Ontario's economy improves. Will collective bargaining follow?

The Ontario Economy:  The 2015 Ontario Budget has revised the government's real growth estimate up significantly from its 2014 Fall Economic Fiscal Outlook.  Real growth for 2014 is now put at 2.2% for 2014, up from the fall forecast of 1.9% and real growth for 2015 is forecast at 2.7%, up from their fall forecast of 2.4%.  Both of these forecasts are slightly lower than the forecasts from the banks and other private sector forecasters. 

With lower oil prices and a lower dollar, Ontario is now growing faster than the rest of Canada.

Substantial Real Growth -- but who benefits?  Seven years ago (starting the latter half of 2008) there was a recession in Ontario.  It ended six years ago when economic growth began again in the third quarter of 2009 (i.e. July-Sept 2009).  Since that time there has been significant economic growth, placing the Ontario economy well above its pre-recession high.  

Ontario, Gross Domestic Product (GDP)
	($ Billions)
	2007	2008	2009	2010	2011	2012	2013
Real GDP (chained $2007)	597.8	596.9	578.5	598.2	613.8	624.4	632.4
Nominal GDP	597.8	604.3	595.4	629.5	658.6	679.6	695.7
Source: The Ontario 2014 Fall Economic Statement, http://www.fin.gov.on.ca/en/budget/fallstatement/2014/ecotables.html#eco1

Real GDP increased $34.6 billion (in constant 2007 dollars) by 2013 compared with the pre-recession high in 2007.  That is a 5.78% real increase over the previous high point.  

The new provincial Budget forecasts another 7.5% real growth for 2014 through 2016.  Private sector forecasts are slightly higher.  While (as the next blog post will demonstrate) workers have not benefited from this real growth, some others must have done very well indeed. 

Nominal GDP (real growth plus inflation) has increased even more significantly, increasing $97.9 billion dollars between 2007 and 2013, a 16.4% increase.  The provincial Budget forecasts another 12.5% nominal growth for 2014 through 2016.

Thirty percent growth in nominal GDP is significant for at least two reasons.  First wages are paid in nominal dollars: they are not automatically adjusted for real growth or inflation.  To maintain their relative share of the real economy and to protect against inflation, compensation must be adjusted.

Second, nominal GDP growth is the key driver of government revenue increases. As it increases, so do government coffers, increasing the government's ability to spend. 

Unemployment falling: Given significant real economic growth, the Ontario unemployment rate has declined.

2009 2010 2011 2012 2013 2014 9.10% 8.70% 7.90% 7.90% 7.60% 7.20% Source: Statistics Canada CANSIM Table 282-0087 http://www5.statcan.gc.ca/cansim/a47

For the first two months of 2015, the Ontario unemployment rate was reported at 6.9% by Statistics Canada. The provincial Budget forecasts that it will hit 6.3% in 2018.  

Ontario consumer inflation is predicted to dip in 2015 but return to the 2.3% range in 2016, with the bank estimates averaging 2% per year over 2014-2016.

	2014	2015	2016
TD	2.3	1.1	2.7
Royal Bank	2.2	1.4	2.2
BMO	2.3	1.4	2.2
Bank Average	2.27	1.3	2.37

Federal Transfers to the provincial government are also driving up revenue: The recently announced major federal government transfer payments to Ontario for 2015/16 (for equalization, health and social transfers) are also much higher than expected.  In fact, about $450 million more than the $800 million increase the provincial government anticipated for all federal transfers to the province.  (Stephen Harper is, after all, facing an election this fall.) 

In total Ontario will receive $1.253 billion extra ― or 6.5% more than the federal transfers to the Ontario government for 2014/15. That, just in itself, is equal to a 1.1% increase in program spending.

The bulk of these increases are for health care. The federal health transfer to the province is up $735 million for 2015/16.

Federal Support to Ontario (millions of dollars)
	2009	2010	2011	2012	2013	2014	2015
	–2010	–2011	–2012	–2013	–2014	–2015	–2016
Canada Health Transfer	9,722	10,141	10,673	11,328	11,980	12,356	13,091
Canada Social Transfer	4,205	4,332	4,463	4,577	4,709	4,843	4,986
Equalization	347	972	2,200	3,261	3,169	1,988	2,363
Total - Federal Support	14,274	15,446	17,335	19,166	19,858	19,187	20,440
Per Capita Allocation (dollars)	1,100	1,178	1,309	1,431	1,467	1,404	1,482

Source: Canadian government, Dept. of Finance:  http://www.fin.gc.ca/fedprov/mtp-eng.asp#notes

Planned provincial spending falls flat:  The 2014 Budget planned total spending at $130.4 billion.  This year's Budget plans total spending of $131.9 billion, an increase of $1.5 billion -- or 1.1%. Notably, the provincial government is actually budgeting less for 2015/16 than they said they would budget for 2015/16 in the 2014 Budget -- $200 million less.

Moreover, almost all of the new spending planned by the provincial government is actually just increased transfers from the federal government -- 83% of the total planned increase comes from increased major federal government transfers to the Ontario government ($1.25 billion out of a total increase of $1.5 billion).  

As the government generally spends less than the planned figure set out in the Budget, it is very possible that all of the actual increased spending at the end of the year will be from federal transfers.

For health care, the situation is more extreme. Health care was budgeted at $50.055 billion in the 2014 Budget.  It is now budgeted at $50.8 billion for 2015, an increase of $745 million (or 1.5%). In other words, the Ontario government is planning to increase health care spending by less than the $753 million increase in federal transfers for health care.

The Ontario government is providing fewer new dollars for health care from its own sources than last year.

(Note: the percentage increases noted here are a little different than some other commentators.  Here, I have compared figures in this year's Budget to the figures in last year's Budget and not to the interim figures for last year in this year's Budget.  As the government typically under spends their Budget, comparing this year's budgeted figures with the interim figures for last year reported in this year's Budget will likely exaggerate the rate of increase. Better to compare figures set at the same time in the respective fiscal years to get comparable figures.)

The Province’s Fiscal Situation: The provincial deficit has been used as a powerful tool to justify attacks on public sector collective agreements, with the government falling into significant deficit during the last recession in 2008/2009.

So it is notable that the Ministry of Finance has once again reduced its estimate of the provincial deficit, lopping $1.6 billion off its estimate of the 2014-15 deficit in late March bringing it down to $10.9 billion. Based on past experience and the improving economy, a further reduction may occur when the government finalizes its 2014/15 deficit with the Public Accounts in the early fall of 2015.  (Last year's Public Accounts took another $800 million off the deficit compared to what the government stated it was in last year's Budget, so a further cut may be coming this year too.)

The 2015 provincial Budget forecast a deficit of $8.5 billion for 2015-16.  This is $400 million less than forecast for 2015-16 in the 2014 Budget.   Roughly $200 million of this is due to the fact that the government now plans to spend less than it planned in the last Budget. 

The consistent pattern for this government has been to make Budget forecasts that overestimate the deficit.  On average they have overestimated the deficit by 31% for each year since the 2009 Budget.

Based on past experienced, the $8.5 billion deficit for this year may well be overstated too.

Upcoming on April 30: Collective Bargaining Settlement Trends: New Possibilities?

Photos: Kat R Canadian Money