10/4/16

Ontario deficit cut over $5 billion in one year as revenue rolls in -- but who will benefit?



 The government's unaudited financial statements for 2015-16 have been released (in lieu of the Public Accounts) and the deficit is down another $700 million from the last government estimate. Combined with earlier reductions, that means they came in with a deficit $3.5 billion less than they originally budgeted for 2015-16 in the 2015 budget. 


  • Revenue for 2015-16 is up   $4 billion compared with the 2015 Budget forecast and up $2 billion from the 2016-17 Budget estimate for 2015-16.  This is good news.  After years of disappointing increases in revenue, we now have a whopper of a year.
  • Revenue increased $9.8 billion between 2014/15 and 2015/16 - - that is an 8.3% increase. Two billion of this is related to the Hydro sell-off.  But there are big increases in revenue from corporate taxes (up 19%), income taxes (up 6.2%) and sales taxes (up 8.1%). Money is rolling in.
  • Interest on debt is down $400 million compared to the 2015 Budget estimate and down $200 million from the 2016 Budget estimate just seven months ago.  The government consistently overestimates the cost of borrowing for debt, part of a policy of overestimating deficits it seems.  In any case, this reduction is more good news that helps reduce the deficit.
  • Total expenses are up $1.9 billion over the 2015 Budget forecast and about $300 million from the 2016 Budget estimate for 2015-16. 
  • It is unusual for this government to overspend its budgets – they usually spend less than budgeted.  And they would have come close this year as well but for a unique circumstance. Specifically, a $1.5 billion increase in expenses the government has included in this financial statement in response to  the Auditor General's concerns regarding proper accounting for the Teachers and OPS pension plan surpluses.  For its part, the government claims that the AGs concern over pension surplus accounting practices was a break with the past practice of many years (and several Auditors) and was only raised by the Auditor in the last few weeks. On its own account, the government had to add $1.5 billion to the program expense line item just weeks before the September 27 deadline to close out the books for 2015-16 with the Public Accounts.
  • There was also some extra spending on health care--around about $300 million for drugs and hospitals (although it is not clear from the financial statements how much extra each got).
  • The actual increase in program spending between 2014/15 and 2015/16 is $4.2 billion, a 3.6% increase – almost double the budgeted 1.9% increase.   As noted, this is mainly due to the the government's decision to use the Auditor's method of accounting for pension surpluses. 
  • Nevertheless, the deficit is $5.3 billion less than the 2014-15 deficit of $10.3 billion, a 51% percent cut.  Even with the extra $1.5 billion for pension expenses demanded by the Auditor General, the deficit was cut in half to $5 billion. If not for the late breaking push from the AG on the Teachers and OPS pension surpluses, the deficit would be down to a measly $3.5 billion, a whopping $6.8 billion less (66% less) than the 2014-15 deficit.  
  • The government's very modest challenge this year (2016-17) is to move the deficit down to $4.3 billion – only $700 million less than the current 2015-16 deficit estimate of $5 billion.  
  • Given the good economic growth in Ontario so far this year,  they are likely well on their way to surpass that.  Perhaps by a long way. Indeed, as the government hasn't given up on its accounting method for  the pension plan surpluses (and has set up a process to review and possibly revise) they may well be even better placed to move out of deficit. 

While some will remain stuck on debt and deficit, the actual debate in ruling circles has now moved more on to how the new found revenue will be used.   

The real question: who will benefit? While public services have been hammered by years of austerity, it wouldn't be the first time a government has followed cuts to public services "needed" to balance the books with tax cuts

Indeed, something quite similar to a tax cut has been the main response to the rapidly improving deficit situation to date -- with good revenue rolling in, the government hasn't bothered to wait for a balanced budgetLast month it moved to provide billion dollar annual payouts to cover 8% subsidies of residential electrical bills --  the government has even branded this subsidy as a Harmonized Sales Tax, or HST, cut.  

But there's no real change in policy regarding harsh public sector austerity -- yet.

The bad news out of these financial statements?  The changed accounting practices for pension surpluses advocated by the Auditor would add $10.7 billion to the provincial debt, and, as a result, the net debt to GDP level actually increases under this scenario by 1.5% to 40.9% instead of leveling off as expected.  While this may only be an accounting issue (it's not like the government had to spend another penny to deal with the changed accounting for public sector pension surpluses), the right has already seized on this, crying on about debt. That may prove an effective strategy to dampen down popular demands to end the attacks on public services.   

But don't be fooled. While the right  may use debt in their battle against public services, debt in itself is not their big concern. After the last recession in 1991-92, the right cried wolf about debt and deficit.  But despite all the histrionics, when Mike Harris was elected in 1995, he slashed taxes, debt be damned.  

