Next year is going to be expensive for Ontario — whether Doug Ford likes it or not

ANALYSIS: A new report suggests that next year will be either expensive or ruinously expensive. It all depends on whether we get the pandemic under control
By John Michael McGrath - Published on Oct 16, 2020
Finance Minister Rod Phillips and Premier Doug Ford will have difficult budgetary decisions to make for 2021-22. (Cole Burston/CP)

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On some day early in November, Finance Minister Rod Phillips will stand up in the chamber at Queen’s Park and deliver his first true budget speech, Ontario’s first budget since the spring of 2019. (The document we got in the spring of 2020 was technically a “fiscal update,” because literally nobody knew what was going on back then.) But we already have a sense of some of the numbers we’re likely to get, thanks to one of the province’s oversight officers.

On Thursday, the province’s Financial Accountability Officer released an update on Ontario’s financial state, and it makes for predictably grim reading. The province is looking at a $37.2 billion deficit for this fiscal year and $20.4 billion next year. For Tories elected on a promise to balance the books, it’s just pages and pages of sadness and depression.

Although 2020 has rewritten many rules, it can’t undo math or change the ways to get the province out of a deficit. The government is going to have to either cut spending or raise taxes if it wants to balance the books. (Which isn’t to say the government needs to rush the province’s books back into balance; that’s a different conversation.) The FAO report evaluates some possible paths back to balance, and their effectiveness: a 10 per cent increase in the personal income tax would raise $3.7 billion next year, a 1 per cent HST increase would raise $3.6 billion, and so on. If the Supreme Court of Canada upholds the constitutionality of the federal carbon tax, that’s another source of possible revenue for Ontario’s treasury, though the politics of that are complicated and likely to be dramatic.

Spending restraint is possible, but the 2019 budget experience (which cost Premier Doug Ford his first finance minister, Vic Fedeli) showed how politically difficult it can be. But there’s one item of good news for the government: the FAO has identified $9.3 billion in money that’s been designated for COVID-19 response but has not yet been spent. If Ford and Phillips were to hang on to that cash instead of spending it, that alone could reduce this year’s deficit by about a quarter.

But that would be a mistake, and you only need to read a little bit more of the report to see why.

The FAO’s economic and deficit projections are already bad enough for this year and next. If we lose control of the pandemic and another harsh lockdown is required for public health and safety, they get even worse. The economic damage to the province from another lockdown would mean a deeper recession this year (real GDP contraction of 7.4 per cent instead of 6.8 per cent) and a weaker recovery next year (only 2.9 per cent growth instead of 5.1 per cent). That translates into bigger deficits: $3.7 billion more red ink this year and $7.8 billion in 2021, for $11.5 billion in additional deficits in the case of a new lockdown.

(The FAO report was largely written before the announcement of new restrictions in Ottawa, Peel region, and Toronto, but the recent measures are already part of the its baseline projection; the scenario of a weaker economy and higher deficits depends on something much more severe — something along the lines of what the province saw in the spring or, say, a shutdown of a whole school board in a major city.)

The math is clear, to the extent that anything can be clear in the midst of all this: another shutdown would be substantially more expensive even than the deficits we’re already seeing, and that doesn’t take into account all the intangible human misery. The FAO can’t reasonably quantify that, but it should absolutely be on the government’s mind.

Fortunately, the government seems to understand that: Ford and Peter Bethlenfalvy, the president of the Treasury Board, both affirmed Thursday that they intend to spend that $9 billion and not rush Ontario back into a balanced budget.

“We still have some money left; we have five and a half months left in our fiscal year,” Bethlenfalvy said. “We are going to spare no expense to make sure the people of Ontario, the families of Ontario, the businesses of Ontario, are kept safe, because that’s our number one priority.”

Ford, Phillips, and Bethlenfalvy would no doubt prefer that they didn’t have to choose between “historic deficits” and “even larger deficits plus avoidable illness and death,” but we are where we are. In one sense, the choice for this year and next is relatively easy. The hard work will come later on when the easy work of the recovery is over and Ontario is still facing a structural deficit of $14 billion or so (per the FAO’s estimates). That’s when tough calls about spending cuts and tax increases will be unavoidable. Given the timing and the realities of politics, Ford is unlikely to do anything painful immediately before the election — which means that voters will get their say first.

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