{"id":2686,"date":"2020-11-10T15:03:56","date_gmt":"2020-11-10T15:03:56","guid":{"rendered":"https:\/\/financesofthenation.ca\/staging\/6309\/?p=2686"},"modified":"2021-02-23T19:17:10","modified_gmt":"2021-02-23T19:17:10","slug":"ontarios-public-finances-diagnosis-and-prescription","status":"publish","type":"post","link":"https:\/\/financesofthenation.ca\/staging\/6309\/2020\/11\/10\/ontarios-public-finances-diagnosis-and-prescription\/","title":{"rendered":"Ontario\u2019s Public Finances: Diagnosis and Prescription"},"content":{"rendered":"\n<div class=\"fonfont\">\n<p>Livio Di Matteo<\/p>\n\n\n\n<p>Michael Smart<\/p>\n\n\n\n<p><em>Ontario recently published its 2020 budget, and it contained a lot of bad news. The cash deficit will be around $100 billion over the next three years. This commentary examines options for bringing the province back to sustainability by either reducing spending, raising taxes, or some combination of both. The authors discuss the economic and political consequences of each of the available options, and shows that there are no easy answers for the Ford government.<\/em><\/p>\n\n\n\n<p>With its long-awaited 2020 Budget last Thursday, Premier Doug Ford\u2019s government has at last given Ontarians the bad fiscal news. The <a href=\"https:\/\/budget.ontario.ca\/2020\/brief.html#section-4\" target=\"_blank\" rel=\"noreferrer noopener\">cash deficit is projected<\/a> to be $39.9 billion in the current fiscal year (an all-time high), and will remain historically high, around $36 billion and $31 billion, in the next two years.<\/p>\n\n\n\n<p>This is not surprising. While news coverage has focussed on extraordinary spending measures, the real story of Ontario\u2019s deficits is that tax revenue has declined sharply due to the pandemic lockdowns and the ensuing recession, and it is projected to remain below trend for several years to come.<sup>[<a href=\"#fn1\">1<\/a>]<\/sup> With the resulting deficits, Ontario\u2019s net debt will rise to $473 billion and 49.6 percent of GDP by 2022-23.<\/p>\n\n\n\n<div class=\"wp-block-image\"><figure class=\"aligncenter size-large\"><img decoding=\"async\" width=\"1024\" height=\"682\" src=\"https:\/\/financesofthenation.ca\/staging\/6309\/wp-content\/uploads\/2020\/11\/fig1-1024x682.png\" alt=\"\" class=\"wp-image-2687\" srcset=\"https:\/\/financesofthenation.ca\/staging\/6309\/wp-content\/uploads\/2020\/11\/fig1-1024x682.png 1024w, https:\/\/financesofthenation.ca\/staging\/6309\/wp-content\/uploads\/2020\/11\/fig1-300x200.png 300w, https:\/\/financesofthenation.ca\/staging\/6309\/wp-content\/uploads\/2020\/11\/fig1-768x512.png 768w, https:\/\/financesofthenation.ca\/staging\/6309\/wp-content\/uploads\/2020\/11\/fig1-1536x1024.png 1536w, https:\/\/financesofthenation.ca\/staging\/6309\/wp-content\/uploads\/2020\/11\/fig1-2048x1365.png 2048w\" sizes=\"(max-width: 1024px) 100vw, 1024px\" \/><\/figure><\/div>\n\n\n\n<p>Sobering as these figures are, Ontario is merely continuing on the path it has been on for the last 30 years \u2013 see Figure 1. Ontario\u2019s net debt was just 12.4 percent of GDP in 1991, but it rose sharply following the recessions of 1991-2 and 2008-9 to reach 39.9 percent of GDP before the beginning of the current crisis.&nbsp;<\/p>\n\n\n\n<p>Governments must inevitably take on debt during the current crisis and, in the current low-interest environment, it is not irresponsible to <a href=\"https:\/\/financesofthenation.ca\/staging\/6309\/2020\/09\/03\/federal-debt-from-1867\/\" target=\"_blank\" rel=\"noreferrer noopener\">carry that additional debt well into the future<\/a>. &nbsp;That said, the <a href=\"https:\/\/www.cdhowe.org\/public-policy-research\/canada%E2%80%99s-foggy-economic-and-fiscal-future\" target=\"_blank\" rel=\"noreferrer noopener\">usual concerns<\/a> about excessive debt are more serious at the provincial level than they may be for the federal government:<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>Provinces pay higher interest rates on debt than the federal government, and they already face <a href=\"https:\/\/financesofthenation.ca\/staging\/6309\/2020\/09\/17\/government-debt-sustainability-in-canadas-post-covid-future\/\" target=\"_blank\" rel=\"noreferrer noopener\">large implicit liabilities from rising health care costs<\/a>.