Ontario overestimates deficit -- for the seventh year in a row

Shocker.  The Ontario government is forecasting that it will beat its deficit forecast -- for the seventh year in a row.

The deficit for this year is forecast in the province's Fall Economic Outlook and Fiscal Review to be $1 billion less than forecast in the spring 2015 Budget.  The forecast for next year is already $300 million less than in the 2015 Budget.  That would make eight years in a row.

For this year, the decline in the deficit was driven by higher than expected revenue ($1.245 billion more revenue,  primarily due to an underestimation of revenue from the Hydro sell-off and $600 million higher than forecast revenue from personal income and land transfer taxes).  Lower than expected interest expense on debt ($140 million) has also helped. 

Program spending however is $397 million higher than expected.  The major in-year increases in spending compared with the 2015 Budget are in two areas, the Hydro privatization and the new Green Investment Fund:

The Liberals usually end up with lower than planned spending by the time the next Budget rolls around – so higher than expected spending may sound unusual.  

But they don't usually report lower spending half way through the fiscal year in their Fall Economic Outlook and Fiscal Review.   Instead they wait for the next Budget to make that announcement.  So, despite the report of extra spending in this Fall Economic Outlook and Fiscal Review, we may well see that overspending becomes under-spending by the time of the spring 2016 Budget and the fall 2016 Public Accounts.

Indeed, based on past experience, these deficit forecasts will be revised downwards in next spring's Budget and the fall Public Accounts.   Notably, half way through the fiscal year, the government still hasn't touched its $1 billion reserve. That may well end up reducing the deficit, as it has in the past.

Taking their strategy from legions of middle managers, the plan is to under-promise and over-deliver. For advocates of public services, however, this consistently makes things look  worse than they actually are.

Despite the long record of the government consistently overestimating deficits and then revising them downwards,  many in the corporate-owned media will continue to cast doubt on whether the government will meet its deficit goals.  Just as they have many times in the past -- with remarkable inaccuracy.

Despite the improved deficit, the government is sticking to its spending plans – “Average annual growth in program spending between 2014–15 and 2017–18 is forecast to be 0.9 per cent, in line with the 2015 Budget.” 

In fact, program expense (spending) is forecast to decline from $120.9 billion this year to $120.6 billion next.  In contrast, this year’s program spending is now forecast to have gone up 2.25% compared to last year. With inflation for current government expenditures running at 2.2% in Ontario and population growth of another 1%, we are facing some significant real cuts in public services. 

The government claims it is relying on [1] managing broader provincial public sector compensation (i.e. “net zero” settlements where any modest gain for workers is offset by other measures to create a net zero outcome for government), [2] program review and transformation (where the government cuts costs for existing programs), and [3] addressing the ‘underground’ economy (essentially to increase tax revenue).

The Fall Economic Outlook lists major broader provincial public sector union settlements that are “net zero”and brags of the discrepancy between settlements in the broader provincial public sector and in all other sectors.

Since July 2012, the average annual negotiated wage increase across Ontario’s provincial public sector has been 0.7 per cent. This is lower than Ontario’s municipal public sector (1.9 per cent), federal public sector in Ontario (1.7 per cent) and private sector in Ontario (1.9 per cent).

Real economic growth is forecast at an average of 2.125% over 2015-2018.  This year’s growth is forecast at 1.9%  -- that is quite a bit higher than the Canada-wide forecast of 1.2%, but also significantly lower than the 2.8% forecast in the last Budget.   

Nominal growth (a key driver of government revenue growth) is forecast at 8.8% over the next two years, matching exactly the government's forecast for tax revenue growth. Changes in nominal growth will be key to deficit forecasts.  

Between the Budget and the Fall Economic Outlook, the government revised nominal growth downwards from 4.2% to 2.9% as real growth fell. So the government did well to see tax revenue come in higher than expected.  

Consumer inflation is estimated to run at an average of 1.8% over 2015-18, with inflation at its lowest this year (1.3%) and then hitting 2% for the following three years.

Notably, the government is expecting significant revenue from its “cap and trade” climate change policy -- $300 million next year and $1.3 billion in 2017-18. That can only help.