Understanding Ontario’s 2018-19 Deficit

According to the Public Accounts of Ontario, the Province recorded an actual deficit of $7.4 billion in 2018-19, double the 2017-18 deficit of $3.7 billion. The actual 2018-19 deficit also turned out to be significantly lower than the $11.7 billion deficit projected by both the FAO and the government at the time of the 2019 Ontario Budget.

This note examines the underlying factors behind the relatively large $3.7 billion year-over-year deterioration in the 2018-19 deficit, and shows that this sharp rise was largely the result of policy choices by both the previous and current governments – including the cancellation of the cap and trade program and higher spending on electricity subsidies.

The note also looks at the unusually large $4.3 billion improvement in the actual 2018-19 deficit from the 2019 budget projection,[1] which was largely the result of unexpectedly strong revenues.

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Examining the year-over-year increase in Ontario’s 2018-19 deficit: spending increases outpaced revenue, doubling the deficit

In 2018-19, Ontario recorded a budget deficit of $7.4 billion, double the 2017-18 deficit of $3.7 billion. The relatively sharp increase in the deficit was the result of modest revenue growth, combined with a relatively large increase in program spending. Policy decisions by both the current and previous governments contributed to the slow increase in revenues as well as the rise in spending last year.

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Government policy decisions reduced non-tax revenues in 2018-19

Non-tax revenue[2] declined by 5.3 per cent (or -$2.7 billion) in 2018-19, driven by several key policy decisions by both the previous and current governments.

In July 2018, the Province ended the cap and trade program, which raised revenue through the auction of emissions allowances to fund spending on greenhouse gas reduction initiatives. The end of the cap and trade program led to a $1.9 billion decline in 2018-19 revenues compared to 2017-18.[3]

As part of the Province’s partial sale of Hydro One, the government sold 20 per cent of Hydro One’s equity in 2017-18,[4] temporarily boosting sales and rental revenue in that year. Fewer asset sales in 2018-19 resulted in a $0.9 billion reduction in sales and rentals revenue when compared to 2017-18.

A further consequence of Hydro One’s partial sale was an Ontario Energy Board ruling that resulted in a one-time $0.4 billion reduction in the Province’s revenue received from the corporation in 2018-19.[5] 

In addition, the debt retirement charge[6] was removed from non-residential electrical bills on March 31, 2018, which permanently lowered non-tax revenue by $0.6 billion beginning in 2018-19.

Taken together, these four non-tax revenue streams declined by $4.1 billion in 2018-19. This more than offset a $1.4 billion increase in other non-tax revenue sources, leading to a $2.7 billion decline in overall non-tax revenues in 2018-19. See Appendix A for further details.

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Electricity subsidies a key factor behind strong spending increase in 2018-19

Program spending increased by 4.5 per cent (or $6.4 billion) in 2018-19, with each of the five largest ministries recording significantly higher spending on a year-over-year basis.

	Ministry Expense	2017-18 ($ millions)	2018-19 ($ millions)	y/y change ($ millions)	y/y growth (per cent)
Program Spending		142,363	148,751	6,388	4.5%
Health and Long-Term Care		59,066	61,511	2,445	4.1%
Education *		28,998	30,425	1,427	4.9%
Community and Social Services		12,264	12,767	503	4.1%
Advanced Education and Skills Development		11,104	11,869	765	6.9%
Energy		3,496	4,899	1,403	40.1%
	of which: Electricity Cost Relief Programs	2,834	4,242	1,407	49.7%
All Other Ministries		27,435	27,280	-155	-0.6%
Interest on Debt		11,903	12,384	481	4.0%
Total Expense		154,266	161,135	6,869	4.5%
* Education expense includes the Ontario Teacher’s Pension Plan. Source: 2018-19 Ontario Public Accounts and FAO.