&nbsp;<\/li><\/ul>\n\n\n\n<ul class=\"wp-block-list\"><li> In a future debt crisis, unlike Ottawa, provinces would not be free to <a href=\"https:\/\/financesofthenation.ca\/staging\/6309\/2020\/10\/28\/is-canadas-federal-debt-a-cause-for-concern\/\">print money or devalue a currency<\/a> to deal with the problem.&nbsp;<\/li><\/ul>\n\n\n\n<ul class=\"wp-block-list\"><li>On the fiscal side too, because tax bases are mobile across borders, it could be harder for provincial governments to raise taxes to meet debt service obligations.&nbsp;&nbsp;<\/li><\/ul>\n\n\n\n<ul class=\"wp-block-list\"><li> Lastly, a substantial portion of provincial revenues is not own source revenue, &nbsp;but a transfer from the federal government that is potentially subject to change. That could create political and economic problems during a future subnational debt crisis, <a href=\"https:\/\/citeseerx.ist.psu.edu\/viewdoc\/download?doi=10.1.1.625.9265&amp;rep=rep1&amp;type=pdf\" target=\"_blank\" rel=\"noreferrer noopener\">just as it has in other countries<\/a>.&nbsp;<\/li><\/ul>\n\n\n\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" width=\"1024\" height=\"682\" src=\"https:\/\/financesofthenation.ca\/staging\/6309\/wp-content\/uploads\/2020\/11\/fig2-1-1024x682.png\" alt=\"\" class=\"wp-image-2688\" srcset=\"https:\/\/financesofthenation.ca\/staging\/6309\/wp-content\/uploads\/2020\/11\/fig2-1-1024x682.png 1024w, https:\/\/financesofthenation.ca\/staging\/6309\/wp-content\/uploads\/2020\/11\/fig2-1-300x200.png 300w, https:\/\/financesofthenation.ca\/staging\/6309\/wp-content\/uploads\/2020\/11\/fig2-1-768x512.png 768w, https:\/\/financesofthenation.ca\/staging\/6309\/wp-content\/uploads\/2020\/11\/fig2-1-1536x1024.png 1536w, https:\/\/financesofthenation.ca\/staging\/6309\/wp-content\/uploads\/2020\/11\/fig2-1-2048x1365.png 2048w\" sizes=\"(max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<p>Ontario\u2019s finances are clearly not on a sustainable long-term path, and a course correction is surely coming someday. To learn how that could be achieved, Ontarians need look no further than across the Ottawa River. While Quebec\u2019s budget balances were similar to Ontario\u2019s for many years \u2013 see Figure 2 \u2013 its fiscal outlook has changed substantially in the last decade. A decade ago Quebec was the fiscal invalid of Canadian federalism, with the highest provincial net debt to GDP ratio. But, more recently, Quebec ran budget surpluses<sup>[<a href=\"#fn2\">2<\/a>]<\/sup> from 2014-15 until the current fiscal year, and its net debt had declined to 39 percent of GDP, from a peak level of 50 percent in 2014.<\/p>\n\n\n\n<div class=\"wp-block-image\"><figure class=\"aligncenter size-large\"><img decoding=\"async\" width=\"1024\" height=\"682\" src=\"https:\/\/financesofthenation.ca\/staging\/6309\/wp-content\/uploads\/2020\/11\/fig3-alt-1024x682.png\" alt=\"\" class=\"wp-image-2689\" srcset=\"https:\/\/financesofthenation.ca\/staging\/6309\/wp-content\/uploads\/2020\/11\/fig3-alt-1024x682.png 1024w, https:\/\/financesofthenation.ca\/staging\/6309\/wp-content\/uploads\/2020\/11\/fig3-alt-300x200.png 300w, https:\/\/financesofthenation.ca\/staging\/6309\/wp-content\/uploads\/2020\/11\/fig3-alt-768x512.png 768w, https:\/\/financesofthenation.ca\/staging\/6309\/wp-content\/uploads\/2020\/11\/fig3-alt-1536x1024.png 1536w, https:\/\/financesofthenation.ca\/staging\/6309\/wp-content\/uploads\/2020\/11\/fig3-alt-2048x1365.png 2048w\" sizes=\"(max-width: 1024px) 100vw, 1024px\" \/><\/figure><\/div>\n\n\n\n<p>How was this turn-around achieved? Figure 3 shows the history of revenue and expenditure per capita in inflation-adjusted terms, for Ontario, Quebec, and the average of all provinces and territories.&nbsp; Ontario\u2019s spending and revenue have long been well below Quebec\u2019s level. Indeed, compared to other provinces and territories, Ontario has long been a lower-tax, smaller-government jurisdiction.