History may be repeating itself.  And, as in the past, the battle will be over whether to use our new collective wealth to improve public services for everyone or divert it to private wealth for the few.

Updates October 7 and 9: The Auditor General has now, essentially, approved the 2015 -16 Public Accounts.  The government says the Public Accounts are identical to the financial statement released earlier and discussed above.  The Auditor General has, however, qualified her opinion because the government has not adjusted the 2014-15 deficit and debt upwards.  Based on the pension asset issue, she believes  the 2014-15 deficit should be adjusted upwards $953 million.  On her account, the deficit actually fell from $11.3 billion in 2014/15 to $5 billion in 2015/16More precisely, that means a one-year $6.24 billion reduction in the deifcit, an astonishing 53.4%.  The virtues and demerits of the different accounting practices aside, this, at least, has the advantage of allowing a comparison of the two years on the basis of the same accounting practices.

 If the government comes even moderately close to such a large dollar reduction in the deficit in 2016-17, they will eliminate the deficit entirely this fiscal year even with the $1.5 billion added to the deficit through the new pension accounting practices advocated by the Auditor.  If the reduction matches the 2015-16 performance, the books would, in fact, be in surplus.    

Such a reduction will prove more difficult with the new in-year spending increase for residential electricity subsidies announced last month (costing about $1 billion per full year and $250 million for the remainder of this fiscal year) and the possibility that the new pension accounting practices advocated by the Auditor General will add more weight to  the deficit But I wouldn't rule out the possibility.
[1] This government consistently overestimates the deficit and then beats that target, sometimes by quite a ways.
[2] With better than planned revenue driving down the deficit last year, the government is now, in effect, forecasting only a $700 million reduction in the deficit this yearThis is much less than their previous estimates of the deficit reduction this year. 
[3] Real growth in the last two quarters reported was an  impressive 3% on an annualized basis.  Moreover, nominal economic growth is predicted to increase from 3.5% in 2015 to about 4.4% in 2016 by the banks.
[4] The Ministry of Finance stated  in its 2016/17 first quarter financial report that they have kept intact their billion dollar reserve.  if that reserve is not used, it will be applied against the deficit.

While we may get some sense of the progress they are making when next year’s Budget is released, we probably will not know for sure until the next Public Accounts come out in late September 2017.   But, with an election only half a year later, that would be perfect timing for the Liberals to announce a major reduction in the deficit, and force the Conservatives, who have banged on about  deficits, to eat their words.

5/18/16

Health care funding falls far short even as Ontario heads out of deficit


A new report from the Financial Accountability Office (FAO) confirms the difficulties government cuts are placing on public health care in Ontario.  

The FAO is a government-funded but somewhat independent office that reviews Ontario government economic and fiscal claims. This is not a left wing think tank -- rather it is very much part of the received establishment.  

Its latest report notes that government spending plans will fall $4 billion short of what is required to maintain services at 2015/16 levels by 2018/19: 

“If the quality and nature of public services remain unchanged over the outlook, the FAO estimates that program spending would need to increase by 2.7 per cent per year on average from 2014-15 to 2018-19. However, the 2016 Budget limits annual program spending growth to just 1.9 per cent on average, 0.8 percentage points lower than the growth in the underlying cost factors that drive public sector spending.”

Moreover:
 
"The government’s plans to restrain spending are occurring across most program areas, notably in the health, education and justice sectors, where planned spending growth is about half the rate of growth in underlying spending pressures.  The FAO estimates that by 2018-19, there would be about $4.0 billion in spending pressures to maintain the quality and nature of public services provided in 2015, assuming no further action by the government.” (My emphasis-DA)

The biggest funding gap is in health care. 

Health care is facing 5.2% cost pressures the FAO notes: 2.2% due to population growth and aging and 3% due to growing wealth and inflation.  
“Assuming that the quality and type of health care services provided in 2015 remains the same over the outlook, the FAO estimates that population growth and aging would contribute 2.2 percentage points per year on average to the growth in health spending. A stronger economy, which leads to higher incomes and price inflation would contribute a further 3.0 percentage points. Combined, these factors would lead to 5.2 per cent annual growth in health spending.”
 
The FAO notes the government plans health care funding increases of 1.8% over the next four years.   

