By Jessica Smith Cross and David Hains
Ontario has tabled a budget with a whopping $33.1 billion deficit, accompanied by bullish rhetoric about the province’s economic recovery from the pandemic.
Finance Minister Peter Bethlenfalvy told the legislature he is “putting the world on notice.”
“Don’t bet against us. Don’t bet against the people of Ontario. We will succeed,” he said in his budget speech. “We have chosen growth, and as sure as I am standing here today, we will grow stronger than ever.”
The 2021 budget, dubbed “Protecting People’s Health and Our Economy,” contains goodies for families and sectors of the economy hit hard by the pandemic, including doubled direct payments for parents, a new tourism grant and increased support for small businesses. You can read a breakdown of the new announcements here.
Coming at the cusp of Ontario’s recovery from the pandemic, the budget broadly outlines the Doug Ford government’s plan for the years ahead: significant fiscal restraint without dramatic spending cuts, no major taxation changes, and the hope that the “Ontario Spirit” will drive a roaring recovery to boost the province out of deficit before the end of the decade.
That is until the campaign promises are made. While 2021 provides the government the last full year to make good on unmet campaign promises from 2018, it does not do so, focusing instead on the recovery from COVID-19.
Deficit and the recovery plan
Ontario's 2021 budget includes a whopping $33.1 billion deficit and doesn't forecast a return to balanced books until 2029-30.
The finance minister cast this as a deliberate choice.
"Some may say we must rely on tax hikes or cuts to public services to restore fiscal stability," Bethlenflavy wrote in the introduction to the budget. "We are choosing a different path, because anyone who claims higher taxes or fewer public services are inevitable is forcing a false choice. Growth is the third path, one that our government intends to pursue.”
"I have become more convinced than ever that economic growth will be the key to ensuring the sustainability of Ontario's public finances," he continued.
Like the 2020 budget, this year’s fiscal plan outlines three different possible scenarios for the province’s economic recovery in the short term. Unlike the plan tabled in November, this budget also includes a recovery plan, or “path to balance,” required by provincial legislation that provides a non-binding forecast for when the province’s books will return to the black.
The 2021 budget actually contains three paths: one based on the government’s projection of economic growth, which comes in just under current private-sector forecasts, and two others based on potential slower-growth and faster-growth scenarios.
In those cases, Ontario’s books would balance in 2031-32 or 2027-28, respectively.
Bethlenfalvy indicated he’s betting on Ontario’s ability to achieve a roaring rebound and promised to release a plan to create the conditions for stronger, long-term care economic growth later this year.
None of the paths are certain and each relies on a series of assumptions about government spending and revenue. For instance, base program spending is expected to increase by only 1.5 per cent a year, after time-limited spending on COVID-19 has concluded in 2022-23, until balance is achieved. Health-care spending would only grow by approximately 2.2 per cent while spending in other sectors would see more stringent restraint: average annual growth of 1.2 per cent in education and one per cent or less in the social services, post-secondary education and the justice sectors.
The budget notes that program growth following economic downturns has varied significantly, from 4.3 per cent annually in the Liberal-led decade following the 2008 global financial crisis to an average of 0.5 per cent annually in five years following the early 1990s recession under the Mike Harris Progressive Conservatives.
All of the budget’s projections are based on the federal transfer status quo. The Ontario government would also dearly like to see an increase in the Canada Health Transfer but there has been no indication of a change so far, and the federal budget is not due to be released until April 19.
Last month the province's Financial Accountability Office (FAO) issued a report that found, absent policy changes in the form of spending cuts or tax increases, the province would reduce its deficit in the coming years but then plateau at a $16 billion structural deficit in the mid-2020s. The FAO offered a menu of options for closing that gap, such as a 1 percentage point increase in the HST rate that would bring in $4.7 billion in additional revenue by 2025-26.
One of the major underlying causes of that structural deficit is the aging of the population, which the FAO said contributes to both slower economic growth and higher demands for government spending.
However, the watchdog’s modelling does not predict the future. For example, it is based on the government increasing health-care spending not only to keep up with medical inflation but also to maintain current service levels as Ontario's population ages and demand increases — something the 2021 budget indicates the government is not planning to do.
It is also possible, FAO Peter Weltman said in a recent interview, to reduce costs without cutting services by transforming the delivery of government services.
For example, the government announced plans in the 2019 budget to increase class sizes and implement mandatory online learning — both would significantly reduce cost drivers in education by reducing the need for teachers, Weltman said.