Notably, Ministry of Energy expenditures increased at the fastest rate, largely due to the sharply higher cost of electricity subsidies. The government spent $4.2 billion subsidizing electricity prices in 2018-19, an increase of almost 50 per cent from $2.8 billion in 2017-18. [7]

Spending by the Ministry of Health and Long-Term Care increased by 4.1 per cent (or $2.4 billion) in 2018-19. This was mainly driven by funding increases for hospitals[8] and higher expenditure for Drug Programs that reflected the introduction of OHIP+.[9]

Education spending grew by 4.9 per cent in 2018-19, an increase of $1.4 billion.[10] Increased funding for school boards was the largest driver of education spending, along with spending for childcare and early years programs.[11]

Spending in all other ministries declined by $0.1 billion in 2018-19, mostly due to lower spending in Indigenous Relations and Reconciliation, Environment and Climate Change, and the Treasury Board Secretariat.[12] See Appendix B for further details.

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Comparing Ontario’s actual 2018-19 results with the 2019 budget projection: unexpectedly strong revenues and lower spending lowered the deficit

The FAO’s Spring 2019 Economic and Budget Outlook projected an $11.7 billion deficit for 2018-19, consistent with the interim deficit reported in the 2019 Ontario Budget. However, the 2018-19 Ontario Public Accounts reported an actual budget deficit of $7.4 billion last year, $4.3 billion lower than projected by both the FAO and Ontario government.

The unusually large[13] $4.3 billion improvement in the deficit, compared to the spring projection, was the result of $2.9 billion in higher revenues – in large part a sharp jump in corporate tax revenues – combined with $1.4 billion in lower program spending than projected in the 2019 budget.

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Three revenue sources accounted for most of the $2.9 billion increase relative to the FAO projection.   Corporations tax for 2018-19 was $1.4 billion (or 9.3 per cent) higher than anticipated, personal income tax was $0.4 billion higher, while income from government business enterprises was $0.6 billion above expectations.

At the same time, total spending in the 2018-19 Public Accounts was $1.4 billion lower than planned at the time of the 2019 Budget, primarily due to lower than planned spending in Health and Long-term Care, Education, Environment, as well as unspent contingency funds. [14]

With the release of the Public Accounts showing a deficit of $7.4 billion in 2018-19, the government has significantly overachieved on the 2019 budget’s projection of an $11.7 billion deficit, largely as a result of unexpectedly high revenues. However, the extent to which this overachievement will carry-forward to future years is uncertain.

The government will be releasing an updated fiscal plan, incorporating the 2018-19 final results, in the upcoming 2019 Fall Economic Statement, scheduled for release on November 6.

Edward Crummey	David West
Principal Economist	Chief Economist
ecrummey@fao-on.org	dwest@fao-on.org

* With contributions from Sabrina Afroz and Paul Lewis

Financial Accountability Office of Ontario
2 Bloor Street West, Suite 900
Toronto, Ontario M4W 3E2

Media queries, contact: Victoria Coste, 647.519.5161 or email vcoste@fao-on.org.

About the FAO

Established by the Financial Accountability Officer Act, 2013, the Financial Accountability Office (FAO) provides independent analysis on the state of the Province’s finances, trends in the provincial economy and related matters important to the Legislative Assembly of Ontario. Visit our website at http://www.fao-on.org/en/ and follow us on Twitter at https://twitter.com/InfoFAO.

