In the lead up to Ontario’s recent election, the Liberals and the NDP fully costed their election promises on a year-by-year basis. They also provided forecasts of the implied deficits.
The Conservatives did neither, stating only that any “deficit would be eliminated over a reasonable period”. Voters should simply “trust” them to do a better job managing the province’s finances than the other two parties.
Immediately after the election, the Ford Government announced the creation of an Independent Financial Commission of Inquiry into Ontario’s Finances to review Ontario’s past spending and accounting practices. The Commission’s mandate included “a retrospective assessment of the government’s accounting practices, with respect to pensions, electricity and any other information deemed relevant to inform the finalization of the 2017-18 financial statements”.
In addition, “the Commission was to review, assess and provide advice on the Province’s budgetary position for 2018-19 and beyond and compare these to the projections presented in the 2018 Budget”. The report was to be completed by the end of the summer and Premier Ford committed to making the report public.
The Commission’s report was submitted to the Government in late August, but it has yet to be made public. After reading the report Premier Ford may have entered a state of “fiscal” shock. He (along with everyone else) certainly expected the budget outlook to be worse than the Liberals forecast, but maybe it is far worse than even he expected.
So what is the potential size of the fiscal problem facing the Government? Under the Fiscal Transparency and Accountability Act, the provincial Government is required to release a pre-election report, including updated economic and fiscal projections for the next three years. These projections are then reviewed by the Auditor General of Ontario to determine their reasonableness.
Last spring, the Auditor General concluded that the economic projections were reasonable. (Since then there have only been minor adjustments to the economic forecast). However, the Auditor General indicated that the 2018 Budget projections for expenses were “not a reasonable presentation of Ontario’s finances” as program expenses and public debt charges were understated, resulting in an underestimation of the annual deficits”.
According to the Auditor General, the government did not properly account for the true financial impact of the Fair Hydro Plan and the pension expenses relating to the Ontario Teachers’ Pension Plan and the Ontario Public Sector Employees’ Union Pension Plan.
Adjusting for these two accounting errors, as the Auditor General recommended, would increase the forecast deficit by $5 billion in 2018-19, rising to $6.0 billion in 2020-21.
It seems highly unlikely that the Commission would not accept the accounting adjustments recommended by the Auditor General. In that case Premier Ford would also have to accept them. Auditor Generals, at both the federal and provincial levels, are highly respected by the public at large. Ignoring their advice would result in a negative opinion on the government’s financial statements and a loss of credibility. Rating agencies would not look kindly on this.
The pre-election status quo fiscal report projected deficits of $1.2 billion in 2018-19 and $0.7 billion in 2019-20 and a surplus of $1.6 billion in 2020-21. Included in these projections is an annual reserve of $0.7 billion. Correcting this forecast for the Auditor General’s accounting recommendations results in deficits of $6.2 billion in 2018-19, $6.3 billion in 2019-20 and $4.4 billion in 2020-21.
This deficit forecast includes none of the Conservative election promises. Based on the Conservatives’ ”Plan for the People”, we attempted to allocate the costs of their election promises to the three fiscal years. This resulted in a projected deficit of $9.3 billion for 2018-19, $11.8 billion for 2019-20 and $12.0 billion for 2020-2.
Every new government leader thinks he can solve his financial problems by finding “efficiency savings”. During the election, Doug Ford indicated that he could easily find $6 billion annually in “efficiency savings”.
To this end Premier Ford commissioned a line-by-line review of government spending, just as the previous Liberal government did (i.e., the Drummond report). Past experience shows that “efficiency savings” do not lead to permanent savings, nor do across-the-board spending cuts. Funding normally has to be restored in future years.
Permanent savings can only be achieved through the elimination of actual programs and their supporting infrastructure, including employees, and through a freeze in compensation. Nearly 70 per cent of total program expenses are allocated to health and education. It is difficult to see how Premier Ford can find $6 billion in permanent spending savings without cutting spending these two areas.
Premier Ford is facing major challenges in meeting his pledge to balance the budget over a reasonable amount of time let alone by the end of his first mandate. It would be better if he spent more time addressing his budget problems, than worrying about the size of Toronto City Council.
C. Scott Clark held a number of senior positions in the Canadian Government, including Deputy Minister of Finance from 1998-2001. He has a PhD in Economics from the University of California at Berkeley and is currently President of C. S. Clark Consulting.
From 1990 to 2005, Peter C. DeVries served as Director, Fiscal Policy Division, at the Department of Finance. In that capacity he was responsible for overall preparation of the federal budget. He is currently a consultant in fiscal policy and public management issues.
Their Blog is 3dpolicy.ca