&nbsp;<\/p>\n\n\n\n<p>Moreover, Ontario and Quebec have been reasonably successful at controlling spending growth since the 2008 recession.&nbsp; The biggest difference in trajectory between Ontario and Quebec is mainly on the revenue side of the budget.&nbsp;<\/p>\n\n\n\n<p>Since 2005, while Ontario\u2019s revenues per capita have grown by 18 percent, Quebec\u2019s have grown by 34 percent. In 2018-19, Quebec collected $14,895 in revenues per capita, about 50 percent more than in Ontario.&nbsp;<\/p>\n\n\n\n<div class=\"wp-block-image\"><figure class=\"aligncenter size-large\"><img decoding=\"async\" width=\"1024\" height=\"682\" src=\"https:\/\/financesofthenation.ca\/staging\/6309\/wp-content\/uploads\/2020\/11\/fig4-1024x682.png\" alt=\"\" class=\"wp-image-2690\" srcset=\"https:\/\/financesofthenation.ca\/staging\/6309\/wp-content\/uploads\/2020\/11\/fig4-1024x682.png 1024w, https:\/\/financesofthenation.ca\/staging\/6309\/wp-content\/uploads\/2020\/11\/fig4-300x200.png 300w, https:\/\/financesofthenation.ca\/staging\/6309\/wp-content\/uploads\/2020\/11\/fig4-768x512.png 768w, https:\/\/financesofthenation.ca\/staging\/6309\/wp-content\/uploads\/2020\/11\/fig4-1536x1024.png 1536w, https:\/\/financesofthenation.ca\/staging\/6309\/wp-content\/uploads\/2020\/11\/fig4-2048x1365.png 2048w\" sizes=\"(max-width: 1024px) 100vw, 1024px\" \/><\/figure><\/div>\n\n\n\n<p>Figure 4 shows this comparison for different components of revenue. Despite lower incomes there, Quebec today collects about 10 percent more per capita in income and consumption taxes than Ontario, and almost twice as much in payroll taxes and social contributions. In addition, Quebec receives substantially more than Ontario in federal grants per capita (mainly through the Equalization program), and in non-tax revenue (chiefly royalties and profits from its hydroelectric sector). As shown in Figure 4, Quebec\u2019s revenues from all sources have increased substantially in real terms since 2005, while Ontario\u2019s have been fairly stable.&nbsp; In all, Quebec\u2019s revenues in 2019 were a remarkable 28 percent of GDP, compared to 17 percent in Ontario.<\/p>\n\n\n\n<p>How did they do it? While part of the reason is Quebec\u2019s higher federal grant revenue, even if Ontario matched Quebec in per capita federal grants, there would still be a significant shortfall. In fact, Quebec\u2019s higher federal transfers explains only about one third of the gap. The main difference is Quebec\u2019s own tax effort. Successive Quebec governments of different political parties have imposed higher taxes. Quebec\u2019s personal income tax rates on the middle class have long been substantially higher than Ontario\u2019s. Sales tax rates have been higher too, since a 2010 reform.<\/p>\n\n\n\n<p>As well, Quebec has employed certain innovative fiscal structures in order to dedicate a portion of its revenue to debt reduction. The <a href=\"https:\/\/www.ctf.ca\/CTFWEB\/Documents\/CTJ%202019\/Issue%204\/1039_2019CTJ4-PF-Godbout-e.pdf\" target=\"_blank\" rel=\"noreferrer noopener\">Generations Fund was created in 2006<\/a> to hold revenue from alcohol taxes and natural resource revenues, as well as a share of annual budget surpluses. Withdrawals from the Fund go to paying down the provincial debt. By 2021, the fund is expected to sit at nearly $12 billion.<\/p>\n\n\n\n<p>The data presented here predate the effects of the pandemic on Ontario\u2019s finances. It should therefore be clear that Ontario has developed a long-term imbalance between its revenues and spending. The general formula for restoring balance is either reduce spending, raise revenues or some combination thereof but there are political and economic pros and cons to all these options. &nbsp;What lessons can Ontario draw from Quebec in achieving more sustainable public finances and bringing down its debt to GDP ratio?