Wynne government reopens spending tap, exposes province to more risk

The Wynne government recently tabled Ontario’s first balanced operating budget in a decade. While it’s good to see the province finally bring its annual operating expenditures in line with revenues, there are worrying signs the government plans to go right back to the same undisciplined approach to spending that created Ontario’s deficit and debt problems in the first place.

A popular narrative from Queen’s Park is that factors beyond the government’s control (such as the global recession of 2009) are to blame for the mountainous run up in debt in recent years.

But this narrative is, at best, an oversimplification. In reality, undisciplined spending also significantly contributed to Ontario’s fiscal problems. Between 2003/04 and 2015/16, program spending in Ontario (which excludes interest payments on government debt) increased at an average annual rate of 4.7 per cent. This rate of spending growth greatly exceeds the annual average growth rate of the provincial economy (3.2 per cent) as well as other relevant metrics.

But had the government increased spending since 2003/04 at the same rate as growth in the provincial economy, Ontario would have run just one budget deficit (instead of 11). Under this scenario, the rapid run-up in provincial debt (a doubling, in fact) simply would not have occurred.

To its credit, the government did slow the rate of spending growth in recent years, holding program spending growth to an average annual rate of 2.2 per cent from 2014/15 to 2016/17.

And this brief period of comparative spending restraint coincided with a period of strong revenue growth. Stronger economic performance and a booming housing market in the GTA, elevated transfers from Ottawa—including equalization payments—and the sale of Hydro One shares helped produce a surge in revenues, shrinking the gap with expenditures. This combination of surging revenue growth and modest spending restraint allowed the government to finally balance the operating budget this coming year.

But make no mistake, serious fiscal challenges remain.

For starters, the factors that helped drive recent revenue gains likely won’t last forever. For example, after more than a decade of strong growth, federal transfers to the province are expected to fall or remain flat in the years ahead. And if Toronto’s red hot housing market cools down, this could affect the the provincial government’s bottom line.

There are risks and pressures on the spending side, too. An aging population will put pressure on the provincial health-care budget. And interest payments on government debt are expected to rise, climbing to more than $1 billion per month in the years ahead. Debt service payments are one of the government’s largest expenses, and their growth over time will make it harder for the government to balance its books.

Given these dark clouds on our fiscal horizon, and the fact that the province carries a debt burden close to 40 per cent of GDP (a historically high level), the need for fiscal restraint is clear.

So it’s worrying that instead of spending restraint, the Wynne government has opened the spending tap, with spending set to grow 4.8 per cent this year—the largest increase since 2009. This is faster than the expected rate of economic growth (4.3 per cent) and significantly faster than what’s needed to offset cost pressures from the combination of population growth and inflation (3.1 per cent).

The decisions in the last decade to increase spending faster than the provincial economy’s growth, and faster than was needed to keep up with a growing population and rising prices, contributed to Ontario’s dire fiscal problems. And when a nasty recession hit the province, the government found itself with spending levels it could not afford and big deficits quickly emerged.

Now, the government is making the same mistakes and exposing Ontarians to the same risks all over again.