Group items tagged

As of the 2020–21 Third Quarter Finances, the government is projecting a deficit of $38.5 billion in 2020–21, unchanged from the outlook presented in the 2020 Budget.

Revenues in 2020–21 are projected to be $151.7 billion, $0.6 billion higher than forecast in the 2020 Budget. The higher revenue forecast largely reflects stronger taxation revenues, attributable to a smaller economic decline in 2020 than the prudent planning assumptions in the 2020 Budget. The forecasts for Government of Canada transfers and net income from Government Business Enterprises are also higher, while other non-tax revenue is lower.

Program expenses are projected to be $2.6 billion higher than forecast in the 2020 Budget, largely due to investments in hospitals, long-term care homes, and business support, primarily offset from existing contingencies.

Since the 2020 Budget, the government has fully allocated all of the time-limited pandemic response funding and extraordinary contingencies of $13.3 billion in 2020–21. In light of this, and to help mitigate expense risks for the remainder of 2020–21, the standard Contingency Fund has been allocated an additional $2.1 billion for 2020–21, given the uncertain and unprecedented impact of the global pandemic.

The 2020 Budget included a $2.5 billion reserve in 2020–21 to protect the fiscal outlook against any unforeseen adverse changes in the Province’s revenue and expense forecasts. With the release of the 2020–21 Third Quarter Finances, the reserve has been reduced to $0.5 billion, which could be used to address any unforeseen events that could arise before year-end.

The forecast for Total Taxation Revenue has increased by $1.5 billion compared to the 2020 Budget. Key changes in the taxation revenue outlook compared to the 2020 Budget include:

Corporations Tax revenue increased by $1.5 billion (15.0 per cent), mainly due to higher amounts from processing 2019 tax returns;

155

Personal Income Tax revenue decreased by $1.0 billion (2.8 per cent), mainly due to lower amounts from processing tax assessments for 2019 and prior years; and

869

Program Expense Changes Since the 2020 Budget — Supports to Protect (Additional Allocations Since 2020 Budget) — Additional Funding for Hospitals

609

Program Expense Changes Since the 2020 Budget — Supports to Protect (Additional Allocations Since 2020 Budget) — More Purchases of Personal Protective Equipment (PPE)

Program Expense Changes Since the 2020 Budget — Supports to Protect (Additional Allocations Since 2020 Budget) — Continued Long-Term Care Sector Response to COVID‑19

398

Program Expense Changes Since the 2020 Budget — Supports to Protect (Additional Allocations Since 2020 Budget) — Medical and Laboratory Equipment

Sales Tax revenue increased by $1.1 billion (4.5 per cent), mainly reflecting the strong rebound in household consumption spending during the second half of 2020;

148

Program Expense Changes Since the 2020 Budget — Supports to Protect (Additional Allocations Since 2020 Budget) — OHIP Funding and Assessment Centres

135

Program Expense Changes Since the 2020 Budget — Supports to Protect (Additional Allocations Since 2020 Budget) — Vaccine Administration

125

Program Expense Changes Since the 2020 Budget — Supports to Protect (Additional Allocations Since 2020 Budget) — Additional Critical Care Beds

Program Expense Changes Since the 2020 Budget — Supports to Protect (Additional Allocations Since 2020 Budget) — COVID‑19 Testing Centres

118

$609 million to support the procurement of additional personal protective equipment and critical supplies and equipment and continued support for essential supply chain operations in the health care sector;

45

1,400

Program Expense Changes Since the 2020 Budget — Support for People, Jobs and Recovery (Additional Allocations Since 2020 Budget) — Ontario Small Business Support Grant

Program Expense Changes Since the 2020 Budget — Support for People, Jobs and Recovery (Additional Allocations Since 2020 Budget) — Additional Support for Businesses — Property Taxes and Energy Bills

300

$869 million in additional investments for the hospital sector for supplies and equipment related to addressing the surge in COVID‑19 cases, including testing, swabs, saliva tubes and test kits, bringing the total increase in funding to hospitals since 2019–20 to $3.4 billion;

