Both the Federal and Ontario budgets are nearly upon us and the key watchword for both is going to be the sustainability of the public finances.
For the public finances to be sustainable in the long term, one needs to have the increase in expenditures matching the increase in revenues. If expenditures grow faster than revenues, well then we can say the expenditures are not fiscally sustainable. I’ve obtained from the public accounts and the federal fiscal reference tables data on government total revenues and total expenditures (including debt service) for the period 1966 to 2010 for both the federal and Ontario government, adjusted them for inflation using the CPI (2002=100) and then divided them by population to get real per capita revenues and expenditures.
For Ottawa, the average annual growth rates for real per capita government expenditures and revenues over the period 1966-2010 are 3.5 and 3.2 percent respectively. For Ontario, the parallel numbers are 2.1 and 1.8 percent respectively. In both cases, we have evidence of real per capita depending growing faster than real per capita revenues. Yet, these crude averages mask the longer-term trends. The two accompanying figures plot real per capita revenues and expenditures against time for both jurisdictions and then fits a trend line (a third order polynomial fit better than a linear trend) to each series.
The results suggest that despite the last few years of large deficits due to the recession, over the long term, Ottawa has solved its public sector sustainability issues but Queen’s Park has not. After the late 1960s, both jurisdictions saw a divergence in per capita revenues and expenditures. However, the fitted trend lines show that Ottawa’s gap began to close after the mid 1990s. Ontario, however, has seen a persistent long-term gap in its trend lines for per capita revenues and expenditures and the two continue to run parallel to one another. Ottawa saw real per capita spending fall and revenues increase over the 1995-2010 period - the current deficit gap is cyclical rather than based on long-term structural trends in spending and revenues.
Ontario has really refused to come to grips with its long-term structural public financing gap. In 2002 dollars, Ontario has a per capita gap about 500 dollars. It either needs to bring spending down about 500 dollars per capita or boost revenues by that amount or some combination thereof. Based on current numbers, that means either cutting spending per capita about 7 percent or raising per capita revenues about 8 percent.
Cutting spending will be difficult despite the Drummond Report's direction given that once health and education are removed, there is alot less of a base to cut from. Raising revenues seems to also be an unlikely scenario. First, Ontario's economy is growing slowly so there is unlikely to be a surge there. Second, the provincial government has already continually indicated it will not raise taxes (though it will raise fees and probably delay corporate tax refuctions). Third, given that Ontario is unlikely to discover oil anytime soon and its northern mining frontier is years away from any credible development, there is no resource rent windfall anticipated - unlike Quebec's budget yesterday. Quebec apparently expects its mining royalty revenues to grow ten-fold over the next six years. That is a gamble. Of course, if you are into gambling, there is always the option of more casinos.