11/19/14

Ontario set to beat deficit target - contrary to media tales of doom




There was much gloom in the corporate media's reports on the Ontario government's Budget follow-up, the Fall Economic Statement.  The Globe and Mail headlined their front page report on the Statement with the claim "Ontario Fades," concluding that "the key takeaway was that the province's struggle to rein in its chronic budget deficits is getting harder."  

The Sun Media columnist Anthony Furey treats the Statement as another gruesome example of governments addicted to debt. 

Stories about worsening government deficits play well with big business attacks on public services, but they are  based on exaggerating minor issues.

True, the Ontario Finance Ministry did reduce the 2014-15 revenue outlook by $509 million.  

But there is much more to the story than that.  

The reported decline in revenue had little to do with current events. Instead it was largely based on new assessments of corporate taxes for 2012 and earlier.  

As well interest spending was also down $214 million due to lower than expected debt costs.  Otherwise the Finance Ministry claims spending (i.e. program spending) is on track.  

Considering both their revenue and expense changes, they are $300 million down.  But that means they are out by less than 1/4 of one percent of total budget  -- almost eight months through the year.  Hardly a big deal. 

But for the Sun's Anthony Furey this is an "old trick of the trade" to fudge the figures for "debt-addicted" governments. 

A quarter of a percent? Some trick.

The true story isn't that the government understates its deficits, it's that the government consistently overstates its deficits and has done so for years. And that is probably going to be the case this year as well.

The $300 million is only a fraction of the $1 billion reserve the government allowed in the Budget for unexpected contingencies (like unexpected corporate tax assessments).  

So, if they keep to this, the 2014/15 deficit will be $700 million less than currently projected once the remaining $700 million of the reserve is turned over to the deficit.

But there is reason to think this still underestimates the extra cash that may well turn up by next fall's public accounts   -- and not just because the government has consistently overestimated their deficits by billions of dollars for many years. 

Even a quick look at last year's Fall Economic Statement is revealing:  the Statement stuck to the Budget's deficit estimate, but, by the time the public accounts came out after the end of the fiscal year, the deficit turned out to be down $1.3 billion.

Nominal Growth: With much higher inflation than expected, the Finance Ministry did revise their 2014/15 inflation estimate upwards from the estimate in the Budget.  They increased their inflation estimate from 1.5% to 2.1% (still short of the latest 12 month Ontario inflation increase of 2.6% that Stats Can reported for September).  

However, they did not change their nominal growth forecast for 2014/15, which remains at 3.5%, just as it was in the Budget.  As a result, they make the claim that, with 1.9% economic growth and 2.1% consumer inflation, nominal growth is still going up only 3.5%.  

That doesn't sound likely.  

Nominal growth is the key driver of government revenue.  So if nominal growth is in fact a little higher than they now claim, they may have a little more revenue at year end than they are currently letting on.  A  ½ % in extra revenue would mean about an extra $590 million.  

If so, that could certainly be put to some good use.  Indeed, if it isn't rolled into program spending, higher inflation will mean that program spending has, in real terms, been reduced further.

Under spending: On program spending, the Finance Ministry brags that they have increased it only 1.2% per year for the past 3 years.  That is significantly less than the increases planned in their Budgets. 

Consistent with their less than planned program spending increases,  the Liberals consistently come in under Budget for expense spending.  They don’t spend all their program budgets and overestimate their interest costs.  Here, for example, are the end of year expense savings reported in the last four Budgets:   


2014 Budget
TABLE 2.4 Summary of Expense Changes since the 2013 Budget
($ Millions)

2013–14
Year-End Savings Target included in 2013 Budget
1,000.00
Increase/(Decrease) since 2013 Budget

Health Sector
(72.3)
Education Sector
(400.0)
Postsecondary and Training Sector
(128.2)
Children's and Social Services Sector
(165.6)
Justice Sector
106.1
Other Programs
(926.7)
Total Increase/(Decrease) since 2013 Budget
(1,586.7)
Net Program Expense Increase/(Decrease) after Applying Savings to Meet $1.0 Billion Year-End Savings Target
(586.7)
Interest on Debt
(49.0)
Total Expense Changes since 2013 Budget
(635.7)

2013 Budget
TABLE 2.4 Summary of Expense Changes Since 2012 Budget
($ Millions)

Interim 
2012-13
Program Expense Changes

Health Sector
(560.1)
Education Sector
(1,490.8)
Postsecondary and Training Sector
(137.7)
Children's and Social Services Sector
(81.5)
Justice Sector
(57.0)
Other Programs
186.9
Total Program Expense Changes
(2,140.3)
Interest on Debt
(247.0)
Total Expense Changes Since 2012 Budget
(2,387.3)


2012 Budget
TABLE 2.4 Summary of Expense Changes Since 2011 Budget
($ Millions)

Interim 
2011-12
Program Expense Changes

   Health Sector
(261.3)
   Education Sector
126.3
   Postsecondary and Training Sector
(52.8)
   Children's and Social Services Sector
(135.5)
   Justice Sector
68.1
   Other Programs
94.6
Total Program Expense Changes
(160.6)
Interest on Debt
(192.9)
Total Expense Changes Since 2011 Budget
(353.5


2011 Budget
TABLE 4. Summary of Expense Changes Since 2010 Budget 
($ Millions)

Interim 
2010–11
Program Expense Changes1

Health Sector
(454.0)
Education Sector2
8.2
Postsecondary and Training Sector
(462.6)
Children's and Social Services Sector
13.1
Justice Sector
(70.9)
Other Programs
(281.2)
Unused Contingency Funds
(1,304.5)
Total Program Expense Changes
(2,551.9)
Interest on Debt
(434.2)
Total Expense Changes Since 2010 Budget
(2,986.1)
1 Excludes fiscally neutral transfers between ministries.
2 Excludes Teachers' Pension Plan.


On average, they under spent their Budget plans by a little over $1 billion a year (not counting contingency fund savings). Health care under spending alone amounted to $337 million per year on average.  

They don’t make any allowance for this under spending in their Fall Economic Statement.  But if the past is any indication, we will see more expense savings reported at the end of the fiscal year.  

Again that cash could be put to good use.  Unassisted, Finance will roll it into the deficit.     

Smart operators may have other ideas.

Finally, on wages, the government's line is slightly tweaked: “any modest wage increases that are negotiated must be absorbed within Ontario's existing fiscal plan.”   Currently, that plan is to increase program spending a teeny-tiny 0.8% per year for the next three years. (They emphasize Deb Matthew’s Program Review as a driver of spending cuts.)  They continue to claim they will respect collective bargaining. 

2 comments:

  1. As expected, (and despite all the gloomy comments from the Globe and the Sun) Finance Minister Sousa has now admitted that the deficit is in fact $1.6 Billion less than planned. Look next for possible further reductions in the deficit when the 2014/15 Public Accounts come out in the fall.

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  2. As suggested above, the Public Accounts for 2014/15 have now revealed that the deficit was much lower -- as usual. Despite the media claims noted in the story above, the deficit turned out to be $2.2 billion less than estimated in the 2014 Budget, coming in at $10.3 B. This was $600 million less even than the revised "interim" estimate in the 2015 Budget noted in the comment above. Also as usual, the province spent much less than budgeted -- $1.6 billion less.

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