This week Ontario’s Finance Minister tabled an update describing the current state of, and future projections for, Ontario’s economy. The 2011 Ontario Economic Outlook and Fiscal Review is a precursor to the much anticipated report by the Commission on the Reform of Ontario's Public Services (the “Commission”) and the 2012 prebudget consultations. Ontario’s next budget is expected in the spring of 2012.
Modest Growth Expected in Ontario’s Economy
Pointing to the declining U.S. economy, concerns surrounding European sovereign debt, higher oil prices and manufacturing disruptions caused by the Japanese tsunami crisis, the Ministry of Finance is projecting modest growth in Ontario’s economy over the next few years. Ontario’s real GDP is projected to grow by 1.8% in 2012, 2.5% in 2013 and 2.6% in 2014. This is consistent with private‐sector projections by economists who have also lowered their previously forecasted projections.
The provincial deficit is projected to be $16.7 billion for this fiscal year, which the Ontario government (the “Government”) is forecasting to eliminate by 2018. To achieve this goal, government spending will have to be curtailed. The Government indicated that it will not consider cuts in education and health care or an increase in taxes. However, the Minister of Finance noted that the greatest area for reform can be found in health care, as it represents almost half of the Ontario provincial budget.
Commission on the Reform of Ontario's Public Services
The task of providing recommendations on reforms that will reduce the deficit has been left to Don Drummond, former Toronto‐Dominion Bank economist, who has been chairing the Commission. The Commission’s mandate has been to evaluate the core services delivered by the Ontario government, and specifically look at programs that are no longer serving their intended purpose which could be eliminated or redesigned. The Commission is to identify areas of overlap and duplication in the Government that could be eliminated to save taxpayer dollars, and areas of value in the public sector that could provide a greater return on the investment made by taxpayers. The Commission will be producing a report for the Government to be released in January 2012, and will guide the Government as they prepare the 2012 budget.
The Ontario government reiterated its commitment to the Healthy Homes Renovation Tax Credit, a key election promise. Effective as of October 1, 2011, senior homeowners, tenants, and people who share a home with a senior relative will be able to claim a refundable tax credit of up to $1,500 for expenses related to permanent modifications to their homes designed to make them more accessible. Expenses paid or payable from October 1, 2011 to December 31, 2012 may be claimed in the 2012 personal income tax return. The Government hopes that this tax credit will create $800 million in home renovation activity and create about 10,500 jobs annually. More details about the new program are found here.
The Government credits the modest growth in the Ontario economy to a number of government initiatives including:
- The Green Energy and Green Economy Act, 2009 which Ontario believes is creating a new generation of clean energy jobs;
- A reduction in taxes, announced in 2009, which has cut income taxes for people and the marginal effective tax rate on new business investment almost in half;
- Increased expenditures in public infrastructure;
- The development of Ontario’s Ring of Fire, which has potentially large deposits of chromite, nickel, copper and platinum; and,
- Continued investments in primary and postsecondary education.
It has been reported recently that Don Drummond will recommend that government spending increases be limited to 1% per year for the next 6 years in order to eliminate the deficit by 2018. To put this goal in context, health care spending has been growing approximately 6% annually, and health care is approximately half of the Ontario budget. This spending will have to be contained in order to meet the 1% goal. However, any increase above the 1% in health care will have to be found somewhere else in the Government. This means that other Ministries will be doing the heavy‐lifting in the elimination of the deficit. Those choices will impact a wide variety of stakeholders, and will ultimately determine if the 1% target is achievable.
Business leaders should also take note of the potential opportunity that may be found given the current financial state of the Government. The Government will want to know about costeffective and innovative solutions to increase productivity and deliver services. The Government has stated that it does not want to sacrifice public services, at the risk of eliminating the deficit. The Government will be open to new technology and software that may make services more efficient and cost effective, as they ultimately plan for the budget in 2012. Those interested in participating in the Ontario budget process may make specific suggestions to the Ministry of Finance here.