Ontario’s fiscal deficit is large, and it’s going to get larger if the government doesn’t do something about it. But if the Tories want to balance the budget by the next election, in 2022, they’ll have to subject voters to pain of the kind they haven’t felt since the 1990s.
The above sunny paragraph more or less sums up Financial Accountability Officer Peter Weltman’s first major report since the June election, released on Monday. In more detail: he says the deficit is currently $12.3 billion; if nothing is done, the deficit will grow to $16.4 billion by 2022; and if the government intends to bring the budget into balance, it’ll have to spend $850 less per person than it does — which would mean big spending cuts.
According to the FAO, the deficit has tripled since 2017, when it was estimated at $3.7 billion. This growth isn’t the result of the accounting changes introduced by the Tories, because those were baked into prior reports. We’re seeing the jump because the previous Liberal government committed a bunch more money this year (about $8.6 billion more than last year) and because the new government lowered revenue by scrapping the cap-and-trade system and bringing in upper-income tax cuts and a new low-income tax credit. This is real money, and the government is going to need to find real money to make up the difference.
(One point worth emphasizing is that the FAO isn’t making predictions, exactly. Because the government didn’t provide future spending and revenue estimates in this year’s fall economic statement, the FAO is simply indicating what will happen if the government doesn’t do anything to change its fiscal course.)
The FAO doesn’t make policy recommendations, but we know which levers the provincial government can pull. And the FAO has helpfully provided the relevant numbers.
A one-point increase in the HST? That would bring in $4.6 billion annually by 2022. A 10 per cent increase in income-tax revenue? Five billion dollars. A one-point increase in corporate income taxes? One and a half billion. But even if the Tories were to introduce such tax increases — which they’ve ruled out in the past — they still wouldn’t be able to dig the province out of the hole it’s in.
So that leaves us with spending cuts — but how many and how fast will need to be debated. Indeed, on Monday, Weltman encouraged MPPs to debate the matter publicly before the province commits to a course of action. The next election is an arbitrary deadline for a balanced budget, and the government hasn’t explicitly committed to it yet. It would represent a faster path back to balance than the one the Liberals took after the 2008-09 recession.
But there’s a flipside here: yes, the deficit has risen thanks to a recent and rapid run-up in spending. But that means that it could potentially be reversed in large part by returning to the province’s 2016 per-person levels of spending. That was hardly an era of hellish austerity. But in the real world, turning back the clock on spending levels is a notoriously difficult thing to do — and wildly unpopular.
The final problem for the Tories is that they’re up against the first rule of holes: when you’re in one, stop digging. (There is no “Dig up, stupid” in public accounting.) That means that further tax cuts, including the promised cuts to the gasoline tax, will need to wait. Their election commitment to remove 5.7 cents a litre in gasoline taxes would cost $1.2 billion annually. So another thing to keep an eye on is whether the government will, in fact, increase the municipal share of gasoline taxes from two cents to four by 2022 — something that former premier Kathleen Wynne had promised to do.
The first stage of that increase — to 2.5 cents — was supposed to happen next year, in the 2019 budget. The Tories could cut the gasoline tax by two cents instead, and the effect on the provincial budget would be more or less the same: it’d cost $321 million. That would let them fulfill part of a campaign promise: they could call it a down payment on the cuts they’ll make if re-elected. But leaving municipalities, which have been expecting a big increase in provincial transfers, in the lurch would come at a high political cost.
And they’re going to need a plan, if for no other reason than that provincial law says so. The Financial Transparency and Accountability Act states that when the provincial public accounts are in deficit, the finance minister must present a “recovery plan” when the budget is tabled. Vic Fedeli will get his chance to do that when he unveils the government’s budget next spring. One point Tories may want to consider: neither the government nor the FAO has factored in the possibility of a recession between now and the next election. The Tories will probably want to think about that possibility before events force them to.
May we have a moment of your time?
Our public funding only covers some of the cost of producing high-quality, balanced content. We depend on the generosity of people who believe we all should have access to accurate, fair journalism. Caring people just like you!
Get Current Affairs & Documentaries email updates in your inbox every morning.