Ontario’s 2015 Budget Likely to Cause Anxiety Among Government’s Traditional Political Allies

While Ontario’s Budget Day brought little in the way of newsworthy items that had not already been leaked in advance, it has helped to resolve an enduring question of the Wynne government: What is Premier Kathleen Wynne’s plan to meet her commitment to balance the province’s book by 2017-18?  Based on the Budget, the answer is that the provincial government will endeavour to hold the line on spending, and will look for economic growth to increase revenues by $16 billion roughly over the next two years.

Although “holding the line on spending” may not sound like a major hurdle for the government to overcome, considering that so much of provincial spending is dedicated toward labour costs associated with health care and education – i.e., teachers and nurses, who represent much of the Liberal Party’s political base – such restraint represents a formidable challenge.  In fact, attempting to restrain health care and education spending is a decision made by Premier Kathleen Wynne that – especially when combined with the sale of control of Hydro One – will cause anxiety among the Liberals’ traditional political allies.

	Interim 2014-15	Plan 2015-16	2016-17 Outlook	2017-18 Outlook
Revenue	118.5	124.4	129.4	134.4
Total Expense	129.5	131.9	133.0	133.2
Reserve	–	1.0	1.2	1.2
Surplus (Deficit)	(10.9)	(8.5)	(4.8)	–

The principal wildcard in the government’s balanced budget equation is of course the performance of the Ontario economy.  If revenue from economic growth underperforms the government’s expectations, and therefore does not provide the operational revenues necessary to cover the deficit, expect the government to change tack and possibly move back the balanced budget date, or possibly even look at selling other assets.

Another wildcard involves interest rates. Even if the government’s revenues materialize as a result of economic growth, it is unclear whether interest rates will remain low.  While the government has been able to lock in much of the province’s debt at really attractive rates, that situation may change, especially under a robust-growth scenario.

 

Positioning the sale of Hydro One within the context of an ambitious transit plan

As described in our Clark panel update last week, the government plans to raise capital spending funds through the sale of Hydro One.

Revenues from this asset sale are slated to be used to partially fund its ambitious “Moving Ontario Forward” transit plan – a promised $13 billion per year for the next 10 years. This transit plan was a follow up to a promise made by the Liberals during the 2014 general election campaign, and represents a massive investment in infrastructure.

Although the sale of Hydro One is tantamount to a limited asset sale program at this time, it nonetheless represents a marked departure from traditional Liberal thinking that will engender significant anxiety among the Left.

 

How will Ontario balance its budget? Not through any austerity program

This budget reinforces the government’s position that across-the-board spending cuts are not something that the Liberals are prepared to do.  Finance Minister Charles Sousa cited the potential harm of such an approach to Ontario’s economic growth.  Furthermore, there would be little if any support in Premier Kathleen Wynne’s Cabinet, or within the broader Liberal Caucus, for such an approach.

That being said, the lynchpin of the government’s expenditure plan is limiting growth in the largest spending areas, especially health care and education.  And, in particular, labour costs associated with these areas (e.g. teachers, nurses). Any chance of holding the line on spending really starts and ends here.  Limiting health care spending growth to 1.9%, education to 2%, children and social services to 2.9% and justice to 1.5% would have substantial consequences within each sector.  We only need to look at recent labour disputes with public sector unions and the threat of real and potential teacher strikes to see the consequences of these actions.

The government is also continuing its Program Review, Renewal and Transformation (PRRT) exercise led by Deputy Premier and Treasury Board President Deb Matthews.  Though not as important to reigning in overall health care and education expenditures, the PRRT can help position the government as being more “surgical” than “slash and burn” in approach.  Examples cited in the Budget include enabling school boards to better utilize school space ($58.6 million this year and fully implemented by 2017/18), more targeted use of the Second Career program ($40 million in ongoing savings) and reductions in several tax credits (Film and Television Production, apprenticeship, etc.).

 

Government still needs to resolve major ORPP design questions

In a week of very large decisions, it was interesting to note that the government appears to have punted the tough questions associated with a new Ontario Retirement Pension Plan (ORPP).

Two of the more controversial elements of the ORPP were:

• the treatment of individuals already participating in a select class of workplace pension plans, especially defined benefit (DB) plans
• the minimum earnings threshold, and whether to mirror CPP’s $3,500.

In both instances, the Budget reviews in detail what the government heard in its consultations, essentially presenting the pro and con for each, and arriving at the conclusion that further analysis and dialogue are required.

Either the government is reconsidering its design of the ORPP, waiting for the outcome of the federal general election, or perhaps recognizing that – between the cap-and-trade program, the sale of Hydro One, an initial step toward reforming alcohol retailing, and upcoming labour negotiations – they have enough on their plate at the moment, and are biding their time before making what promises to be another very significant milestone decision for this government.

Given how integral the ORPP was to the 2014 election platform and the Premier’s personal commitment on the issue, it is, however, likely a matter of when and not if the government lands on these key elements.