Who is More Fiscally Sustainable: Ottawa or Queen's Park?

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. 

The Federal government according to its last budget had expenditures of about 281 billion dollars and revenues of 249 billion for a deficit of about 32 billion dollars. Ontario, based on its last budget, had expenditures of about 124 billion and revenues of almost 109 billion for a deficit of about 16 billion dollars.  

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.

Comments

[Determinant]

FWIW New Brunswick did not have kindergarten at all when I lived in that province, that's why I started in SK when I moved to Ontario. All-day kindergarten needs to be chopped.

Health and Education are to the two cost-drivers in the provincial budget and they need some intelligent management. For instance the public drugs formulary should be subject to the rigorous cost-benefit and clinical efficacy trials that BC had a decade ago. Ignore the screaming drug companies, get the losers off the formulary.

Police salaries, which the Globe & Mail mentioned today, also need to be reined in. Toronto and the OPP started a silly bidding war to see who could have the highest pay rates for constables in the province. That needs to stop, it never should have started. Other municipalities have had trouble with their policing costs, mainly due to salaries.

[Nick Rowe]

Demographics and healthcare are (is?, since it's the combination of the two) what scares me about fiscal sustainability. And that's provincial. Ontario's best hope is that all the boomers migrate to BC to spend their declining years.

[Frances Woolley]

Determinant - Don Drummond gave a very interesting talk at Carleton today - one thing he was saying is that an unacceptably high (I don't remember the number) percentage of people with diabetes in Ontario don't get the three standard annuals tests - and as a result the province doesn't have great diabetes outcomes. I need to look at the background documents to the health care part of the report because it sounds as if there's some interesting stuff in there.

[Determinant]

That would be Type II Diabetes; I am a Type I. Despite the name they are completely different diseases under the hood with very different causes on a biological level. They really should have different names. Type I's are only 10% of all diabetics though we have it for a lifetime. Type II's are generally worse cases to deal with because you have to break a lifetime of habits. Type I's are young and pliable.

The tests he is referring to are Hemoglobin A1C (average blood sugar), cholesterol and blood pressure. Certain blood pressure meds have a secondary protective function for kidneys, they are as common to see today in Diabetics as insulin.

On the hope front, there is some very interesting cure research going on at Massachusetts General Hospital for Type I Diabetes. Cure as in restoration of full endochrine function. The bonus is that the protocol uses a generic drug that has been around for decades. The testing is going into the Phase 2, make or break stage this year, it will take three years to complete. As a dose of reality, this research would not have been possible without the advances in computers, the discovery of DNA and the radical improvement in molecular biology in recent decades. Banting & Co. were really taking a shot in the dark in the 1920's and got lucky.

But if I were Minister of Health I would fall all over myself to get this cure out to Type I diabetics and get them off the expensive, heavy-hitter list. We are high health care users, there just aren't so many of us.

Certain lists of chronic diseases or very expensive like Diabetes, many Mental Health issues, Cancer ought to have dedicated "streams" with agreed treatment protocols that are judged on clinical efficacy and cost. Letting them fester in local centres with family doctors doesn't work and leads to repeat visits that cost money and don't do anything.

[tyronen]

How much of Ontario's structural gap is due to the tax cuts passed in the mid-1990s?

[Livio Di Matteo]

Tyronen:
That's a good question - I'm not sure if anyone has worked directly on that question. The reduction in income tax rates in the 1990s and later on corporate tax rates would have had some effect but these were accompanied by the Employer Health Tax as well as the Ontario Health Premium after 2003 (really an income tax surcharge). Per capita revenues in Ontario are on an upward trend as the Figure shows but to borrow from Star Trek, they are on a parallel rather than intercept course with per capita spending.

[Tim]

What I find mighty interesting is the fact Ontario is supposed to now be the down and out laggard of the Canadian economy but BC and Alberta the two new leading lights of confederation appear to undergoing a 1993 level of political convulsion. Do Alberta and BC voters know something on the ground about their economic situations that the professionals don't(Perhaps the absolute depression in natural gas prices?). I have to say I love Wildrose Party leader and Premier in waiting Danielle Smith going on and on about Eastern Canadian "elites". I thought all the Eastern Canadian "elites" were broke now.