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Ontario’s Fall Economic Statement Offers More Questions than Answers

The Wynne government put forward the traditional Fall Economic Statement in the Legislative Assembly this afternoon.  Part snapshot of how Ontario’s economy is doing, and part guidance from the government on what might be in the spring budget, this year’s Fall Economic Statement left observers with many of the familiar questions about exactly how the government intends to meet its promise to balance the budget by 2017/18.

On Friday, individual ministries were provided with their funding envelopes.  This is the 2015/16 global budget number that each ministry is expected to develop its expenditures around and report back to Treasury Board and the Premier’s Office with their plan on how to do so.  We expect that many of the ministries will find doing so within the status quo to be impossible.  The challenge will be how many put forward creative solutions and how many put forward the proverbial “RCMP Musical Ride”, untouchable if not core services that they know full well the government cannot touch.

Today’s Fall Economic Statement led with a number of initiatives the government intends to pursue to capture tax revenue lost to the ‘under-the-table’ economy, however, these are not new and past governments have had limited success raising significant new revenues in this way.

As the spring 2015 budget draws nearer, all eyes will be watching to see if the government starts seeding the ground with clues to a possible extension of its commitment to a 2017/18 balanced budget. While many feel that the government is hopeful that the Ontario economy will continue to grow and increase tax revenues, it is difficult to see how the commitment can be met without some combination of reduced spending, tax increases, or asset sales.

Ontario Fiscal Outlook
The Liberal government maintains that it is on path to balance the budget by the end of their mandate. However, they are beginning to admit that this path is becoming gradually more difficult to traverse with revenue outlooks being missed and projections softened. Many billions are left to trim before balancing (~$12.5 billion is left on the operating budget).

Total government borrowing (which includes both operating deficits, debt refinancing and borrowing to finance capital projects), will hit $35 billion this year and rise to $37.5 the year next. Such large borrowing programs create significant interest rate risk, payments to service the debt are already the third largest budget item after education and health (~$10.5 billion).

The path to a balanced budget will now be entering the critical phase where overall spending growth will slow to near zero, and several ministries will face substantial cuts in order to allow modest growth in health and education budgets. The government will need to maintain focus if it is to meet its fiscal targets.  We will soon be seeing why Premier Wynne placed her most trusted minister, Deb Matthews, at Treasury Board.

Ed Clark Report pours cold water on asset sales
Help balancing the budget won’t come from significant asset sales.  The much anticipated ‘Premier’s Advisory Council on Government Assets’ or more commonly known as the ‘Clark’ report (after the council’s Chair, TD Bank CEO Ed Clark) recommended the government keep core assets, rather than selling them for one-time revenues.  Despite the perception that the government was looking to fundamentally transform the LCBO, Ontario Power Generation (OPG) and Hydro One, the panel concluded that all three crown corporations should continue to be owned by government.

Overall, the panel’s findings were far less reaching than expected, and an exercise that was billed as a major attempt to raise vast sums to fund infrastructure projects has become a limited effort to reform the electricity sector.

We can expect that the Clark Panel recommendations, and the next steps in trying to implement these changes, will take up a lot of time from senior staffs in the Premier’s Office, Treasury Board and the Ministry of Energy.

New Treasury Board Responsibilities shake up the budget process
As the government prepares for its annual review of individual ministry spending (the Results Based Plan process) and the 2015 budget, it will be important to gauge how the Premier’s Office, Treasury Board and the Ministry of Finance work together.

Recall, Treasury Board (a newly re-created central ministry) figured prominently in all ministerial mandate letters, tasked with “transforming and modernizing public sector service deliver while protecting vital public services”.

Driving this transformation will require Treasury Board to be actively involved in budgeting as well as the policy approach of ministries and government service delivery. This will require the explicit support of the Premier’s Office and will then, in turn, need to be consistent with the priorities and resource allocation in Minister Sousa’s 2015 Budget.

The level of coordination at both the political and public service sides of government will need to be extensive and nearly seamless, however this is uncharted territory and it will be interesting to see how well this coordination is executed.  The final results of all of this work will then require the buy-in of Cabinet and caucus before being made public.

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