Ontario Budget 2018: Investments in future productivity come with risk

Ontario Budget 2018: Investments in future productivity come with risk

The Ontario government’s 2018 Budget, A Plan for Care and Opportunity includes major new spending on a number of health care, child care, and infrastructure initiatives. While all this spending will boost the economy long-term through higher productivity and labour force participation, the return to deficit spending while the economy is relatively healthy raises the risk of having to shrink deficits and pay down debts during a future recession.

Child care: Reducing a major barrier to women’s labour force participation

Ontario’s urban centres have some of the highest median monthly child care fees for infants and toddlers in Canada. Since affordable child care is the single most important policy lever available to the Province to increase productivity, the Institute has analyzed how to lower costs in multiple blog posts as well as in its 16th Annual Report. Ontario’s commitment to spend $2.2 billion over three years to provide free preschool for children age two-and-a-half to four and more subsidized spaces for infants and toddlers is a huge step towards women participating in the Ontario labour market at the same rate as men, which could add $36.5 billion to Ontario’s economy.

Back in the red: Deficit and debt continue to grow

Budget 2018 brings Ontario back in the red until 2024-25. As promised, this year’s $6.7 billion deficit is less than one percent of GDP ($830.1 billion in the third quarter of 2017). Yet the deficit is still substantial, resulting from revenue that cannot grow fast enough to cover huge spending increases over the next three years—particularly on health (4.3 percent per year), education (4.1 percent) and children’s and social services (5.2 percent).

The growth of social assistance spending—largest among all expense categories—is notable given the relatively healthy labour market. Spending by the Ministry of Community and Social Services tends to grow roughly in line with Ontario’s unemployment rate because more people out of work require social assistance. While Budget 2018 importantly raises living standards for the worst-off Ontarians by increasing social assistance benefits and easing eligibility restrictions, the timing of these changes is questionable.

The return of a deficit and resulting higher debt translate to substantial spending on interest payments. Interest on debt this year will cost $12.5 billion or 7.9 percent of total expenses—more than all spending on post-secondary and training. This will continue increasing, with interest payments making up 8.9 percent of total expenses by 2023-24. This is a risky strategy because it relies on low interest rates and high revenues from a strong economy, rather than spending discipline, to ensure the share spent on interest payments remains far below the 1999-2000 peak of 15.5 percent.

A chart shows long term projections for Ontario's interest on debt, total expenses, revenue and program expenses between 2017-18 and 2025-2026

Health care: Low-cost drugs for Ontarians does not equal universal pharmacare

With the word “care” in the title, it is no surprise that health care comprised a major line item in Budget 2018, with expenses projected to grow an average of 4.3 percent annually over the next three years, a significant jump from the 1.8 percent growth projected in Budget 2016. This rapid increase in health care spending—which is already twice as large as the next biggest area of spending—runs counter to the restrained growth strategy the Province has taken since 2012. Unless further operational efficiencies can be found, health expenditures will need to keep growing to avoid reductions in access and quality of care in the coming years.

Budget 2018 expands drug and dental coverage to all Ontarians—but not enough, and not in the most efficient manner. In addition to providing no-cost coverage to youth and seniors, the new OHIP+ will now reimburse up to 80 percent of eligible dental and drug costs for the one in four working age (25-64 years) Canadians without employer-provided coverage. A major reorientation of pharmaceutical policy is needed because of Ontario’s high per capita drug spending and Canada being the only developed country with universal health care that does not also provide universal prescription coverage. While drug coverage for youth makes sense given their increasingly precarious work, expansion of OHIP+ could have waited until the unveiling of comprehensive reforms widely expected in the next year, following the 2018 federal budget announcements.

Moreover, this OHIP+ expansion is not being done in the most efficient manner. Reimbursing drug costs means the Ontario government cannot use its increased bargaining power as a single buyer to drive down drug prices. Additionally, while the program will increase coverage for the roughly one in ten Canadians who cannot afford their prescriptions, the annual maximums of $400 for singles, $600 for couples and $50 for each child will leave significant gaps in prescription coverage for some Ontarians. For example, the most commonly prescribed drug class for Canadians age 25 to 44 is anti-depressants, which can cost as much as $200 per month.

The other big ticket expenditure is mental health and addictions. Over the next four years, $2.1 billion will fund 400 school-based mental health workers and provide more counselling, therapy, and walk-in clinics. In the long term, the decision to invest additional dollars on mental health is a smart move: unaddressed mental health and substance issues impact the economy through absenteeism and lost productivity, and will cost our economy $16 billion in 2041. Investing in preventative care and early intervention is crucial given that roughly one in five Canadians experience mental health problems in any given year.

Infrastructure: Ontario is prioritizing projects with the best productivity returns

Budget 2018 promises $230 billion for infrastructure projects over 14 years—building on the $190 billion over 13 years in the 2017 Long-Term Infrastructure Plan and the initial $130 billion over ten years in Budget 2014. Commitments include $79 billion for public transit, $25 billion for highways, $19 billion in capital grants for hospitals, and $16 billion in capital grants for schools. The Institute continues to recommend that projects be prioritized according to their productivity returns. Investments in hospitals and schools—both of which lead to a positive change in productivity—should therefore have more importance than spending on general roadway infrastructure.

Increasing access and modernizing post-secondary education and training

Growth in post-secondary spending is modest compared with health and education expenditures, yet the government is still spending $365 million on experiential learning, a new Ontario Apprenticeship Strategy, and establishing a one-stop-shop ‘skills training bank’ for employers, job seekers and workers. These initiatives are aligned with several of the Institute’s past recommendations. The Province is also expanding OSAP eligibility and simplifying tuition payment by including the subtracted OSAP grant and loan funding in the invoice. The gains in efficiency and transparency from this change are maximized the earlier before enrollment students can access this net cost information. However, this change also removes students’ flexibility to use student aid for living expenses, a barrier to accessing post-secondary education.

Minor modifications to increase tax progressiveness

Alongside several modifications and enhancements of existing personal and corporate tax credits, Budget 2018 includes minor changes to make taxation more progressive. Ontario’s personal income tax (PIT) will be simplified to remove an additional surtax currently charged on those making more than $75,000 and instead create two new PIT brackets. Although the top marginal PIT rate is unchanged, the surtax removal will remove inequities that currently allow higher income earners to deduct more through non-refundable tax credits. Ontario also announced it would follow the federal government’s lead on closing income sprinkling and other tax loopholes.

Do the productivity returns offset the spending risks?

The new deficit spending on health care, child care, and post-secondary education are investments that will help grow the economy long-term through higher productivity and labour force participation. But deficit spending during economic growth is countercyclical—these good times should be when the government builds its reserves for a recessionary rainy day. The deficit and consequent increased debt could therefore be problematic if, as feared in the next few years, a recession strikes before these investments can boost economic growth.

Written by: Jacob Greenspon and Margaret Campbell

Category: Training, Budgets, Education, Employment, Financial Analysis, Infrastructure, Productivity, Social Policy, Taxation, Economy