The Ontario Fall Economic Outlook foreshadows a bold 2015 budget

The Ontario Fall Economic Outlook foreshadows a bold 2015 budget

This year’s Fall Economic Outlook revealed that the Ontario economy is growing at a slower pace than hoped. The province’s revenue is below expected returns, with revenue for the 2014-2015 fiscal year expected to be $118.4 billion.

This amounts to $509 million less than what the government had forecasted last spring. However, the government maintains they are committed to eliminating the deficit by 2017-2018, despite the absence of detailed explanations for how the province will realistically eliminate the deficit.

The province has outlined four major initiatives it plans to pursue to achieve a balanced budget. These include: revision and transformation of government programs; changes to compensation costs; cracking down on the underground economy that evades its share of taxes; and utilizing the value of provincial assets. These steps alone, while positive policy steps for the province, are likely not enough on their own to balance the budget by 2017-2018.

To begin, program review and the implementation of changes take time, as does trying to rein in the underground economy. Program review will likely not deliver savings in the short term that will be substantial enough to eliminate a large part of the $12.5 billion deficit. Furthermore, taking aim at the underground economy, while prudent economic policy, will raise about $700 million for the treasury over the next four years, which is not enough to make up for the $500 million revenue shortfall this year. Both these initiatives are positive long term planning changes for the province, but are unlikely to bring the transformation necessary to balance the province’s current deficit. With interest rates likely to rise in the coming years, failure to eliminate the deficit will significantly impact Ontario’s ability to finance the delivery of its programs and services.

Thirdly, while the Institute has supported making changes to compensation of government employees, the Institute recommends the government reconsider their target for compensation reform.  Rather than target the compensation of senior executives, the Institute’s analysis has found that compensation of administrative and clerical government employees are significantly higher than compensation for similar roles in the private sector. In contrast, government employees in management and strategic positions, those with vital decision making roles where top talent must be attracted, are not paid wages comparable to the private sector. Current compensation packages make government positions an appealing option for entry-level workers, while the compensation packages for senior roles fall short. The public sector wage premium on clerical and administrative staff currently costs the tax payers of Ontario over $1 billion per year.[1] The Institute recommends that the government put in place private sector comparators across all positions and make the adjustments that are necessary.

Overall, the government’s strategy to eliminating the deficit, focusing on cuts to programs, reductions to executive salaries, and tax evasion, seems focused on costs and outputs. Yet, the province does not have high spending costs compared to other provinces. Working Paper 16 detailed that both as a percentage of GDP and per capita, Ontario’s levels of government spending are lower than all other provinces. In 2009, government spending was $2,400 per capita, 30 percent lower than all other provinces.[2] Where Ontario falls short, is investing in policy areas that will increase future productivity long term, including transportation infrastructure.

The Institute supports the province’s proposals to increase funding for transportation infrastructure in the Greater Toronto and Hamilton Area. While the $15 billion over ten years to help fund transit in the GTHA falls short of the $50 billion needed to fund the Big Move, and the estimated $50 billion needed to support operating costs, the Moving Ontario Forward plan is a positive step toward improving the GTHA’s infrastructure needs. The Institute has long advocated for improvements to transportation infrastructure in the GTHA as an essential component to long term increases in productivity and economic growth for the province. As the $500 million shortfall in expected revenue suggests, the government needs to direct focus on long-term, sustainable investments that will increase Ontario’s productivity and economic growth. Perhaps it is time to look at all or most of government spending with a lens toward economic growth.

The Fall Economic Outlook is likely merely a prelude to the big show – the Provincial Budget is 2015. With plans to introduce an Ontario Retirement Pension Plan, initiatives to support youth employment, and a mandate to take an interventionist position to improve Ontario’s business environment, the government has a unique opportunity to introduce a bold budget early in their term.

 Photo Credit: borzaya, Getty Images

Category: Economic Progress, Public Policy