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Ontario government spending grows. But the deficit falls like a stone

Yesterday’s third quarter report from the Ministry of Finance indicates that their estimate of the deficit for 2016/17 fiscal year has fallen by $2.4 billion -- from $4.3 billion to $1.9 billion.

This despite the announcement of another $223 million in new spending increases for 2016/17.  If you recall, the government announced even more in-year spending increases in the fall for Hydro rebates and hospitals.  

Since the 2016/17 Budget, they have now increased program spending about $1.1 billion through in-year increases.  That is an in-year increase in program spending of 0.92%.  

This is quite unusual for a government that typically under-spends their budget.  

The new increased expenditures announced yesterday are mostly on a specific hospital based service and drugs:

·    Ontario Drug Benefit Program: an additional $106.0 million to address funding requirements for the Ontario Drug Benefit program.
·    Malignant Hematology including Stem Cell Transplants: an investment of $95.4 million to support additional capacity to provide stem cell transplants in Ontario, which require specialized facilities and staffing, including creating a new unit at Sunnybrook Health Sciences Centre, as well as OHIP out-of-country costs for stem cell transplants that cannot be accommodated in Ontario.

Health spending is now forecast to be $347.6 million higher than forecast in the 2016/17 Budget. That's the biggest increase of any ministry -- although at 0.67% far from the biggest percentage increase of any ministry.   

Tempering these expense increases is the previously reported $381 M decline in interest expense on the debt. As a result, total expense is up $737 M.

Following an expert panel's report on pension accounting discussed in a previous note, the government is indeed sticking to its preferred accounting method for the teachers and civil servant pension plans, significantly reducing the debt and deficit.  With this, the key debt to GDP ratio is now scheduled to fall for a second year in a row -- hitting 38.3%.
The large majority of the in-year decrease in the deficit measured against the Fall Economic Statement is the reversion to the long held accounting practices for these pension plans.  

But this obscures the fact that since the Budget (which also used the government's preferred budget accounting method for the pension plans), there has been a dramatic increase in revenue thanks to increases in a variety of taxation categories.  The big gains were in corporate taxes (up $1.1 B since the Budget) and sales taxes (up $803 M).  Both of these categories have also seen significant increases since the Fall Economic Statement (very significant in the case of sales taxes)Income taxes are also up significantly since the Budget ($726 M) -- but the estimated increase is significantly less than in the Fall Economic Statement.

In total, revenue is up almost $400 million since the Fall Economic Statement and up $2.52 billion since the 2016/17 Budget.   That big increase in revenue largely explains the $2.4 billion reduction in the deficit since the Budget -- when the pension plans were accounted for on the same basis as this third quarter report. 

The government has gotten some favourable media about falling deficits through this third quarter report -- something I can't recall happening before from a usually forgotten report.  

But they are likely saving more good news for the upcoming Budget or the close out of the 2016/17 books with the Public Accounts in late September.  Those are higher profile announcements and much closer to the 2018 election.  

Bottom line: revenue is increasing, the deficit is falling, and the government has shown an uncharacteristic willingness to spend more in-year than budgeted. 

On the fiscal front, things are looking up – at least in the short term.  Some will benefit, but, as always, the question remains, who?  


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