Wynne Government shifts to the left in advance of presumed spring election

Ontario’s Fall Economic Statement signals shift to the left in advance of presumed spring election

What you need to know:

• The Fall Economic Statement signals a shift to the left by Ontario’s Liberal minority government. Broad spending cuts are not being considered.
• The Wynne government says it is committed to hitting its current balanced budget target of 2017/18, pinning its hopes of succeeding on the province’s economy growing, job creation and resulting boost in revenue.
• Infrastructure features prominently in the Fall Economic Statement with the creation of the Trillium Trust – a trust fund from which profits from government asset sales could be kept and directed toward public infrastructure projects. And a promise for new regulations to allow Ontario pension funds to invest more in public infrastructure projects.

Analysis

With this economic update, Premier Wynne and Finance Minister Charles Sousa are seeking to distance themselves from the last year of the McGuinty government, and are readying themselves for a possible – if not probable – election in spring 2014.

The Fall Economic Statement marked a noticeable shift to the left by Premier Wynne’s Liberal government.  Even though the government says that it remains committed to reaching its 2017/18 balanced budget target, the Liberals have signaled that they do not plan to reach that objective by restraining spending.

By rejecting broad-based cuts and committing to current levels of spending – even if government revenue does not grow at expected rates – Wynne’s government has moved away from the Drummond Report’s recommendations in marked fashion.

The Drummond report recommended significant structural reforms to the way government operates.  Under former Finance Minister Dwight Duncan, some of those reforms were put in place while others were shelved.

It would appear that under Premier Wynne’s government not only have the structural reforms been shelved, or at least delayed, but the determination to hold the line on spending appears to have disappeared.

This shift may be intended as a political maneuver to regain support that the Liberals lost to Andrea Horwath’s New Democrats.  Specifically, the potential creation of an Ontario pension plan, originally raised by Andrea Horwath, and “pay or play” R&D tax credits, would more likely resonate with the NDP base.  So, too, would the pledged infrastructure development.  However, creating a vehicle for infrastructure development through the sale of public assets is a policy that could be most associated with the PC Party.

Key Policy Highlights

No broad spending cuts to achieve 2017/18 balanced budget commitment: Premier Wynne’s government says it is committed to meeting its existing 2017/18 balanced budget targets, but if government revenues do not grow as expected the Liberals plan to keep spending and will not make any broad cuts.  With this shift, the Liberal government is implicitly challenging the assumption that the province has a structural deficit, and is leaving open the door to missing the balanced budget targets and continued deficit spending.

New approaches to Infrastructure Funding: Premier Wynne’s government suggested it will move on making two key changes to help fund more infrastructure projects, including looking at new types of projects where public-private partnerships can be used.

• Trillium Trust – Creation of a dedicated fund that would receive gains from asset sales, such as from the sale of the Province’s interest in General Motors shares, and the LCBO headquarters building (which the Liberals announced in February 2012), to finance key public infrastructure priorities.  The government also indicated that it will examine options for selling the OPG head office building on University Avenue in Toronto.
• Allowing pension funds to invest more in infrastructure projects – Government will propose regulations that would exempt Ontario pension funds from the current rule limiting ownership of a single infrastructure project to 30 per cent of voting shares.This change is something that StrategyCorp’s J.C. Bourque wrote about in May in the Globe & Mail as something that was long overdue in Ontario.

Controversial “Pay or Play” R&D Tax Credits: The government has said it will “study measures…to promote capital investment” — including a “pay or play” incentive whereby a special corporate tax could be earned back through investments in new equipment, R&D or training.  Potential examples, provided by the government, are:

• Replacing existing R&D tax credits with an incentive that would reward incremental business R&D spending
• A special corporate tax that could be eliminated or reduced through investments in new equipment or other eligible investment expenses
• A payroll tax that could be eliminated or reduced by employer investments in employee training and/or by funding training programs.

 Fiscal Performance and Outlook

• The government declared that it remains on track to balance the budget by 2017/18 – with the major caveat that, should economic conditions falter, it would prioritize spending in key areas ahead of meeting the target.
• The government is predicting essentially the same deficit of $11.7B for 2013-14 as it did in the 2013 Budget.
• It has, however, revised down its real GDP assumptions from the 2013 Budget.

What to expect next at Queen’s Park

The government made certain that the Fall Economic Statement would not be subject to a confidence measure in the legislature.

While the government can make any piece of legislation a confidence motion, and the opposition parties could try to work together to bring one to the floor, we anticipate that the next real confidence measure will not take place until at least Budget 2014, which will also likely serve as the basis for the Liberal Party’s election platform.

In the meantime, although the PC Party and the Liberals previously agreed to a set of relatively minor bills that would be passed through an accelerated process, there remains a high risk of continued dysfunction in the legislature.  Despite a politically-charged legislature, Premier Wynne’s minority Liberal government should continue to govern at least until Minister Sousa tables the Ontario budget in the spring.