&nbsp;&nbsp;<\/p>\n\n\n\n<p>On the expenditure side, while it is always possible to do better when it comes to getting value for money, it remains that Ontario already spends less per capita than the other provinces on its public programs including health and education. &nbsp;Reducing this further via greater private sector involvement in the largest expenditure items &#8211; health and education &#8211; would inevitably come at a high political cost. Quebec did flatten per capita spending since 2010, but <a href=\"https:\/\/altausterity.mcmaster.ca\/documents\/w5-aug-1-2017-peter-graefe-austerity-in-quebec.pdf\" target=\"_blank\" rel=\"noreferrer noopener\">not without protests, demonstrations and strikes<\/a>.<\/p>\n\n\n\n<p>On the revenue side, there are also challenges. Raising income taxes on the middle class will be a tough sell politically while targeting <a href=\"https:\/\/drive.google.com\/file\/d\/1WU2_cOXVzAe7jif5cEzTudWhv3FOXg-M\/view\" target=\"_blank\" rel=\"noreferrer noopener\">targeting tax increases at high income taxpayers will not generate much additional revenue<\/a> \u2013 it <a href=\"https:\/\/drive.google.com\/file\/d\/1bo4qRXHCBaP_TO8u4RTHQaiuMV1uRGDj\/view\" target=\"_blank\" rel=\"noreferrer noopener\">could even reduce revenue<\/a>, through its effect on tax avoidance behaviour. While many economists would instead support an increase the provincial sales tax rate, just as Quebec has done, there are again likely political costs.&nbsp; Failing the political will to pursue any of these options, Queen\u2019s Park is left with the alternative of pressuring the federal government for changes in transfer programs that would benefit Ontario.<\/p>\n\n\n\n<p>Quebec\u2019s experience with fiscal consolidation show that where there is a will there is indeed perhaps a way. Will Ontario find that will? That we will see.<\/p>\n\n\n\n<hr class=\"wp-block-separator\"\/>\n\n\n\n<p id=\"fn1\"><sup>1<\/sup>Pandemic-related extraordinary spending will total $21.1 billion, whereas the decline in tax revenue from previous<br>trend will be more than $40 billion over the three-year planning horizon.<\/p>\n\n\n\n<p id=\"fn2\"> <sup>2<\/sup> The data here report deficits on a cash basis, and are drawn from the Finances of the Nation REAL database , available at <a href=\"https:\/\/www.financesofthenation.ca\/real-data\/\" target=\"_blank\" rel=\"noreferrer noopener\">https:\/\/www.financesofthenation.ca\/real-data\/<\/a> . Note that the figures reported differ from those in the Ontario Public Accounts, which treat capital investment on an accrual rather than cash basis, and where certain government business enterprises and agencies are excluded from the consolidated revenue and expenditure of the province.<\/p>\n<\/div>\n","protected":false},"excerpt":{"rendered":"<p>Ontario recently published its 2020 budget, and it contained a lot of bad news. The cash deficit will be around $100 billion over the next three years. This commentary examines options for bringing the province back to sustainability by either reducing spending, raising taxes, or some combination of both. The authors discuss the economic and political consequences of each of the available options, and shows that there are no easy answers for the Ford government.<\/p>\n","protected":false},"author":1,"featured_media":2691,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_uag_custom_page_level_css":"","advgb_blocks_editor_width":"","advgb_blocks_columns_visual_guide":"","_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[109],"tags":[139,71],"class_list":["post-2686","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-commentary","tag-fiscal","tag-provincial-governments"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v26.9 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Ontario\u2019s Public Finances: Diagnosis and Prescription - Finances of the Nation<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/financesofthenation.ca\/staging\/6309\/2020\/11\/10\/ontarios-public-finances-diagnosis-and-prescription\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Ontario\u2019s Public Finances: Diagnosis and Prescription - Finances of the Nation\" \/>\n<meta property=\"og:description\" content=\"Ontario recently published its 2020 budget, and it contained a lot of bad news. The cash deficit will be around $100 billion over the next three years. This commentary examines options for bringing the province back to sustainability by either reducing spending, raising taxes, or some combination of both. 