Appendix A: Revenue by Source

	2017–18 Actual	2018–19 Actual	y/y change	y/y growth
	$M	$M	$M	Per cent
Taxation
Personal Income Tax	32,900	35,381	2,481	7.5%
Sales Tax	25,925	27,808	1,883	7.3%
Corporations Tax	15,612	16,606	994	6.4%
Employer Health Tax	6,205	6,544	339	5.5%
Education Property Tax	5,883	6,171	288	4.9%
Ontario Health Premium	3,672	3,819	147	4.0%
Land Transfer and Non-Residential Speculation Tax	3,174	2,761	-413	-13.0%
Gasoline Tax	2,701	2,709	8	0.3%
Tobacco Tax	1,244	1,241	-3	-0.2%
Fuel Tax	760	774	14	1.8%
Beer and Wine Tax	601	603	2	0.3%
Electricity Payments-In-Lieu of Taxes	494	435	-59	-11.9%
Ontario Portion of Federal Cannabis Excise Duty	–	19	19
Other Taxes	552	653	101	18.3%
Total Tax Revenue	99,723	105,524	5,801	5.8%
Transfers from Government of Canada
Canada Health Transfer	14,359	14,852	493	3.4%
Canada Social Transfer	5,314	5,451	137	2.6%
Equalization Payments	1,424	963	-461	-32.4%
Labour Market Development Agreement	672	719	47	7.0%
Infrastructure Programs	1,065	605	-460	-43.2%
Social Housing	419	394	-25	-6.0%
Direct Transfers to Hospitals, School Boards and Colleges	314	390	76	24.2%
Home Care and Mental Health	116	329	213	183.6%
Workforce Development Agreement	234	296	62	26.5%
Indian Welfare Services Agreement	274	281	7	2.6%
Early Learning and Childcare	122	160	38	31.1%
Bilingualism Development	85	85	-	0.0%
Legal Aid - Criminal	64	64	-	0.0%
Youth Criminal Justice	52	53	1	1.9%
Labour Market Agreement for Persons with Disabilities	63	-	- 63
Other	283	448	165	58.3%
Total Transfer Revenue	24,860	25,090	230	0.9%
Income from Investment in Government Business Enterprises
Ontario Lottery and Gaming Corporation	2,487	2,464	-23	-0.9%
Liquor Control Board of Ontario	2,207	2,276	69	3.1%
Ontario Cannabis Store	-6	-42	-36	600.0%
Ontario Power Generation Inc./Hydro One Ltd.	1,464	772	-692	-47.3%
Total Government Business Enterprise Income	6,152	5,470	-682	-11.1%
Other Revenue
Fees, Donations and Other Revenues from Hospitals, School Boards and Colleges	8,309	9,237	928	11.2%
Vehicle and Driver Registration Fees	1,912	1,991	79	4.1%
Sales and Rentals	2,450	1,477	-973	-39.7%
Other Fees and Licenses	819	861	42	5.1%
Carbon Allowance Proceeds	2,401	472	-1,929	-80.3%
Royalties	290	251	-39	-13.4%
Independent Electricity System Operator Revenue	210	227	17	8.1%
Power Supply Contract Recoveries	185	173	-12	-6.5%
Local Services Realignment	138	138	0	0.0%
Net Reduction of Power Purchase Contracts	74	41	-33	-44.6%
Electricity Debt Retirement Charge	593	15	-578	-97.5%
Miscellaneous	2,478	2,733	255	10.3%
Total Other Revenue	19,859	17,616	-2,243	-11.3%
Total Revenue	150,594	153,700	3,106	2.1%
Source: Schedule 1 in the 2018-19 Ontario Public Accounts, pages 92 and 93. 2017-18 numbers have been re-stated.

Appendix B: Expense by Ministry

	2017–18 Actual	2018–19 Actual	y/y change	y/y growth
	($M)	($M)	($M)	(Per cent)
Ministry
Accessibility Directorate of Ontario	19	18	-1	-5.3%
Advanced Education and Skills Development	11,104	11,869	765	6.9%
Agriculture, Food and Rural Affairs	989	1,066	77	7.8%
Attorney General	1,686	1,714	28	1.7%
Board of Internal Economy	296	371	75	25.3%
Children and Youth Services	4,116	4,419	303	7.4%
Citizenship and Immigration	44	100	56	127.3%
Community and Social Services	12,264	12,767	503	4.1%
Community Safety and Correctional Services	2,523	2,678	155	6.1%
Economic Development and Growth/Research, Innovation and Science	898	890	-8	-0.9%
Education	27,339	28,747	1,408	5.2%
Teachers' Pension	1,659	1,678	19	1.1%
Energy	3,496	4,899	1,403	40.1%
Environment and Climate Change	715	560	-155	-21.7%
Executive Offices	55	50	-5	-9.1%
Finance	845	954	109	12.9%
Interest on Debt	11,903	12,384	481	4.0%
Municipal Partnership Fund	506	510	4	0.8%
Power Supply Contract Costs	191	173	-18	-9.4%
Francophone Affairs	6	6	0	0.0%
Government and Consumer Services	569	567	-2	-0.4%
Health and Long-Term Care	59,066	61,511	2,445	4.1%
Indigenous Relations and Reconciliation	1,208	289	-919	-76.1%
Infrastructure	1,739	1,766	27	1.6%
International Trade	47	39	-8	-17.0%
Labour	303	308	5	1.7%
Municipal Affairs and Housing	1,368	1,479	111	8.1%
Natural Resources and Forestry	851	838	-13	-1.5%
Northern Development and Mines	744	826	82	11.0%
Senior Affairs	27	32	5	18.5%
Status of Women	27	22	-5	-18.5%
Tourism, Culture and Sport	1,582	1,545	-37	-2.3%
Transportation	4,452	4,713	261	5.9%
Treasury Board Secretariat	187	182	-5	-2.7%
Employee and Pensioner Benefits	1,442	1,165	-277	-19.2%
Total Expense	154,266	161,135	6,869	4.5%
Source: Schedule 4 in the 2018-19 Ontario Public Accounts, page 98. 2017-18 numbers have been re-stated.