Accordingly it concludes:“Given these factors, it is unclear how the government will achieve its target of 1.8 per cent annual spending increases (for health) over the next four years.” (My emphasis.-DA)


As can be seen in the chart above, the projected health spending is a major cut compared with the past:

…”Provincial health spending grew by 7.2 per cent on average annually from 2005-06 to 2009-10. Following the financial crisis, the Province limited health spending growth to 3.1 per cent per year from 2009-10 to 2014-15 period. According to the 2016 Budget, the government plans to further limit health spending growth to just 1.8 per cent per year from 2014-15 to 2018-19, below the already restrained pace of growth of the past five years.”

While in the past, our health care system was getting "enrichments" -- it is now getting significant "efficiencies". 

Ontario's Economic and Fiscal Situation: The news from the FAO is a little better than it has been in the past.

According to the FAO, the economy is improving, revenue is growing (albeit not quite so quickly as the government hopes), and spending pressures are building.  As a result, the government (absent new policies) will briefly achieve little or no deficit in 2017-18, but then return to deficit.  The key debt to GDP ratio however has stopped getting worse and is beginning to modestly improve.  

Economic Growth: 

"The FAO is forecasting solid growth for the Ontario economy, with real GDP rising by 2.5 per cent in both 2016 and 2017, in-line with the current average outlook of private sector economists. Beyond 2017, Ontario’s economic growth will moderate slightly, averaging 2.2 per cent per year. However, there are significant risks for both the global and Canadian economies that could lead to weaker economic growth for Ontario."


The real growth forecast by the FAO for 2016 and 2017 is a little higher than the 2016 Budget forecast. Growth of 2.5% in 2016 and 2017 would be an increase from 2.1% average growth over 2011-2015.  This level of growth is also better than the level FAO predicts for Canada as a whole (1.7% in 2016 and 2.4% in 2017).


Government Revenue: Revenue growth for 2016 -2019 is predicted to be a little more modest than the Ontario 2016 Budget forecast, falling in total 0.8% behind over 4 years, with the bulk of that in 2017.   Taxation revenue will be stronger than it has been as with better nominal economic growth, and revenue from the federal government is expected to grow at 4%, much as predicted in the Budget.  The FAO also puts revenue growth from governmental enterprises and other non-tax revenue at a similar level as forecast in the provincial Budget.

Coming out of deficit:  Notably, the FAO deficit forecast for this year is $300 million less than in the 2016 budget. Moreover, the province is in a position to balance the budget in 2017-18.    


Based on the revenue and spending outlooks, the FAO forecasts budget deficits of $5.7 billion in 2015-16, $4.0 billion in 2016-17, and $580 million in 2017-18, somewhat larger than the 2016 Ontario Budget projections.  However, given the flexibility built into the government’s fiscal projections, the Province is in a position to achieve its commitment of balancing the budget in 2017-18.



This breaks with the many who have claimed that Ontario would definitely not balance the budget in 2017-18.   Moody's had downgraded Ontario's long term debt and had expressed skepticism last year that the government would balance the budget in 2017/18 as planned.  They now have upgraded Ontario, noting that the return to a balanced budget is on the horizon.

Growing spending pressures: The FAO sees growing spending in the longer term, as spending pressures rise from population growth, population aging and  higher costs of services:


For program spending, the FAO outlook adopts the 2016 budget projection, which assumes average annual spending growth of 1.9 per cent over the 2014-15 to 2018-19 period. Beyond the budget outlook, the FAO projects program spending to increase by 3.4 per cent in 2019-20 and 2020-21, reflecting rising spending pressures from underlying demographics and higher costs of services.

Going back into deficit:  In the longer term, with increased spending pressures, the FAO believe deficits will re-appear (absent new policies):


Beyond 2017-18, as revenue growth remains moderate, but spending pressures build, the FAO projects a gradual deterioration in the Province’s budget balance, with a deficit of $1.7 billion by 2020-21.

Debt: Accordingly, the FAO suggests that the debt will continue to increase but the (arguably more important) debt to GDP ratio has already begun to “modestly” decline,  with a prediction that it will move from 39.6% in 2015-16 to 38.4% in 2020-21.


Finally, the FAO also notes that there are risks to the government’s austerity plan to keep spending below demographic and cost pressures:


There are a number of significant risks for the Province’s fiscal outlook. From 2014-15 to 2018-19, the government plans to restrain spending growth to well below the growth of underlying demographic and cost pressures. It is unclear to what extent the government will achieve this level of spending restraint or what the implications are for public services.

The take-away? For what it is worth, this representative of mainstream opinion believes we are more or less on track for a balanced budget in 2017/18, that government funding for public programs is falling behind real cost pressures, that health care is being hit hardest of all, that it is unclear how government can achieve such low level funding increases for health care, that funding for public programs and especially health care will have to increase in the medium term, and that, absent new policies, we will go back into modest deficit after 2017/18.