to achieve.

Over the next five years, the government expects to rein in the deficit from $10.3 billion in 2019–20 to $3.5 billion in 2022–23, with a balanced budget forecast in the following year. The government will have to be vigilant to achieve its optimistic spending targets, particularly in health care, which is already feeling the pinch from years of restraint. On the revenue side, risks to the economic outlook could also derail the government’s forecast. Ontario’s economy has slowed much more than expected even just a few months ago—consumer demand, investment, and exports have all underperformed. On balance, the Conference Board anticipates the Ontario economy will grow moderately over the near term, but high household debt, low business confidence, and the possibility of worsening trade disputes could all hamper growth. A deterioration in the economic outlook would result in lower revenues than expected, making the fiscal targets unachievable.

With a mandate to return to a balanced position, the government had two choices: raise revenues or slow spending.

The risks surrounding the fiscal projection are troubling considering Ontario’s poor fiscal situation. The province has the second highest net debt-to-GDP ratio in the country at 40.2 per cent. Ontario’s net debt has climbed to one-third of a trillion dollars, more than doubling in the last 10 years. Having increased its debt so much over the past decade, it is essential that the province gets its fiscal house in order. And while Budget 2019 does chart a course to balance, sticking to this plan won’t be easy.

New and Notable in Budget 2019

With a mandate to return the province to a balanced position, the government had two choices: raise revenues through taxation or sharply slow spending. Budget 2019 opted for the latter. However, the government did find room for some minor tax relief for low-income individuals, as well as some measures aimed at business investment. Here are some notable new measures found in Budget 2019:

Notable Initiatives Impacting Revenues Over 2019–20 to 2021–22
  • Immediate write-off measures and accelerated investment incentive for Ontario businesses paralleling the measures from the federal fall update in 2018 ($2.5 billion in forgone revenues).
  • Ontario will not, however, parallel the federal phase-out of the small business deduction.
  • New refundable personal income tax credit for child care beginning in the 2019 tax year ($1.1 billion in forgone revenues).
Notable Initiatives Impacting Spending Over 2019–20 to 2021–22

Health Care (average annual growth restricted to just 1.6 per cent)

  • Establishing a new single agency to provide health care oversight. This will lead to reduced bureaucracy and regional administrative duplication. The government expects this to generate savings of $350 million by 2021–22.
  • Improved productivity for the health care workforce, including improved scheduling. The government expects this to generate savings of $250 million by 2021–22.
  • Regionalization of public health care units. The government expects this to result in savings of $200 million by 2021–22.

Education and Post-Secondary (average annual growth restricted to just 0.5 per cent)

  • Finding internal efficiencies in the Ministry of Education, with estimated savings of $25 million by 2021–22.

Social Services (annual spending cut by an average of 2.0 per cent per year)

  • Closure of underutilized youth justice services and a reduction of beds in open and secure custody detention systems, leading to savings of $48 million by 2021–22.
  • Evidence-based sector transformation that will result in operational efficiencies of $510 million annually by 2021–22.

The Economy

While the Ontario economy performed better than the Canadian economy over the last five years, the pace of growth is easing, and more quickly than anticipated. In the closing months of 2018, the Canadian economy faced broad weaknesses in consumer demand, business investment, and exports. The Ontario economy is not immune to easing trends. We expect it will advance at a much more moderate pace of around 1.5 per cent over the next two years, compared with average annual growth of 2.5 per cent between 2014 and 2018. While the Canadian economy picked up speed at the start of the year, macroeconomic concerns are numerous and include elevated consumer debt, rising trade disputes, excessive government regulations, and weak private investment intentions.

The Ministry of Finance’s forecast on the economy reflects our views on easing economic growth. The budget projections for GDP are generally in line with those of the Conference Board. Weaknesses in the economy reflect businesses’ reluctance to increase spending on machinery and equipment. Also, the correction in the housing market is taking a toll on growth; however, it is not expected to worsen. Solid population growth and pent-up demand from millennials will help ensure a recovery for the housing sector.

While this government’s first budget includes some new measures, on balance it will provide little stimulus to economic growth. After accounting for inflation, program spending is expected to contract over the next five years, with key sectors such as health care, education, and children’s and social services experiencing stringent spending restrictions. There is some possibility of a stronger contribution to economic growth from the government, as ambitious spending targets may be difficult to achieve.

The Ford government will continue important investments in transportation and other infrastructure.

Keeping with the long-term public infrastructure agenda to invest $144 billion over 10 years, the Ford government will continue important investments in transportation and other infrastructure. However, the government will be reining in how much is invested, from $15.3 billion in 2018–19 to $14 billion in 2022–23, with cuts starting this fiscal year. This will lower government borrowing requirements, debt accumulation, and interest payments.