Program Expense Changes Since the 2020 Budget — Supports to Protect (Additional Allocations Since 2020 Budget) — Telemedicine/Virtual Care Utilization 78 Program Expense Changes Since the 2020 Budget — Supports to Protect (Additional Allocations Since 2020 Budget) — Additional COVID‑19 Mental Health and Addictions Supports

$398 million to respond to the impact of COVID‑19 in the long-term care sector, including through continued prevention and containment measures, funding to support implementation of testing guidelines, and support for operators who have been impacted by the changes in occupancy numbers due to COVID‑19;   $155 million to support managing the COVID‑19 pandemic with investments in critical medical and laboratory equipment; $148 million to provide health care support for uninsured patients and operate COVID‑19 Assessment Centres; $135 million for administration of the Province’s COVID‑19 vaccination program. The government’s vaccine rollout is underway since launching in December. Based on available supply as of February 4, more than 350,000 doses have been administered with more than 80,000 people fully vaccinated; $125 million in COVID‑19 investments in the hospital sector through the planned addition of more than 500 critical care beds to address urgent operating pressures and build capacity in the health care system to respond to a resurgence in cases of COVID‑19; $118 million in testing, laboratory services as well as purchasing and distribution of medical equipment; $78 million investment to support an increase in demand for Telemedicine services during COVID‑19. Through this investment, providers will be able to leverage a variety of virtual care technologies that best meet the needs of their patients while helping to reduce the spread of COVID‑19; $45 million investment to support a comprehensive cross-ministry plan to address mental health and addictions supports related to COVID‑19, which has exacerbated mental health issues due to self-isolation and job losses. The investments will support building healthier and safer communities, including increasing service provision, providing tools and resources, developing and implementing training, and providing housing supports;

$1.4 billion to launch the Ontario Small Business Support Grant to support small businesses that are required to close or significantly restrict services under the provincewide shutdown effective December 26, 2020, with one-time grants of up to $20,000;

$300 million in additional support made available, for a total of $600 million, for property tax and energy bill relief to eligible businesses that were required to close or significantly restrict services due to enhanced public health measures;

Between February and May, Ontario employment declined by 1,134,700 (−15.1 per cent). Since June, employment rebounded by 729,100 net jobs and as of January was 405,600 (−5.4 per cent) below the February 2020 level. As of January 2021, the unemployment rate was 10.2 per cent, down from a high of 13.5 per cent in May.

Private-sector forecasters, on average, project real GDP to rise by 4.5 per cent in 2021, easing from an average of 5.0 per cent in October 2020 and slower than the 4.9 per cent increase projected in the 2020 Budget.

Importantly, the FAO estimates that Ontario was facing an $8.1 billion deficit in 2018-19 prior to the introduction of the 2018 Budget. In this context, the government introduced the 2018 Budget which included a broad range of new public spending initiatives. While many of these new programs would provide significant social and economic benefits for Ontarians, the government has not raised adequate revenue to pay for them, adding to continued deficits over the outlook.

To address the budget deficit, the government introduced a ‘fiscal recovery plan’ which projects a balanced budget by 2024-25, based on restricting the growth in program spending. The fiscal recovery plan provides few policy specifics, but assumes that the government will dramatically cut spending growth from an average of 4.2 per cent over the next three years, to just 2.1 per cent from 2020-21 to 2025-26.

Based on the FAO’s analysis, severely restraining the growth in program spending, below the pace of population growth and price inflation, could lead to a balanced budget by 2025-26. However, this plan implies that the Province would have to lower spending by approximately $15 billion, or eight per cent, by 2025-26. 

Even with the significant spending restraint planned by the government in the 2020s, Ontario’s debt burden would remain elevated, and the Province would miss its 2023-24 net debt-to-GDP target by a wide margin.

The 2018 Budget postpones deficit recovery, leading to the accumulation of additional debt into the 2020s when demographic pressures on the budget will intensify. This additional debt will increase the challenge of stabilizing Ontario’s public finances, shift the burden from the baby boom generation to younger Ontarians, and would leave future governments with less flexibility to respond to future crises, including recessions.

