Did Ontarians realize that when they voted for Doug Ford’s Conservatives that they would end up endorsing Kathleen Wynn’s election platform? How can this be? The starting deficit for the current fiscal year in the Economic Outlook and Fiscal Review (Fall Update) was $15 billion, the forecast provided by the Independent Financial Commission of Inquiry in late August. But this estimate actually includes the Liberal’s election platform: $300 million in revenue reducing measures and $5.7 billion in program spending increases.
In his Fall Update, Minister of Finance, Victor Fedeli, only removed the 2018 Budget tax increases ($308 million), but left all the Liberal spending initiatives in place. There may be some changes to these Liberal-spending initiatives in the Spring 2019 Budget, but once firmly in place, it will be difficult to eliminate or reduce new program spending. As a result, the Conservative 2018 election platform has been replaced by the Liberal election platform.
It gets even more confusing.
Although the Fall Update included revised economic projections for 2018 and the next three years, these revised forecasts were not used to produce a new fiscal forecast for 2018-19. Instead, Mr. Feldeli simply used the Commission’s $15 billion deficit estimate for 2018-19 as his starting point.
No fiscal forecasts were provided for the outer years. And as a result, the Fall Update made no attempt to indicate when the budget would be balanced, despite Mr. Ford’s election promise to eliminate the deficit by the end of his first mandate. This should surprise no one because the Ford government has no idea how to go about eliminating the deficit. Instead, the government may take the easy way out and start focussing on the debt-to-GDP ratio as its fiscal target (like the federal government). As noted in the Fall Update, “the government is taking steps to address public debt. As recommended by the Commission, the government will determine and set an appropriate target and timeline to reduce the net debt-to-GDP ratio.” As long as the economy grows, the net debt-to-GDP ratio will decline even if there is no reduction in the deficit.
Mr. Feldeli reduced the Commission’s $15 billion deficit estimate by a mere $500 million, not a very ambitious start to balancing the budget. In fact, the Update consists of a mixed bag of confusing and contradictory fiscal actions. Revenues were reduced by $2.9 billion, over half of which was attributable of the elimination of the Cap and Trade Carbon Tax. In addition, revenues were reduced by a further $689 million, because of “a provision built into the fiscal plan for tax measures to strengthen Ontario’s economy”, whatever that means. This is above the Commission $0.8 billion included in its $15 billion deficit estimate for the impact of U.S. tax reform.
Program spending for the current fiscal year was reduced by $3.2 billion. Of this amount, $1.1 billion was from “Expenditure Management Restrictions and Update Forecasts”. This includes a freeze on hiring and restrictions on travel and hospitality. No savings estimates were provided for the individual measures. Another $1.8 billion was secured from an “Ongoing Review of Programs”, again no details were provided, although the bulk would have come from the elimination of the Cap and Trade Carbon Tax program. Other spending reductions amounted to $485 million, primarily due to a reduction in the Contingency reserve. The Commission increased the Contingency Fund by $300 million to $1 billion. However, the Fall Update still indicates that the Contingency Fund is set at $1 billion and all of the other reserves included in the 2018 Budget are unchanged. So what was reduced? Spending increases amounted to $302.6 million.
Mr. Fedeli could actually have shown a larger decline in the deficit. The amounts set aside for the potential adverse impact of U.S. tax reform could have been reduced. In addition, the spending estimates include an Operating Reserve of $1 billion and a capital reserve of $250 million. Given that nearly three-quarters of the fiscal year has passed and given the effects of the discretionary spending freeze, it is doubtful that these reserves will be needed. The deficit could have been at least $3.5 billion lower.
Furthermore, what was the rationale for the tax reduction measures – eliminating the high-income surtax and the introduction of the low-income Individuals and Families Tax Credit, among others – given the size of the deficit? The Expenditure Management Restrictions are short-term measures only and are not sustainable. Freezing hiring and restrictions on travel, meal and hospitality spending are low-hanging fruit, which cannot be sustained for any length of time. Where are the sustained cuts to spending, which must be made, given that the deficit is primarily structural?
The most noteworthy thing about this Fall Update is the revelation that the government has little or no understanding of the structure of the government’s finances. We are left with vague commitments and promises that the government will engage in extensive consultations and come with a credible deficit reduction plan. This is code for “we don’t have a clue”. What will make things worse (for the federal government also) is the high probability of a global economic slowdown in 2019 or 2020.
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