My name is David Wake. I am Ontario’s Integrity Commissioner and have been appointed the Financial Accountability Officer on a temporary basis, while Stephen LeClair is on medical leave.
Today I delivered to the Speaker, for tabling, a report providing an updated economic and fiscal outlook for the Province of Ontario.
The report details the FAO’s assessment of the current economic outlook and the Province’s fiscal position, given developments since the FAO’s last economic and fiscal outlook released in May.
Based on this assessment, and in the absence of additional government measures, Ontario’s budget would be expected to remain in deficit over the next five years.
I will ask the FAO’s Chief Economist, David West, to provide an overview of the report’s highlights.
Developments since the FAO’s Spring Report
There have been three significant developments since the FAO’s spring report:
- the release of the 2015-16 Public Accounts;
- the Government’s Speech from the Throne in September; and
- a revised economic outlook.
Each of these developments had a material impact on the Province’s fiscal position.
The recent Public Accounts reported higher than expected tax revenues for 2015-16, which translate into higher revenues over the outlook.
The Public Accounts also included a legislated change in the accounting treatment for jointly sponsored pension plans, which increased the Province’s net debt by $10.7 billion and the annual deficit by $1.5 billion in 2015-16. However, there is significant uncertainty on the impact of this accounting change going forward.
In developing this updated fiscal projection, the FAO has assumed that program expense would be $1.5 billion higher each year over the outlook as a result of the accounting change. The report provides Ontario’s fiscal position both including and excluding this accounting change, to allow for consistency with the 2015-16 Public Accounts as well as comparability with the FAO’s spring report.
The second major development since the FAO’s spring report - the Government’s Throne Speech - included new commitments to expand child care spaces and provide an HST rebate on electricity bills. When fully phased-in, these commitments are expected to result in new operating expenses of about $1.8 billion per year.
Finally, the outlook for economic growth in Ontario has moderated since the spring, reflecting weaker economic conditions in Canada and globally. Slightly slower economic growth leads to a modestly lower projection for tax revenues. At the same time, the slower growth of the Canadian economy has resulted in a lower interest rate forecast, which reduces the projection for interest on debt expense.
Excluding the change in accounting treatment for pension plans, these developments – the 2015-16 Public Account results, the September Throne Speech commitments and a revised economic outlook - were largely offsetting, resulting in a moderately higher budget deficit over the outlook compared to the FAO’s spring report.
Including the assumed impact from the accounting change, the FAO projects Ontario budget deficits of $5.2 billion in 2016-17 and $2.6 billion in 2017-18. Beginning in 2018-19, the deficit is forecast to steadily deteriorate to $3.7 billion by 2020-21, as growth in revenue is outpaced by increases in program expense and interest on debt.
However, the government remains committed to balancing the budget in 2017-18 and maintaining balance going forward.
Eliminating the budget deficit by 2017-18 will be more challenging given the assumed impact of the change in accounting treatment. Even so, achieving budget balance in 2017-18 may still be within the government’s reach through the sale of public assets, the allocation of new revenues to existing spending or other steps.
But maintaining a balanced budget after 2017-18 will likely require additional measures to raise revenue or reduce expense.
Based on the FAO’s projections, Ontario’s net debt is expected to rise by $64 billion over the next five years to $370 billion in 2020-21, the result of cumulative deficits, capital spending and the change in accounting treatment. This is about $20 billion higher than forecast in the FAO’s spring outlook, primarily due to the accounting change.
As a result of the higher debt, combined with slightly slower growth in nominal GDP, Ontario’s debt-to-GDP ratio is now expected to plateau at about 41 per cent, significantly above the FAO’s spring projection.
As noted in the FAO’s spring report, the Government has committed to reduce the debt-to-GDP ratio to 27 per cent, approximately 14 percentage points below the projected value in 2020-21, but has yet to provide details of how or when it plans to achieve this goal.
This report summarizes the FAO’s estimates of the most likely outcomes for Ontario’s fiscal position, given developments over the past six months.
However, as highlighted in the FAO’s spring report, there are significant risks.
If economic growth turns out to be even modestly weaker than expected, tax revenues would be lower.
At the same time, pressures to increase the growth in program spending continue to build, reflecting the growth in population and price inflation.
The government has also built into its fiscal plan specific assumptions about revenues from the new cap and trade program and from new federal transfers – assumptions which are incorporated into the FAO’s projections. These two revenue sources are expected to total over $3 billion in 2017-18. Differences in the timing or net benefit of these new revenue sources could have a significant impact on the government’s fiscal position.
To summarize, there have been a number of significant developments since the FAO’s spring report on Ontario’s economic and fiscal outlook.
When taken together, these developments suggest a moderate deterioration in the Province’s fiscal position compared to our spring report.
However, when the assumed impact of the change in the accounting treatment of jointly sponsored pension plans is included, the projected deficits become more significant, suggesting the need for additional fiscal measures to achieve the Government’s goal of a balanced budget.
We are happy to take questions.