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Ontario’s deficit rose by $3.7 billion in 2018-19, but was $4.3 billion lower than the budget projection
This chart compares Ontario’s actual deficit in 2018-19 to the actual deficit in 2017-18 and to the projected deficit for 2018-19 in the 2019 Ontario Budget and FAO spring outlook. The graph shows that the deficit in 2017-18 was $-3.7 billion, the actual deficit in 2018-19 was $-7.4 billion, and the projected deficit for 2018-19 was $-11.7 billion. The graph highlights the fact that the 2018-19 deficit was $3.7 billion larger or roughly double the 2017-18 budget deficit, and that the 2018-19 deficit was $4.3 billion less than expected by the FAO or the government in the spring.

A decline in non-tax revenue offset the surprisingly strong tax revenue growth in 2018-19
This chart shows the year-over-year growth of total revenue, tax revenue, and non-tax revenue for 2018-19. The graph shows that total revenue grew 2.1 per cent, tax revenue grew 5.8 per cent and non-tax revenue declined by 5.3 per cent in 2018-19.

Surprisingly strong tax revenues in 2018-19
This chart shows the average annual growth in nominal GDP and tax revenue from 2000 to 2017 and the growth in nominal GDP and tax revenue in 2018-19. Between 2000 and 2017, the nominal GDP grew by 3.6 per cent per year while tax revenue grew by 3.5 per cent per year. In 2018-19, nominal GDP grew by 3.4 per cent while tax revenue grew by 5.8 per cent.

Policy decisions lowered 2018-19 non-tax revenues
This chart decomposes the non-tax revenue in 2017-18 and 2018-19 into four components namely (1) carbon allowance proceeds, (2) sales and rentals, (3) debt retirement charge, and (4) net income from Ontario Power Generation, Hydro One, and Brampton Distribution Holdco Inc. It illustrates that the revenue from carbon allowance proceeds was $2.40 billion in 2017-18 and $0.47 billion in 2018-19. Revenue from sales and rentals was $2.43 billion in 2017-18 and $1.48 in 2018-19. Revenue from debt retirement charge was $0.59 billion in 2017-18 and $0 in 2018-19. And revenue from Ontario Power Generation, Hydro One, and Brampton Distribution Holdco Inc. was $1.46 billion in 2017-18 and $0.77 billion in 2018-19. Overall, this chart highlights the fact that there was a $4.1 billion decrease in non-tax revenue in 2018-19 from 2017-18.

The cost of electricity subsidies reached $4.2 billion in 2018-19
This chart shows the average cost of the Electricity Price Mitigation Program (Vote 2905) from 2010-11 to 2016-17, and the cost of the program in both 2017-18 and 2018-19. The chart shows that the cost of the program was $0.8 billion on average from 2010-11 to 2016-17, $2.8 billion in 2017-18, and $4.2 billion in 2018-19.

Unexpectedly high revenue and government spending revisions improved Ontario’s 2018-19 deficit
This chart shows the breakdown of the difference between the projected budget deficit as of the 2019 Budget and FAO Spring Outlook and the actual deficit in 2018-19. It decomposes the difference between the $-11.7 billion deficit projected in the 2019 budget and FAO spring outlook and the $-7.4 billion actual deficit into two components: (1) unexpected revenue increase amounting $2.9 billion and (2) government spending revision amounting $1.4 billion.