Most economic forecasters, including the FAO, expect this robust pace of growth to moderate somewhat over the next few years. The FAO is forecasting average real GDP growth of 1.9 per cent per year from 2017 to 2022, as rising interest rates, combined with high levels of household debt, slow the growth of household spending.

Significant changes to the US tax system, coupled with Congress’s recent $1.3 trillion spending plan[5] should provide strong support for US domestic demand in the short-term. This fiscal policy stimulus combined with the upswing in the global economy will result in a temporary boost to US growth, with real GDP projected to increase by 2.6 per cent and 2.3 per cent, over the next two years.  

Beyond 2019, the boost from fiscal stimulus will fade, while US interest rates are expected to continue rising, slowing economic growth over the outlook.

Over the outlook, real GDP growth is expected to moderate, averaging 2.0 per cent, as the Bank of Canada gradually raises its policy interest rate, contributing to slower growth in household consumption and residential investment.

Overall, the FAO projects real GDP growth to slow to 2.2 per cent in 2018 and average 1.9 per cent over the remainder of the economic outlook.

The FAO’s forecast is broadly consistent with the outlook of most economic forecasters and largely in-line with the FAO’s fall economic outlook.

The FAO’s economic outlook covers the five-year period from 2018 to 2022.  However, to assess the government’s ‘fiscal recovery plan’ which projects a balanced budget by fiscal year 2024-25, the economic outlook was extended by an additional three years to 2025, based on the FAO’s latest long-term economic projection.[11]

In 2017-18, the FAO estimates that Ontario will record a budget deficit of $3.6 billion, based on the Auditor General’s recommended accounting treatment for the Fair Hydro Plan and net pension assets.

For 2018-19, the FAO projects that Ontario’s budget deficit will increase sharply to $11.8 billion, the result of significant increases in program spending from the 2018 Budget combined with only a weak gain in revenue. Going forward, the FAO is projecting that the budget deficit will increase to $12.7 billion by 2020-21.

The FAO’s projection for persistent budget deficits, despite strong economic growth and low unemployment, suggests that the Province is facing a fundamental imbalance between revenues and spending, resulting in a structural deficit.[13] As a result, Ontario’s current deficit cannot be eliminated by economic growth alone, but would instead require fiscal policy changes to raise revenue or reduce spending.

The FAO’s fiscal projections are based on the Auditor General of Ontario’s recommended accounting treatment for the Fair Hydro Plan and net pension assets.*

In 2017-18, the FAO estimates that revenue grew by 6.7 per cent, reflecting strong gains from both tax and non-tax sources.

Over the medium-term, the FAO is projecting that revenue growth will slow significantly to 2.7 per cent per year on average from 2017-18 to 2020-21. This slower growth reflects several factors. Tax revenues are projected to increase more slowly, in-line with moderating economic growth, following several years of stronger than average economic growth. Increases in federal transfers are expected to slow, reflecting current federal-provincial agreements. Time-limited revenues totaling $2.1 billion will end in 2018-19.

Projected to average 3.9 per cent growth per year from 2017-18 to 2020-21

Taxation Revenue

Federal transfers are projected to grow by 1.8 per cent per year from 2017-18 to 2020-21

Income from GBEs are projected to grow at 2.4 per cent on average from 2017-18 to 2020-21*

These revenues are projected to decrease from $19.3 billion in 2017-18 to $18.0 billion by 2020-21

The FAO projects total spending to grow by 4.5 per cent from 2017-18 to 2020-21. The strong growth in spending is driven by the new spending initiatives announced in the 2018 Budget combined with rising interest on debt payments.

Overall, the 2018 Budget increased health spending by $0.8 billion in 2018-19 rising to $2.4 billion in 2020-21 compared to the 2017 Fall Economic Statement. This raised the planned average annual growth of health sector spending from 3.5 per cent to 4.6 per cent from 2017-18 to 2020-21. The pace of health spending growth is now projected to approximately match the growth of core cost pressures, including population growth and aging, and price inflation.[23]

However, if the spending on new health care programs is excluded,[24] the FAO projects that spending on existing health care services will grow by an annual average of 3.7 per cent, which is below the rate of population growth, aging, and price inflation.[25] This indicates that budget pressures in existing health services may not be fully relieved by this additional spending. 

