Balanced Budget Remains Elusive After Activist Ontario Budget

OTTAWA, May 2, 2014 /CNW/ - The 2017-18 deadline for balancing its budget  looms ever closer for Ontario's provincial government—and with every new budget, it becomes clearer that the target might be elusive.


HIGHLIGHTS

  • This is an activist Ontario budget, with plans for enhancements to public pensions, significant infrastructure investment and improvements to the business climate.   
  • Ontario continues to "kick the can" down the proverbial road when it comes to total program spending restraint.
  • Ontario will require strong economic growth in 2017 and 2018 to bring revenues in line with the budget's projections, in order to balance the budget in 2017-18 as still planned.


Budget 2014 announced a few new program measures, such as an ambitious new infrastructure plan and a plan to improve the business climate and create jobs—both of which will be rolled out over the next 10 years. The centrepiece of this year's budget is the new Ontario Retirement Pension Plan (ORPP), which will take effect in 2017. But these new program measures simply add more fiscal pressure, as the government looks at weaker revenue projections over the near term.

To offset the expected weaker revenues, the Ontario government has introduced a few new tax measures, including an increase in taxes for those earning more than $150,000 a year, as well as a tobacco tax increase, and a hike in the aviation fuel tax.

Despite these measures, it remains abundantly clear that Ontario continues to "kick the can" down the proverbial road when it comes to total program spending restraint. In order to achieve a balanced budget, the government plans to bring total spending growth to an abrupt halt in the later years of the budget planning time frame. And that alone won't be enough—strong economic growth will also be required in 2017 and 2018 to bring revenues in line with the budget's projections.

The centrepiece of Budget 2014 is, without question, the new Ontario Retirement Pension Plan. The plan is modelled on the Canada Pension Plan and represents a major expansion of Canada's retirement income system. It aims to provide a guaranteed pension of up to 15 per cent of maximum pensionable earnings (to be set at $90,000) in retirement. The plan would be fully funded by increasing the contribution rate by 3.8 percentage points, half of which is to be paid by the employer and half to be paid by the employee.

Annual contributions are expected to total approximately $3.5 billion once the plan is fully ramped up. This will have a negative short-term effect on household spending, with early estimates from our economic model simulations suggesting that it would subtract between 0.1 and 0.2 per cent from GDP, beginning in 2017.

The Conference Board's most recent economic outlook for Ontario is broadly consistent with the near-term outlook contained in Budget 2014. However, beginning in 2016, the projection deviates from the forecast contained in Budget 2014. Over the 2016 to 2017 period, the Conference Board expects economic growth to average just 2.1 per cent per year, as the economy approaches full potential. The budget estimate, meanwhile, is a much higher 2.5 per cent. This more optimistic projection presents a potential risk to the budget's fiscal outlook, which relies heavily on strong growth during those years to meet the balancing deadline of 2017-18.

Tax revenues will rise by an average of $1 billion per year. Most of this increase will come from a 1-percentage point increase on the tax rate for individuals earning incomes between $150,000 and $220,000 and a 2 percentage point hike for individuals earning between $220,000 and $514,000.

One other significant tax change announced in the budget is a 4-cent increase in the tax on aviation fuel, which will be phased in over the next four years. In previous research, The Conference Board of Canada pointed out that the current 2.7 cents per litre aviation fuel tax, because it applies even to international flights, is already out of line with global norms and may be hurting Toronto's role as an airline hub.

Read the full budget analysis, An Activist Ontario Budget, but Balanced Budget Remains Elusive.

SOURCE Conference Board of Canada

For further information:

Brent Dowdall, Media Relations, Tel.: 613- 526-3090 ext. 448
E-mail: corpcomm@conferenceboard.ca