Ontario’s 2019 Budget: The impact is in the details
The Ontario government’s 2019 Budget, Protecting What Matters Most, released yesterday combines smaller than expected cuts in most areas with ambitious, albeit ill-defined, new spending in others. While direction has been set, implementation will be key for judging the Budget’s impact on Ontario’s economy. Major new transit and childcare initiatives coincide with reduced and changing funding for post-secondary as well as a more parsimonious approach to economic development. The government has also delayed difficult issues, such as waiting until 2023-24 to balance the budget – despite the current economic boom – due to a reluctance to increase tax rates. Now is the time to cut the deficit so that spending can be expanded in the case of a recession.
Therefore, the success of the government’s plans hinges on the details and execution of Budget 2019. In view of this, the Institute offers several suggestions for how to best refine the policy moves announced in the government’s Budget.
The deficit will worsen before getting better
Ontario’s public debt will not start being reduced anytime soon given the Budget’s announcement of $26 billion of revenue lost due to tax cancellations and new credits as well as no tax increases. The deficit will increase to $11.7 billion in 2018-19 from $3.7 billion the year prior before breaking even in 2023-24, one year sooner than anticipated in the previous government’s 2018 Budget. This will increase public debt as a ratio of provincial gross domestic product (GDP) from 39.2 percent to a peak of 40.7 percent in 2020-21 and finally decrease to 38.6 percent in 2023-24. By then, revenue is forecasted to rise from $150.6 billion to $175.1 billion.
Expenditures are expected to outpace revenues in the medium term despite modest increases in the latter. Tax revenues will continue to increase into 2024 despite no proposed rate hikes; federal government payouts are expected to rise by $4 billion; and lastly, government business enterprises are expected to profit $7.2 billion to government coffers. Nevertheless, expenditures continue to rise with the greatest forecasted change expected to be in interest on debt (IOD) (Exhibit 1). IOD is currently the fastest growing expense and the fourth largest overall (after health, education, and social services). It is projected to rise by another 30.3 percent by 2023-24 to $15.5 billion—nearly the amount spent on Children's and Social Services Sector.
Exhibit 1: Forecasted change in Budget expenses, Ontario, 2017-18 to 2023-24
Major new transit in GTA announced but remains uncertain
One of the largest new spending commitments of the Budget is $11.2 billion for various new rail lines across the Greater Toronto Area (GTA), along with a presumed (but not yet guaranteed) $17.3 billion from the federal and municipal governments. This represents another shake-up of regional transit plans, and the ambitious proposals require substantial thinking, financing, and collaboration before they can be considered feasible. Several rounds of negotiation among the provincial, federal, and municipal governments are required before funding, if it is even available, can be committed and shovels hit the ground. Municipalities will have a harder time coming up with their share of funding due to the cancellation of the planned and negotiated increase in gas tax revenue sharing. The province should explore previously-discussed revenue tools such as road tolls that would enable Toronto and other cities to perform the job they are being asked to do. In addition, the Ontario government should look into obtaining funding from the Canada Infrastructure Bank for these transit projects, as Montreal has.
The Budget provided cost estimates and timelines for four lines in the GTA and announced another two lines in Toronto and one in Mississauga (Exhibit 2). Most prominent is a three-stop subway expansion into Scarborough that will provide a quicker way for residents of some of Toronto’s densest neighborhoods to get downtown and (eventually) replace the aging Scarborough RT. The government also announced plans for an underground extension of the soon-to-open Eglinton Crosstown LRT to Pearson Airport, providing another link to an important transport hub and “employment megazone”. A downtown relief subway called the ‘Ontario Line’ should help ease overcrowding on the Yonge Line, although the route announced in the Budget should be reconsidered as it bypasses rapidly growing but underserved Liberty Village. Finally, the Yonge subway will be expanded north into Richmond Hill. Importantly, this is planned to only open after the Ontario line since extending the Yonge subway north without first opening a relief line would create more overcrowding on an already overcapacity Yonge subway. Furthermore, while increased capacity from the new subway lines is positive for managing congestion on roadways, these transit lines will require greater and sustained operating costs, not just initial capital costs.
Exhibit 2: Public transit lines, costs, and opening dates announced in Greater Toronto and Hamilton Area
While the GTA received the vast majority of attention and funding in this budget’s transit plans, the government also announced plans to increase GO Transit rail service across southern Ontario. Funding is allocated for more commuter trains to run each weekday east to Oshawa, west along Lake Ontario to Hamilton, Niagara Falls, and St. Catharine’s, and to Kitchener. This marks a tentative, but important, step toward increasing mobility across the Greater Golden Horseshoe.
Childcare subsidy reduces prices but still need more spaces
Another major spending item in the budget is the new Ontario Childcare Access and Relief from Expenses (CARE) tax credit, which will cover up to 75 percent of childcare expenses for families earning under $150,000. As a longtime proponent of the economic benefits of increasing access to childcare, the Institute regards this announcement as timely and important. However, several aspects of the government’s plan deserve attention.
The CARE tax credit will provide families with up to $6,000 per child under the age of seven, up to $3,750 for children ages seven to sixteen, and up to $8,250 for children with severe disabilities. However, this subsidy level is far below the cost of childcare in most of Ontario (Exhibit 3). It also does not take into account large differences in childcare costs among different age groups of children under age seven.