The FAO estimates that Ontario will record a budget deficit of $3.6 billion in 2017-18, in-line with the FAO’s fall projection. In 2018-19, tax revenue growth moderates, time-limited revenues end, and government business income temporarily drops. These factors, combined with significant new spending measures announced in the 2018 Budget, result in a sharply higher deficit of $11.8 billion in 2018-19. The FAO projects the deficit will continue to increase, reaching $12.7 billion by 2020-21. In contrast, in the 2018 Ontario Budget, the government projected a small budget surplus in 2017-18, followed by deficits of approximately $6 billion from 2018-19 to 2020-21[27]. The difference between the deficit projections of the FAO and the government reflects the FAO’s moderately lower revenue projection combined with the FAO’s adoption of the AG’s recommended accounting treatment for the Fair Hydro Plan and net pension assets

he government’s recovery plan projects a balanced budget by 2024-25, based largely on restricting the growth in program spending. The government’s plan provides few policy specifics on how it intends to limit spending growth, but assumes the government will dramatically cut the growth in program spending from an average of 4.2 per cent per year over the next three years, to an average of just 2.1 per cent beginning in 2021-22.

The FAO’s extended outlook includes a detailed revenue projection to 2025-26, incorporates the 2018 Budget’s projection for program spending to 2020-21 and continues to adopt the AG’s recommended accounting treatment for the Fair Hydro Plan and net pension assets. However, due to the critical importance of the assumption for program spending growth over the extended outlook, the FAO developed two projections. The FAO’s ‘spending restraint’ projection is based on the government’s plan to limit the growth in program spending to 2.1 per cent per year from 2020-21 to 2025-26. The FAO also developed a ‘status quo’ projection which assumes program spending will grow by approximately 3.5 per cent per year from 2020-21 to 2025-26. This projection implies that the quality of public services would be maintained, as program spending increases to accommodate population growth and aging as well as price inflation, core cost drivers which contribute to the rising cost of providing public services.

The FAO’s ‘spending restraint’ projection shows that Ontario could achieve a balanced budget by 2025-26, roughly consistent with the government’s own fiscal recovery plan, which anticipates a balanced budget a year earlier. This projection relies on a dramatic slow-down in spending growth beginning in 2021-22, compared with the government’s planned spending over the next three years.

Despite a similar projection for economic growth, the government forecasts revenue growth will average 3.3 per cent annually over this period, lower than the FAO’s forecast of 3.7 per cent and well below the expected growth rate of nominal GDP.

Based on these core cost drivers, the FAO’s status quo outlook assumes program spending growth of 3.5 per cent per year from 2020-21 to 2025-26, to maintain the existing quantity and quality of public services. In contrast, the government’s fiscal recovery plan relies on limiting the annual growth in spending to an average of 2.1 per cent per year over five years, well below the pace of population growth and inflation. The FAO’s ‘spending restraint’ projection assumes program spending growth consistent with the government’s recovery plan.

By limiting the growth in spending, the 2018 Budget’s fiscal recovery plan implies that government spending on goods and services would be reduced by $650 per person by 2025-26, after adjusting for inflation.

After the 2008-2009 recession, limiting spending growth was a critical part of the Province’s plan to balance the budget in 2017-18. This was achieved through a combination of strategies, including delivering public services more efficiently,[32] restraining public-sector wage growth, and deferring maintenance for schools and hospitals.[33] This reduced program spending to an average of 2.3 per cent per year over the 2011-12 to 2017-18 period.

Beginning in 2021-22, the government plans to grow program spending by an average of just 2.1 per cent per year, below the 2.3 per cent growth of the 2011 to 2017 period, and well below the 3.5 per cent that is necessary to meet the cost pressures of population growth, aging and inflation.

Spending restraint of this magnitude implies that the government would have to find $15 billion in permanent savings to achieve a balanced budget by 2025-26, compared to the FAO’s status quo projection.

