A tale of two deficit budgets

Hey there, time traveller!
This article was published 19/03/2012 (5009 days ago), so information in it may no longer be current.

The spring budgets for Canada’s federal government and Ontario are important because of their economic weight within the federation. They are also important because of their illustration of the differences in the relative fiscal positions of Ottawa and Ontario.

According to the Federal Fiscal Monitor, for the first nine months of the 2011-12 fiscal year, the budgetary deficit stood at $17.7 billion, compared to a deficit of $27.4 billion in the same period of 2010-11. Revenues were up $7.1 billion, or 4.2 per cent, primarily reflecting higher income tax revenues. Ottawa’s finances are taking advantage of modest growth and these fiscal indicators suggest a final deficit for 2011-12 closer to $22 billion rather than the $31 billion deficit forecast in the November fiscal update. Indeed, Ottawa’s deficit will really not be that much bigger than for Ontario, which currently stands at about $16 billion.

The way to fight a deficit is to either raise revenues or reduce expenditures or some combination of the two. The federal government appears to have a firm sense of direction of where it wants to go having begun an expenditure review process that aims to save $4 billion annually by 2014/15 across federal departments. Indeed, the federal government has publicly opted to focus on expenditure reduction though given the improvement in its fiscal position and concerns about harming a fragile recovery, it may usher in spring budget season as a lamb rather than a lion.

In the wake of the analysis provided by the Drummond Report, Ontario is in desperate straits as it tries to avoid the expenditure restraint advocated in the report. Its fall economic outlook showed a persistent deficit into the medium term.

Unlike the federal government, Ontario has not seen any major recent improvement in its revenues. Ontario is very closely tied to the U.S. economy via its export sector and that engine of its economy has yet to sputter to life.

Ontario’s fiscal room is limited, as it has already committed itself to insulating health and education, which means its room for expenditure control is limited. Nevertheless, the Ontario government is likely planning tough negotiations with its health sector and is going to confront its education sector spending via compensation freezes for teachers and other workers. úWhile it is publicly committed to not raising taxes, it is seeking to raise revenues in other ways whether it is more gambling or higher user fees for assorted provincial licences and permits.

As a result, Ontario is about to licence a casino for Toronto and perhaps even Ottawa as well as expand the sale of gambling products into the broader retail sector. One expects that after the next budget it will cost a lot more in Ontario to hunt, fish and drive a car.

Moreover, combining tax credits for low incomes into the Ontario Trillium Benefit and converting the payments from a lump sum at tax time to payments spread out over the year smacks of a desperate attempt to slow down cash outflow in order to make the books look better.

Of the two jurisdictions, Ontario has the more serious deficit problem. First, it is now dependent for 20 per cent of its revenues on the federal government. While the federal government does not appear to have targeted transfer payments for expenditure reduction, the eventual slowdown in the growth rate of health transfers will be a concern.

Second, Ontario has vowed to protect health and education, which leaves a much smaller base for expenditure reduction. The federal government has a broader base on which to apply its expenditure reduction though much of it is transfer payments to government and individuals.

Having announced its intentions for health transfers, its public discussion of increasing the age for social security represents an attempt to deal with individual transfers in the long run.

Third, given its slow economic growth and lagging productivity, Ontario cannot count on being saved by a sudden burst of economic growth. Ottawa, on the other hand, has a more diversified revenue portfolio that includes the bounty from resource rich provinces such as Alberta and Saskatchewan. Ottawa is benefitting from the western resource boom via growth in income tax revenues. Unfortunately, Ontario is not about to discover oil and its northern mining frontier appears to be years away from development. Despite the mild winter, Ontario faces a cold fiscal spring.

Livio Di Matteo is professor of

economics at Lakehead University.