But that also provides a cautionary tale about how such reforms can be easier budgeted than done: the government's class size and online learning plans were politically unpopular and have since been largely abandoned.
Promises made, promises kept or broken
Ford won the province over in 2018 by promising to implement "efficiencies" to eliminate the deficit while cutting taxes but not spending.
Reality has caught up with some of those pledges.
Back in 2019, the budget indicated that the Ford government planned to begin implementing one of its major election promises — a personal income tax cut for the middle class — in this budget year. At the time, government officials confirmed the cut had been baked into the fiscal projections, even though it was not explicitly announced. The plan, as promised, was to reduce the rate of the second provincial income tax bracket to 7.32 per cent from 9.15 per cent.
That promise was not announced in this budget — there is no change to personal income tax rates.
The Tories also promised to lower gasoline taxes by 10 cents a litre and diesel taxes by 10.3 cents a litre but that has not come to pass and, since then, there have been mixed messages about whether the cancellation of Ontario's cap-and-trade system and the implementation of the federal carbon backstop contribute toward those goals.
Similarly, the PCs made a signature promise in the 2018 campaign to lower hydro rates by 12 per cent, a goal that Minister Greg Rickford said he wanted to accomplish without subsidies. While there have been myriad governance and regulatory changes since then, and industrial and large commercial businesses have seen reductions due to shift costs to the tax base, residential rates have not decreased.
And while the government has provided some energy-related pandemic relief, including supports targeted at businesses and adjusting time-of-use rates to reflect the reality of working from home, the budget did not contain a path to keeping the 2018 campaign promise.
Similarly, the government has not followed through on a keystone part of its 2018 environment plan, a $400 million "Ontario Carbon Trust" intended to provide companies with incentives to reduce greenhouse gases.
Ontario is also 14 months away from the next scheduled provincial election.
It's the PC government's last non-election year budget — the 2022 document will be a de facto campaign platform in the lead-up to a spring vote.
Bethlenfalvy stressed that this is an "investment" budget that is geared as a response to COVID-19. And much of the deficit spending in the document, including money for vaccine rollouts, hospital beds, long-term care investments, PPE and business support, is related to the pandemic.
But at the same time, the government is facing political pressures — that the opposition parties have levelled criticism that the PCs are not spending enough on pandemic measures, like the absence of paid sick days or additional help for tenants — and that there are members of the PC caucus who feel as though spending has gone too far.
Bethlenfalvy’s remarks addressed both sides. "It's clear that we are sparing no expense to defeat COVID-19," he said, perhaps anticipating attacks from the left.
"And while this level of the deficit is neither sustainable nor desirable forever, I am absolutely, unequivocally convinced it is necessary to get through the pandemic and recover stronger," said the finance minister who came into government with an eye towards cutting the deficit and making it more efficient.
"In fact, I believe the price of not making these investments would be much, much higher in terms of lost lives, jobs and prosperity."
A significant portion of the spending decisions the government is making are designed to shore up small businesses, many of which have been frustrated by the public health measures that have limited their revenue over the past year. That has caused some backlash from typically PC-friendly groups like the Canadian Federation of Independent Businesses.
Other concerns were not prioritized. That includes education, where the chorus of unions and the Official Opposition has been that more money needs to be spent to lower class sizes and improve ventilation, among other measures.
Earlier this week, Green Leader Mike Schreiner had wanted the government to allocate $4 billion in additional funding towards mental health, warning about what has been called the "fourth wave" of the pandemic due to long-term effects. That request was not met, with the province continuing with its previously announced mental health plan, which means an additional $175 million next year.
All of the opposition parties criticized the budget for not being good enough and not spending enough to help Ontarians.
"The government must have missed the memo, because the pandemic is not yet over," shot Opposition Leader Andrea Horwath, who is set to enter her fourth election as party leader.
She said that if it was her budget she'd urgently invest in long-term care, education and hospitals, including paid sick days and paid time off to get vaccinated. "We would be investing in people right now, that's what we would be doing."
Liberal Leader Steven Del Duca, still trying to carve out terrain on which the party can gain seats in the next election, focused on education. "I'm furious to see that this budget includes a devastating cut to education," he said. "This was not a budget for the single biggest economic crisis in more than a generation."
And Schreiner, ever-mindful of the party brand, focused on what he sees as the budget's failures to address issues that Ontarians care about. "The budget fails to address the multiple crises we face in housing, mental health and climate," he charged.