Under the FAO’s ‘spending restraint’ projection (consistent with the government’s recovery plan), Ontario’s budget deficit would improve rapidly, reaching a small surplus by 2025-26. But the balanced budget would be achieved by severely restricting the growth in government spending over a five-year period.

In contrast, based on the FAO’s ‘status quo’ projection, public services would be maintained, but Ontario’s budget deficit would steadily deteriorate over the extended outlook. By 2025-26, the FAO projects that the deficit would reach $16.6 billion, or 1.5 per cent of GDP.

Under both of the FAO’s projections, Ontario’s net debt-to-GDP ratio would be well above the Province’s net debt-to-GDP target of 35 per cent in 2023-24. Even with the significant program spending restraint assumed in the government’s fiscal recovery plan, the FAO projects that the Province would miss its net debt-to-GDP target by 7 percentage points in 2023-24.[36]

the 2020 Budget allocated $3.0 billion to its standard contingency funds in 2020-21, which grow over the 2021-22 to 2022-23 period and are much larger than usual. The government has yet to clearly indicate the specific purpose of the sharp increase in these funds after the pandemic.

net debt as a share of GDP is projected to reach 50 per cent by 2025-26 in the absence of policy changes.

This could make the province more vulnerable to unexpected interest rate increases in the future. However, the cost of financing the large increase in debt will be manageable over the outlook if interest rates remain near historic lows, as currently expected.

a second and larger wave of COVID-19 infections in the fall prompted renewed restrictions across the province, significantly slowing the pace of Ontario’s economic recovery late last year and early in 2021.

As the province recovers from the COVID-19 pandemic and the economy rebounds, the budget deficit is expected to remain elevated at $30.7 billion in 2021-22 and improve modestly to $24 billion in 2022-23. Beyond 2022-23 the FAO projects that the deficit will stabilize at around $16 billion in the absence of further policy changes.

As the pandemic continues, total revenues are expected to decline sharply in 2020-21 by $4.5 billion, a decline of 2.9 per cent.

The drop in overall revenues results from a substantial $10.3 billion decline in tax revenues which is partially offset by a significant $8.0 billion increase in transfers from the federal government, largely consisting of one-time COVID-related support.

Despite the economic rebound, 2021-22 revenues are expected to remain largely unchanged as the increase in tax revenues is offset by a reduction in federal transfers. As the economy is more fully reopened, revenue growth picks up in 2022-23.

Program spending growth in key sectors will not keep pace with demand for public services

The 2020 Budget allocated $3.0 billion to its standard contingency funds in 2020-21, significantly above the usual size and in addition to the temporary COVID-19 funds. Over the next two years, the allocation to the standard contingency funds will increase even further. While contingency funds are maintained to manage expense risks, the government has not clearly indicated the purpose of the sharp increase in these funds after the pandemic. Importantly, if these contingency funds are not used for new programs or future unforeseen events, they may be used to reduce deficits.

Assuming vaccines are distributed to the general population over the course of 2021 and that social distancing and select restrictions remain in place until early 2022, Ontario real GDP is expected to rise by 3.9 per cent in 2021 and 4.5 per cent in 2022

In Ontario, the Fiscal Sustainability, Transparency and Accountability Act, 2019 (FSTAA) requires that when the budget is in deficit, the Province must develop a fiscal recovery plan that specifies how and when the budget will be balanced. The government committed to present a multi-year fiscal recovery plan in the 2021 Ontario budget, to be delivered by March 31, 2021.

Net debt is expected to rise sharply by $41.7 billion, to $395 billion in 2020-21, pushing the net debt-to-GDP ratio up to 46.7 per cent. Large and continued deficits add to debt and raise the net debt-to-GDP ratio over the outlook, which reaches almost 50 per cent by 2022-23 – 10 percentage points higher than the pre-pandemic ratio.

However, the cost of financing the large increase in provincial debt is expected to be manageable over the medium term. As a share of revenue, interest on debt is expected to rise to 8.2 per cent in 2020-21, as revenues decline due to the COVID-19 pandemic. As the economy and provincial revenues rebound, interest payments as a share of revenues are expected to decline to 7.9 per cent by 2022-23, similar to its pre-pandemic share.

