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Revenue is flowing in -- but harder times are ahead for public sector services

Ontario government revenue is way up -- $16.6 billion higher than the forecast in the Budget just six months ago. That’s an average increase of $2.7 billion per month -- or up another 1.5% every month. 

Revealingly, the quarterly increases in revenue reported have grown sharply: from a modest $1.2 billion in the first quarter report, to $5.8 billion in the second quarter report, on to a whopping $9.6 billion now in the government's new 3rd quarter report.  Yet the fact that the government was massively underestimating revenue was obvious right from the get go when the Budget was re-introduced in August.  

The slow recognition of the extra revenue reduced pressure on the PC government to improve health care funding during a hospital capacity crisis. And not one extra penny was added for hospitals, despite the crisis.  

It would be hardly surprising if more revenue is recognized in the final two reports for this fiscal year – the 2023 Budget and the September 2022/3 Public Accounts.

This is similar -- if not quite so bad -- as last year's $31.1 billion underestimation of government revenue (with $11.5 billion of that only recognized 5 months after the fiscal year ended). Apparently, Finance Minister Peter Bethlenfalvy’s game is to massively underestimate revenue and overestimate the deficit -- and then only ‘fess up when it is too late to spend the money on useful public services. Bethlenfalvy would not be the first to do this -- but he is taking it to a new level.

Expenditures are estimated up $3.4 billion over Budget, but this is entirely accounted for by a one-time $5 billion increase for land claims reported in the 3rd quarter finances. All other areas of spending (including contingencies) are projected at $1.6 billion less than estimated in the Budget ($5 B - $1.6 B = $3.4 B). So, this $3.4 billion budgeted increase will not form part of the base for next year – indeed, the government looks to be on track to build the next Budget from a starting point $1.6 billion lower than last year.

Notably, the total expenses estimated in the 3rd quarter finances ($202 billion) are about $11 billion more than the Financial Accountability Office (FAO) estimated eight days earlier.  So we may see this estimate revised downwards in the upcoming March Budget and September Public Accounts.  If so, that will reduce the deficit.   

Ministry of Health and Ministry of Long-Term Care budgeted spending, unfortunately, remains the same as budgeted (although, through a separate line item, there was $183 million extra budgeted for COVID prevention and containment in LTC homes -small potatoes for health care). The unprecedented capacity crisis in the hospitals this year did not prize any more money out of the government.  This is quite a contrast with the significant in-year health funding increases implemented since COVID. Despite all the capacity problems in health care, austerity is creeping back in. 

The FAO estimated in early February that the government will underspend its health budget this fiscal year by $1.258 billion. Meanwhile, the Feds have just now increased the Canada Health Transfer to Ontario for the 2022/23 fiscal year ending March 31 by an additional $776 million.  Supposedly, this is for "urgent needs, especially in pediatric hospitals and emergency rooms, & long wait times for surgeries." But it appears, despite their demands for new money, the PCs don't think there is an urgent health care problem - or at least not one that requires them to spend a nickel of that money this fiscal year.

The deficit is (nominally) put at $6.5 billion. This is already $13.3 B less than the Budget. The $1 billion “reserve” remains intact as does $1.7 billion in the “contingency” line items (referred to indelicately by some as slush funds). Based on past practice, other ministry line items will be underspent and will, along with reserve and contingency leftovers, reduce the purported deficit.

The government does admit the debt to GDP forecast is way down. It is now put at 38.3 per cent in 2022–23, 3.1 percentage points lower than the 41.4 per cent forecast in the 2022 Budget. That’s an eye-popping reduction in just six months. Fiscally, Ontario is in good shape -- for now.

Real growth is put at an impressive 3.7% in the 2022 year, while nominal growth is put at an astronomical 9.4%. Nominal growth (real growth and GDP inflation combined) is the key driver of government revenue, hence the growth in revenue.

For the 2023 year, the forecasts noted are much lower -- 0.3% for real growth and 2.9% for nominal growth. This is even down a little from the government's fall forecast. The party is running out of beer -- 2023 is looking to be very different from the growth in 2022 of revenue and GDP.

Bethlenfalvy continues to telegraph that no big spending increases should be expected in the Budget: “I think that what Ontarians can expect is more of the same”. Citing the “uncertain economic times” he stated: “Now is the time for governments to show restraint, to act cautiously and responsibly”. Presumably this only refers to things they don’t want to spend on – police, privatization, and highways may be a different matter.

We are in an uphill battle to maintain public services, public sector workloads and public sector real wages.

Health will likely be hit by reductions in COVID spending, as was the case this past fiscal year. Health sector COVID spending is currently budgeted at $4.9 billion for 2022/23 – or about 6% of the total health sector spend. The PCs put this spending in a separate COVID line item. In the last Budget, they planed to eliminate this spending in 2023/24.  Will they actually dare do so in the upcoming 2023/24 Budget? If so, hold on to your hats -- it would be a big and painful cut.

Bethlenfalvy also defended keeping his large “contingency” line items (not to mention his $1 billion “reserve”). These line items allow all sorts of manipulation. The contingency funds must be allocated to a specific ministry before they can be spent. But they also allow the government considerable freedom to spend where they want with little oversight (with $2.8 B slushed out so far this year). These funds also inflate the deficit forecast at the start of the fiscal year – very handy in fighting off demands for needed public services. And at the end of the fiscal year, the unspent portion of the enormous contingency and reserve funds (running at about $2.7 billion at the end of the 3rd quarter) allows the government to report a smaller deficit than budgeted. In effect, the contingency funds allow Bethlenfalvy to sprinkle spending “increases” during the year for various favoured ministries and pet projects while also reporting a smaller than budgeted deficit at the end of the year. Quite a neat trick - -but what else might you expect from a Bay Street boy.

The relative wealth of provincial money flowing over COVID is coming to an end; harder times for public services and working people appear to be ahead. Unless we change that course.


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