While balancing the books was the major theme of the recent budget, the Ontario government did announce new credits that will provide a mild boost to household disposable incomes. Most notable is a personal income tax credit for child care for low- and moderate-income households that is expected to provide an extra $390 million annually to families starting this year. For businesses, the Ontario government is providing $3.8 billion in tax relief over the next six years through the Ontario Job Creation Investment Incentive, which will lower the marginal effective tax rate from 16 per cent in 2018 to 12.6 per cent in 2019. This is a step in the right direction to lift investment intentions and business confidence.

How Achievable Are the Budget’s Fiscal Projections?

Budget 2019 focused on committing the province to a path to balance in five years’ time. Impressively, the province set targets for every major spending category out to 2023–24, a welcome surprise as provinces usually provide only overall spending targets that far into the future. Nonetheless, it is one thing to set a target and another to achieve it.

Over the next five years, the province plans to restrict program spending growth to a slim 1 per cent. Inflation alone over that period will run 1.9 per cent annually. The biggest-ticket item, health care, will certainly be the most difficult to contain. The province plans to restrict growth in health care spending to 1.8 per cent over the next five years. This will be a remarkable feat if achieved, as the province has seen health care spending grow at an average annual rate of 3.7 per cent over the last decade. Furthermore, projections from The Conference Board of Canada’s demographic model of heath care spending indicate that it will need to increase by an annual average of 4.7 per cent over the forecast period to meet the demands of a growing, and aging, population. If spending were to fall in line with our projections between 2019–20 and 2023–24, the average annual difference between our model and Ontario’s Budget 2019 would be nearly $4.9 billion. This means the Ontario government will need to find substantial efficiencies in the health care sector, something other governments have failed to do.

These targets will be difficult to achieve.

Education and social services will also face belt-tightening over the next five years. Education is set to see its spending envelope restricted to an annual pace of just 0.7 per cent per year. Spending on social services will see substantial cuts of 1.7 per cent on an average annual basis. As was the case with health care, these targets will be difficult to achieve. Spending over the last decade has seen growth of 4.3 per cent for education and 3.9 per cent for social services. (See Chart 1.) While some details were given on how these targets will be met, and are outlined above, most of the savings required to reach these tough targets have yet to be detailed.

Chart 1
Big Changes in Store for Program Spending
(average annual spending, percentage change)

*The Conference Board of Canada’s own calculations
**includes post-secondary education
Sources: The Conference Board of Canada; Ontario Ministry of Finance.

The government’s revenue outlook depends on the outlook for GDP. Therefore, we can assess how realistic the government’s fiscal projections are by looking at their assumptions for GDP versus our own forecast, completed in February. While the achievability of the government’s spending targets may be challenging, the government’s expectations for revenues are in line with the Conference Board’s most recent forecast. Overall, the government expects revenues to grow at an average annual pace of 3 per cent over the next five years.

If the government can follow through on its ambitious spending plan, and revenues fall in line with the reasonable expectations, the province should slowly whittle away at the deficit. As the current $11.7-billion deficit slowly turns into a $300-million surplus by 2023–24, net debt-to-GDP is expected to fall from 40.7 per cent this fiscal year to 38.6 per cent at the end of the forecast. (See Chart 2.)

Chart 2
As Government Embarks on Path to Balance, Net Debt-to-GDP Will Fall
(susurplus/deficit, $ billions; debt-to-GDP, per cent)

f = forecast
*surplus/deficit includes contingency
Sources: Budget 2019; The Conference Board of Canada.

Final Thoughts

In its first budget, the newly elected Ontario government has put forth its plan to balance the books in five years’ time. While the government’s fiscal situation needed a course correction, the road to balance will be an extremely challenging undertaking. The spending targets presented in Budget 2019 are some of the most stringent over an extended period in the province’s history. Demographic and inflationary pressures alone will make these goals challenging. In health care, which is the largest spending category, an aging population is placing increasing demands on an already strained system. The government will also likely face public outcry from citizens and unions across the province, adding further pressure to government objectives. Certainly, the days of large spending increases are behind us, and the province has now entered an era of belt-tightening.

Our Ontario budget experts are ready to provide impartial, evidence-based, and non-partisan economic analysis of Ontario’s 2019 budget.

In our free webinar, our economists will provide brief fact-based insights to the 2019 Ontario budget. The presentation will be approximately 20 minutes including time for Q & A. Join us on Friday, April 12 at 11:00 a.m.

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