The Ontario Liberals’ pre-election, back-to-deficits budget may or may not win over voters when they go to the polls on June 7. But it clearly has not impressed the public- and private-sector bean counters.
The conclusion from the province’s Auditor-General and from credit-rating agencies is that the budget has paved a potentially precarious fiscal path for the province. The easiest way off it is for the Liberals simply to lose the election. But what we don’t know is whether the next government’s fiscal plan will be any more sound.
After spending a few weeks analyzing the government’s March 28 budget and pre-election financial report, Auditor-General Bonnie Lysyk said on Wednesday that the plan to bolster social spending will spill more red ink than the government has projected. She says the government is underestimating the “true financial impact” of its electricity rate cuts under last year’s Fair Hydro Plan, and has understated its future public-service pension expenses.
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Her report estimated Ontario’s budget deficit at $11.7-billion in fiscal 2018-19, substantially higher than the $6.7-billion estimate in the budget. It projects deficits of $12.2-billion for 2019-20 and $12.5-billion for 2020-21, nearly double the government projections of $6.6-billion and $6.5-billion, respectively.
To be clear, the Auditor-General isn’t passing judgment on the prudence of returning Ontario to deficits. That’s not her job. Rather, her report focuses on the reasonableness of the government’s financial projections, based on what it has planned in its budget. And other than the concerns about the electricity and pension impacts, Ms. Lysyk concluded that the government had been suitably “cautious” in its assumptions on revenue and expenses. The wisdom of running deficits is a question for someone else.
That someone else would include the private-sector credit-rating agencies – two of which gave the budget a thumbs-down in reports issued in the past week.
Moody’s Investors Service last week lowered its outlook on Ontario’s debt ratings to “negative” from “stable” – a signal that the deficit plans have brought the possibility of a rating cut onto its radar screen. It warned that with economic growth likely to slow over the next few years, revenues will be hard-pressed to cover the government’s growing spending commitments – raising the spectre of rising debts to cover the expected budget shortfalls.
This week, rating agency DBRS Ltd., while maintaining its ratings for the province, issued an even more blunt assessment.
“The policy shift clearly demonstrates the elected government is no longer committed to disciplined fiscal policy,” DBRS said.
DBRS said the government is accelerating spending at a time when the business cycle is near its peak and the economy is at or near full capacity. That flies in the face of standard Keynesian fiscal logic that governments should lean against the economic cycle – increasing fiscal stimulus in bad times and cooling their spending in the good times.
The agency argued Ontario is opening the door for bigger debt troubles in the event of a serious economic downturn – not comforting in a province already saddled with more than $300-billion in net debt, and rising.
“In past recessions, budgetary results have weakened and the debt-to-GDP ratio has increased sharply. If such circumstances were to materialize, Ontario’s ratings could be adversely affected,” DBRS warned.
But DBRS rightly points out that if the Liberals are defeated six weeks from now – and recent public-opinion polls suggest they could lose in a big way – then the spending commitments contained in their budget might never see the light of day. The Progressive Conservatives, who are leading in the polls, have been critical of the Liberals’ spending plans, and have pledged to balance the books – although their leader, Doug Ford, has conspicuously avoided presenting hard numbers on how he intends to deliver.
On budget day, I called this budget a Hail Mary pass for the Liberals – changing their fiscal course in a last-gasp attempt to win back voters. But a colleague of mine recently floated another theory: that this is a budget not designed to try to win the election, but with an expectation of losing it.
The idea is that the Liberals are making a lot of bold, expensive promises knowing full well that they won’t have to pay for them. Instead, the budget essentially forms the seeds of a new policy position for a party in opposition.
While I don’t quite share the cynicism of my colleague, I agree that the likely fate of this budget is its death on election day. What the fiscal watchdogs both inside and outside the government need to know, then, is whether the PCs are prepared to present something more fiscally sound, prudent and realistic. The voters need to know, too.
Mr. Ford, let’s see your plan.
David Parkinson