This outcome is largely due to the expectation that interest rates will remain near historic lows over the outlook. However, the significant increase in debt leaves the province more vulnerable to unexpected interest rate increases in the future.

Given high COVID-19 caseloads and hospitalizations, the FAO expects stringent restrictions will remain in place through much of the winter, followed by a slow reopening during the rest of the year as vaccinations become increasingly available. As a result, the projected rebound in economic activity in 2021 will be more muted than previously expected.

The FAO projects Ontario real GDP will drop by 5.9 per cent in 2020, the largest annual decline in economic output on record.

In the January 2021 Monetary Policy Report, the Bank affirmed its intention to continue monetary policy support and hold the rate at 0.25 per cent until the Bank’s annual inflation target of 2 per cent is achieved.

According to the Bank’s projections, a slow recovery and the impact of the pandemic are expected to dampen inflation until 2023, signalling that short-term interest rates are likely to remain low over the next two years.

Over the 2023 to 2024 period, Ontario’s economy is expected to return to more normal conditions, with average real GDP growth of 1.9 per cent.

During the pandemic shutdowns, Ontario employment fell by a record 1.1 million jobs (or 15.2 per cent) from February to May 2020. As the economy reopened through last summer, employment rebounded strongly, rising by 729,100 since May 2020 and recovering almost two-thirds of the jobs lost during the first wave of the pandemic. Despite these gains, Ontario employment remained down by 405,600 jobs (or 5.4 per cent) in January 2021 compared to the pre-pandemic levels in February 2020.[5] The pace of monthly job gains has slowed noticeably as the second wave of COVID-19 infections and renewed partial restrictions caused job losses in some sectors in late 2020 and early 2021.

On an average annual basis, Ontario’s employment declined by 355,300 jobs (-4.8 per cent) in 2020, while the unemployment rate jumped to 9.6 per cent, up from 5.6 per cent in the previous year. As the economy improves through 2021, job growth will rebound, but the level of employment is not projected to reach its pre-pandemic peak until 2022. The unemployment rate will gradually trend down to pre-pandemic levels towards the end of the outlook.

Corporate profits are projected to record a sharp 12.0 per cent decline in 2020, even as businesses adapted their operation to pandemic shutdown measures. Over the next two years, corporate profits are expected to recover strongly with average growth of 8.0 per cent as businesses increasingly return to more normal levels of activity. Overall, nominal GDP is expected to decline by 5.2 per cent in 2020, followed by a rebound of 5.4 and 6.0 per cent growth in 2021 and 2022, respectively.

Large ongoing budget deficits projected for Ontario

The FAO projects Ontario’s budget deficit will increase from $8.7 billion in 2019-20 to a record $35.5 billion in 2020-21. As the province recovers from the COVID-19 pandemic and the economy rebounds, the budget deficit is expected to remain elevated at $30.7 billion in 2021-22 and improve modestly to $24 billion in 2022-23. These projected deficits are broadly consistent with the government’s deficit forecast in the 2020 Ontario Budget.

Total revenues are projected to fall by $4.5 billion in 2020-21 to $151.6 billion, a decline of 2.9 per cent. The drop in revenues results from a substantial $10.3 billion (9.5 per cent) decline in tax revenues[7] and a $2.2 billion decrease in ‘other’ revenues, notably lower income from Government Business Enterprises[8]. These revenue declines are partially offset by a significant $8.0 billion (31.3 per cent) increase in transfers from the federal government, largely consisting of one-time COVID-related support.[9]

Based on the 2020 Budget spending plan, Ontario’s program spending in 2020-21 is projected to be $174.6 billion, or $22.3 billion higher than in 2019-20. This 14.7 per cent rise in program spending is the largest increase since 2009-10, with over 70 per cent of the total increase driven by temporary COVID-19 related spending.