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The cash deficit will be around $100 billion over the next three years. This commentary examines options for bringing the province back to sustainability by either reducing spending, raising taxes, or some combination of both. The authors discuss the economic and political consequences of each of the available options, and shows that there are no easy answers for the Ford government.","og_url":"https:\/\/financesofthenation.ca\/staging\/6309\/2020\/11\/10\/ontarios-public-finances-diagnosis-and-prescription\/","og_site_name":"Finances of the Nation","article_published_time":"2020-11-10T15:03:56+00:00","article_modified_time":"2021-02-23T19:17:10+00:00","og_image":[{"width":1280,"height":720,"url":"https:\/\/financesofthenation.ca\/staging\/6309\/wp-content\/uploads\/2020\/11\/QP-exterior_0.jpg","type":"image\/jpeg"}],"author":"admin","twitter_card":"summary_large_image","twitter_creator":"@FONCanada","twitter_site":"@FONCanada","twitter_misc":{"Written by":"admin","Est. reading time":"7 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recently published its 2020 budget, and it contained a lot of bad news. The cash deficit will be around $100 billion over the next three years. This commentary examines options for bringing the province back to sustainability by either reducing spending, raising taxes, or some combination of both. The authors discuss the economic and&hellip;","coauthors":[],"tax_additional":{"categories":{"linked":["<a href=\"https:\/\/financesofthenation.ca\/staging\/6309\/category\/commentary\/\" class=\"advgb-post-tax-term\">Commentary<\/a>"],"unlinked":["<span class=\"advgb-post-tax-term\">Commentary<\/span>"]},"tags":{"linked":["<a href=\"https:\/\/financesofthenation.ca\/staging\/6309\/category\/commentary\/\" class=\"advgb-post-tax-term\">Fiscal<\/a>","<a href=\"https:\/\/financesofthenation.ca\/staging\/6309\/category\/commentary\/\" class=\"advgb-post-tax-term\">Provincial Governments<\/a>"],"unlinked":["<span class=\"advgb-post-tax-term\">Fiscal<\/span>","<span class=\"advgb-post-tax-term\">Provincial Governments<\/span>"]}},"comment_count":"0","relative_dates":{"created":"Posted 5 years ago","modified":"Updated 5 years ago"},"absolute_dates":{"created":"Posted on November 10, 2020","modified":"Updated on February 23, 2021"},"absolute_dates_time":{"created":"Posted on November 10, 2020 3:03 pm","modified":"Updated on February 23, 2021 7:17 pm"},"featured_img_caption":"","series_order":"","_links":{"self":[{"href":"https:\/\/financesofthenation.ca\/staging\/6309\/wp-json\/wp\/v2\/posts\/2686","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/financesofthenation.ca\/staging\/6309\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/financesofthenation.ca\/staging\/6309\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/financesofthenation.ca\/staging\/6309\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/financesofthenation.ca\/staging\/6309\/wp-json\/wp\/v2\/comments?post=2686"}],"version-history":[{"count":7,"href":"https:\/\/financesofthenation.ca\/staging\/6309\/wp-json\/wp\/v2\/posts\/2686\/revisions"}],"predecessor-version":[{"id":3744,"href":"https:\/\/financesofthenation.ca\/staging\/6309\/wp-json\/wp\/v2\/posts\/2686\/revisions\/3744"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/financesofthenation.ca\/staging\/6309\/wp-json\/wp\/v2\/media\/2691"}],"wp:attachment":[{"href":"https:\/\/financesofthenation.ca\/staging\/6309\/wp-json\/wp\/v2\/media?parent=2686"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/financesofthenation.ca\/staging\/6309\/wp-json\/wp\/v2\/categories?post=2686"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/financesofthenation.ca\/staging\/6309\/wp-json\/wp\/v2\/tags?post=2686"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}