Slowing economic growth to squeeze Ontario’s finances
Ottawa,ON - Slowing economic growth in the years to come will prevent Ontario from balancing its provincial budget until 2021-22, based on a Conference Board of Canada analysis. And to achieve a balanced budget by 2022, the Ontario government...
Ottawa,ON – Slowing economic growth in the years to come will prevent Ontario from balancing its provincial budget until 2021-22, based on a Conference Board of Canada analysis. And to achieve a balanced budget by 2022, the Ontario government needs to hold increases in health care costs well below the growth rates of the past decade.
The Conference Board estimates that potential real (or sustainable) economic growth for Ontario is declining to 1.9% annually, which will translate into lower-than-expected levels of annual government revenue over the longer term.
“The projected sluggish growth in Ontario’s long-term potential output plays a crucial role in our analysis of the revenues available for government public services, notably health care,” said Glen Hodgson, senior vice-president and chief economist for the Board.
“If Ontario residents expect their publicly funded health care system to continue to grow at or near recent levels, they will most likely have to pay for it through higher taxes. If the public is unwilling to accept and support higher taxes, other transformative changes will likely be required to how publicly-funded health care is delivered in Ontario.”
Aging demographics and slower labour force growth will reduce Ontario’s nominal (real economic growth plus inflation) Gross Domestic Product (GDP) increase to an average of 3.9% over the 2011-2031 forecast period. Ontario is also being affected by the more challenging economic environment in the United States.
In its 2011 budget, the Ontario government laid out a plan to eliminate its annual fiscal deficit – projected to come in at $16 billion this year – in 2017-18. That outlook was based on restricting total program spending to growth of just 1.7% per year over the next seven years. The government pledged to curb annual growth in public health care spending from its 7% pace of the past decade to just 3% per year beginning in 2012-13. Even if these spending plans are met, slower projected revenue growth will delay the date of a balanced budget.
This report, Ontario’s Economic and Fiscal Prospects: Challenging Times Ahead, sheds light on Ontario’s fiscal challenges in three ways:
It estimates potential economic growth in Ontario over the longer term. Potential output is based on three principal factors: the projected available labour force in Ontario; capital investment; and productivity growth; It produces a model of health and education spending to account for demographic changes, trends in technology and access to services, and trends in cost drivers in these sectors, over a long-term forecast horizon.
It projects when the Ontario government is likely to re-balance its books, based on revised revenue projections – and under different spending assumptions for health care in particular. Each of three scenarios uses the same economic outlook, which determines revenue growth.
“In fiscal terms, the scenarios highlight the challenges of controlling health care spending growth, of transforming the publicly-funded health care delivery system in Ontario, and/or of increasing available government revenues,” said Hodgson.
Scenario 1: ‘Maintain the spending plan’ – For the government to achieve its target of a balanced budget by 2017-18, it would have to slow overall program spending to growth of 0.7% annually beginning next year.
Scenario 2: ‘Adjust for aging population’ – Health care spending has increased by an average of nearly 7% annually for a decade. If the government raises health care spending to account for population growth and inflation, costs are still projected to increase by an average of 4.7% per year. This figure is well above the Ontario government’s current target, and is beyond the Conference Board’s estimate for sustainable nominal GDP growth. Under these assumptions, the provincial government would be unable to re-balance its budget through 2031, which is the time frame of this study.
Scenario 3: ‘Maintain spending growth’ – Funding for Ontario’s health care system is assumed to continue to grow at a pace that is more closely aligned with recent history (5.6% annually), with spending restraint maintained on other provincial programs. To generate additional revenue under this scenario, the provincial sales tax rate would have to increase from 8% to 15% to allow the provincial government to balance the budget by 2017-18.
This report was prepared for The Conference Board of Canada’s Canadian Alliance for Sustainable Health Care (CASHC). Launched in May 2011, CASHC is intended to provide Canadian business leaders and policymakers with insightful, forwarding-looking, quantitative analysis of the sustainability of the Canadian health care system and all of its facets. CASHC actively engages private and public sector leaders from the health and health care sectors in developing its research agenda. More than 30 companies and organizations have invested in the initiative, providing invaluable financial, leadership, and expert support.
Link to report: http://www.conferenceboard.ca/e-library/abstract.aspx?did=4662.