Exhibit 3: Subsidy amount and average childcare fee by municipality, Ontario, 2018
While the subsidy will provide parents with added relief (on top of the existing federal and provincial Child Care Expense Deductions), much hinges on whether the government can help slow down the increase in prices—which have risen far above the rate of inflation since 2014 in most of Ontario. Yet the high cost of childcare in Ontario is due to both high demand and low supply. The CARE subsidy will likely stoke demand even further by decreasing the cost for parents. Unless this higher demand attracts more providers into the market, the result will be higher prices. The government’s plans to boost supply through creating 30,000 childcare spaces in schools and increasing the maximum ratio of infants to care providers will likely be inadequate (and in the latter case, could be unsafe). Finally, given the variation in child care prices across Ontario, the government should have considered locally-tailored solutions such as setting subsidy amounts by region or funding municipalities’ childcare programs.
A student-centred education plan
Budget 2019 proposes new mathematics policies in an attempt to reverse Ontario’s declining math scores. A new curriculum that emphasizes practice and memorization will be phased in, teachers will be required to pass a math content test before certification, and supports will be offered to parents and students to increase learning outside the classroom. These initiatives largely align with the Institute’s work on improving math scores, although the cancellation of ‘discovery learning’ does not accord with findings that it may actually be useful for older students who already have basic skills. To achieve these goals as well as improve outcomes in STEM fields, there will be an increase in funding by $1 billion over three years.
Post-secondary institutions will likely need to make do with less provincial support. As costs increase for universities and colleges, Budget 2019 will implement a ten percent tuition decrease in the 2019-20 school year and a freeze in 2020-21. This will save college students $340 on average and save undergraduate students $660. However, with lower revenues coming from domestic students, post-secondary institutions will likely increase the amount of foreign students in order to meet their budgetary needs. Rather than cut costs for all students, tuition policies should focus on offering financial aid to those students in greatest need to ensure that all Ontarians have access to Ontario’s universities. In addition, public funding will be contingent on institutions meeting ten unannounced performance targets by 2024-25. Currently, under two percent of funding is conditional on meeting performance targets which will then rise to 60 percent by 2025. This could increase institutions’ performance and accountability if done right, but in any case exacerbates their financial uncertainty.
Economic development will have a “less is more” approach
Economic development reform will focus on streamlining investments and reducing regulations, an approach for which the Institute recommended in its Working Paper Open for Business: Strategies for Improving Ontario’s Business Attractiveness. The Ministry of Economic Development, Job Creation, and Trade will therefore receive less funding: $782.2 million in 2019-20, from a projected $1 billion in the 2018-19. Savings are expected to be found in the streamlining of research institutions and the province’s international presence by targeting high value-added activities and global markets, respectively. As a university-based think-tank, the Institute looks forward to learning more about the government’s direction in the near future. Both a review of Ontario’s R&D tax credits and an expert panel focused on a provincial intellectual property framework to maximize commercialization opportunities in postsecondary institutions should consider the Institute’s past recommendations for establishing a robust innovation environment.
The Ontario Job Creation Investment Incentive parallels the immediate write off measures and the Accelerated Investment Incentive announced in the federal government’s Fall Economic Statement 2018. Under these measures, investments in manufacturing and processing machinery and equipment and specified clean energy equipment can be immediately written off. Most other capital investments are eligible for an Accelerated Investment Incentive that provides a depreciation rate of up to three times the normal rate in the first year the asset is put into use. Matching recent US policy changes to capital will provide a better, more targeted approach to stimulating business investment than a previously-announced one percent cut to the corporate tax rate.
The automotive, agriculture, and mining and forestry sectors can expect to benefit from new initiatives presented in the Budget. Investments in mining are part of a larger strategy to develop northern Ontario’s economy, and as in previous budgets, intentions to develop the Ring of Fire were announced. Automotive investments will aim to make Ontario a leader in mobility technologies including a producer of alternative fuel vehicles. Agriculture reform will take the form of reduced red tape in farmer credit checks and for receiving compensation for livestock loss. Although beneficial for these industries, combined, they only account for approximately three percent of Ontario’s GDP and will not have a significant impact on the province’s overall economy. In addition, the government has pledged $105 million per year to racetracks and another $10 million for breeding programs, funding that would likely offer higher returns on investments elsewhere.
Little change yet on healthcare
Compared to other budgetary items, healthcare expenditures are falling when accounting for inflation which will make streamlining difficult to achieve. Investments will be made to tackle the growing mental health and addictions problem with $3.8 billion in funding over ten years, although this is contrary to other policies expanding the availability and allowance of alcohol in casinos, parks, and convenience stores. Hospitals will be modernized and expanded with $17 billion over ten years and $267 million is allocated for home and community care. Free dental care will be offered to low income seniors with the goal of removing 60,000 emergency room visits annually and thus freeing up resources for those in need.
Photo credit: diane555
 Institute for Competitiveness and Prosperity analysis based on data from Statistics Canada Table 36-10-0400-01 and Global Affairs Canada, https://www.international.gc.ca/investors-investisseurs/assets/pdfs/download/vp-automotive.pdf.