Province plans to slow base program spending growth Based on the 2020 Budget’s medium-term outlook, total program spending growth is projected to moderate over the 2021-22 to 2022-23 period as temporary COVID-19 related measures are gradually phased out. Specifically, COVID-19 related spending is projected to decline from $16.5 billion[10] in 2020-21 to $2.8 billion in 2022-23. Over this period, base program spending growth (excluding COVID-related expenditures) is projected to slow from 4.2 per cent in 2020-21 to 2.7 per cent in 2022-23.

Program spending growth in key sectors will not keep pace with demand for public services

Based on the 2020 Budget, over the next two years planned program spending growth in key sectors will not keep pace with the underlying growth in the demand for public services, which is driven by factors such as population growth and price inflation (Figure 4-4).

In the health sector, base spending is projected to grow at an average annual pace of 2.9 per cent, below the projected growth of 4.6 per cent in key cost drivers of the health care sector, such as health inflation, population growth and aging. Education sector spending is projected to grow at an average annual pace of 1.6 per cent, slower than the 2.9 per cent annual growth projected for the number of school-age children and price inflation. Similarly, planned program spending growth in children’s and social services, justice, and postsecondary education sectors will be below the average projected growth in their underlying demand drivers over the 2021-22 to 2022-23 period.

Growth in ‘Other Programs’ spending driven by significant increase to standard contingency funds ‘Other Programs’ includes a variety of ministries[11] along with the standard operating and capital contingency funds, which are regular prudence measures incorporated into the government’s budget. According to the 2020 Budget, the government allocated $3.0 billion for its standard contingency funds in 2020-21,[12] significantly above the usual size of the funds,[13] and also in addition to the dedicated COVID-19 contingency funds. While the standard contingency funds are maintained to manage expense risks, the government has yet to indicate the specific purpose of the sharp increase in these funds. Importantly, if these contingency funds are not used for new initiatives or to respond to future extraordinary events, the unused portion of the funds would be available to reduce future deficits.[14]

Over the 2021-22 to 2022-23 period, the allocation to these standard contingency funds will increase even further, accelerating the growth in ‘Other Program’ spending to an average annual pace of 9.5 per cent, significantly higher than the planned growth in all the key sectors. Excluding contingency funds, ‘other’ base program spending is projected to grow at 4.4 per cent annually, 1.1 percentage point above the pace of population growth and inflation.

The FAO projects a record budget deficit of $35.5 billion (or 4.2 per cent of GDP) in 2020-21, as the COVID-19 pandemic resulted in both a sharp decline in revenues and a significant increase in program spending. Importantly, the government could report a smaller budget deficit for 2020-21 than the FAO’s projection if it does not allocate the remaining contingency funds to specific programs or spends less than planned.[15]

Net debt is expected to rise sharply by $41.7 billion, to $395 billion in 2020-21. The substantial increase in net debt results in a large jump in the net debt-to-GDP ratio, which is expected to rise to 46.7 per cent in 2020-21. Large and continued deficits lead to increasing levels of debt and a rising net debt-to-GDP ratio over the outlook, which reaches almost 50 per cent by 2022-23 – about 10 percentage points higher than the pre-pandemic ratio.

In the absence of policy changes, the FAO projects Ontario’s budget deficits to remain steady in the range of $16 billion in the extended projection. These ongoing deficits reflect the starting point of an $8.7 billion deficit in 2019-20 (before the onset of the COVID-19 crisis), the lasting economic and fiscal impacts of the pandemic going forward, as well as the province’s aging population, which contributes to both slower economic growth and higher demands for government spending.

To provide an estimate of the extent of ongoing revenue increases or spending cuts that would be required to balance the budget, the FAO constructed a hypothetical scenario under which the budget is balanced over a five-year period. In this “balanced budget scenario,” a total of $16 billion of revenue increases and spending cuts (in equal measure) are phased in over five years to reach a balanced budget by 2025-26.

If the government were to permanently increase personal income tax revenue by 10 per cent or around $500 per tax filer, starting in 2021-22, the budget deficit would improve by $3.7 billion in the first year and by $4.9 billion by 2025-26. For federal transfers, if the annual growth rate of the Canada Health Transfer or the Canada Social Transfer were to increase by 1 percentage point over the projection, the budget deficit would decrease by 1.0 billion or $0.5 billion respectively by 2025-26. For expenditure policy, if the government were to decrease the growth rate of program spending by 0.5 percentage points in each year beginning in 2021-22, the budget deficit would decrease by $4.7 billion by 2025-26. Given the FSTAA requirements for a balanced budget, these estimated budget sensitivities are intended to inform the debate around the government’s policy choices.

