Is the Ontario Finance Minister Living in Fiscal Fantasyland?

This article was previously published in the Globe and Mail In the coming days, Minister of Finance Charles Sousa will stand in the Ontario Legislature and deliver the fall fiscal update. The fall fiscal update is the government's opportunity to update any of the assumptions it had made in the April 2015 budget, including Minister Sousa's promise to balance the budget by 2017-18. And updating is certainly in order.

The April 2015 budget was a "hold your breath" budget. If absolutely all of the government's optimistic projections worked out, and if the government used $3.4 billion in reserves over the next three years, they would be able to squeeze through a balanced budget. Describing those assumptions in the 2015 budget as "optimistic" is generous. The budget might better be described as fiscal fantasy. For example, in the April budget the government assumed revenue growth of 4.3 per cent over the next three years. Fantastic indeed, given that the revenue growth rate over the most recent three years has been 2.6 per cent. Private sector forecasts of real GDP growth--a key driver of government revenue, are all projecting lower than anticipated growth. This is a result of lower commodity prices, swings in the Canadian dollar exchange rate, and continued sluggish employment growth that has not recovered since the recession or kept pace with population growth. Yet Minister Sousa seems to think the public will believe his claim that revenue will grow significantly faster in the next three years than it has the past three years. How fast has your income been growing in Ontario over the past three years? Reality demands an adjustment to this head-in-the clouds assumption. If the revenue projections are not are not lowered in the fall fiscal update, there is no reason to believe Minister Sousa's commitment to balancing the budget.

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Another fiscal fantasy in the 2015 budget is the Minister's promise to control program spending. Minister Sousa projected program spending to grow at an average rate of just 0.3 per cent per year over the next three years. This is a snails' pace of growth compared to the explosive 4.1 per cent annual average spending growth this government has undertaken over the past eight years--a pace that their voting base has come to expect and demand. A check of the budget projections for education spending alone is laughable. Between 2017 and 2018 the Minister predicts no increase in the education budget. This target will be impossible to maintain if the government continues its practice of secret million dollar payouts to teachers' unions. Is it realistic to believe that Minister Sousa will replace his spending firehose with an eyedropper? This is an ambitious goal to say the least, and spending restraint is not something on which this government has a strong track record. In the fall fiscal update, the program spending projection needs to be realistic or the public has no reason to trust Mr. Sousa's predictions. So what should the revised fiscal assumptions be? The Ontario Financial Accountability Office (FAO) recommends a project spending projection of 1.4 per cent to reflect the pace of spending growth in the past four years, or 3 per cent to reflect the pace of inflation and population growth. The FAO predicted in a November 4 report that anticipated reduced revenue combined with projected higher program spending will lead to a deficit in 2017-18 between $3.5 and $7.4 billion. The FAO also recommends reducing the revenue growth predictions from the nigh impossible 4.3 per cent growth to a more realistic realm of somewhere between 3.6 per cent and 4.1 per cent. While this is more realistic, it remains far more ambitious than the 2.6 per cent growth the province has seen in revenue for the past three years. So if Mr. Sousa stands up some time in the coming weeks to deliver his updates on the government's key budget assumptions and doubles down on his promise to balance the budget, we the taxpaying public need to consider whether the numbers he uses reflect a true fiscal update, or if the Minister is living in a fiscal fantasyland. Ontario Director Christine Van Geyn email: cvangeyn@taxpayer.com