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.