Over the past five months, the Ontario government has introduced a number of changes to both revenue and spending policies. These changes included cancelling the cap and trade program, scaling back or cancelling many new spending initiatives from the 2018 Budget, reversing several tax increases included in the 2018 Budget and paralleling business tax changes introduced by the federal government. These policy changes, combined with a moderately weaker economic forecast, have contributed to a larger budget deficit since the FAO’s Spring outlook.[1]

Based on the FAO’s status quo projection, Ontario’s budget deficit will deteriorate to $15.1 billion in 2019-20 (an increase of $2.8 billion from 2018-19), largely due to reductions in revenue announced since the 2018 Budget. In the absence of policy changes from the government, the budget deficit would continue to deteriorate over the outlook, exceeding $16 billion by 2022-23.

While the government has not indicated when it intends to achieve balance, it has committed to not raising taxes.[2]

To explore the implications of achieving a balance budget without raising taxes, the FAO developed a scenario that eliminates Ontario’s current deficit over the next four years exclusively through spending restraint. Based on this scenario, the Ontario government would need to limit the growth in total program spending to 1.2 per cent per year on average from 2019-20 to 2022-23. This would be the slowest average growth in program spending since the mid-1990s. Restraining total spending to this extent would imply that spending per person would have to be reduced by $850 (or 8 per cent) by 2022-23, compared to today’s spending levels.

Over the outlook, the FAO projects that Ontario’s economy will expand at a more modest pace, with real GDP rising at an average rate of 2.0 per cent per year from 2018 to 2022,

Nominal GDP – the broadest measure of the tax base – is expected to grow 3.8 per cent in 2018, slowing from a gain of 4.1 per cent in 2017. The FAO projects nominal GDP growth will average 3.9 per cent over the outlook, down from average growth of 4.4 per cent over the past four years.

The sustainability of US fiscal policy, given steep increases in the federal budget deficit, is a key risk for the US and global economies.

Policy decisions by the current Ontario government will reduce revenues by $2.1 billion in 2018-19, and by an average of $3.7 billion over the next four years.

Overall, nominal GDP growth is forecast to average 3.9 per cent over the five years of the outlook, down from average growth of 4.4 per cent over the past four years.

In 2018, the US lowered the federal corporate tax rate from 35 per cent to 21 per cent and introduced significantly more generous capital expensing rules. These US tax changes have negatively impacted Canada’s relative competitiveness and could potentially lead to reduced business investment in Canada and Ontario.

In response, the federal government announced new corporate tax measures, which the Province is paralleling. However, if businesses were to respond more strongly to the US tax changes, Ontario business investment could be weaker than projected by the FAO, reducing Ontario’s economic growth both in the short- and long-term.

The government’s higher projected deficit for the current fiscal year is the result of a lower estimate for tax revenue. In a departure from usual practice, the 2018 Fall Economic Statement did not include a medium-term fiscal forecast. In the absence of a fiscal projection by the government – including planned program spending – the FAO developed a status quo medium-term fiscal projection, which represents the expected fiscal outlook for Ontario given existing policies without anticipating any new government policy decisions.

The current deficit projection is higher than the FAO’s spring outlook due to a combination of revenue and expenditure policy changes introduced since the 2018 Budget, coupled with a moderately weaker economic forecast.

Over the outlook, steady economic growth is expected to support average annual employment gains of 1.0 per cent[17], in-line with growth in the labour force, keeping the unemployment rate relatively stable.

Over the outlook, total revenues are projected to grow at an average pace of 2.6 per cent per year, 0.5 percentage points slower than the FAO’s spring forecast. The slower growth is the result of:

policy decisions since the 2018 Budget, which combine to significantly reduce revenues; and slightly weaker growth in key economic drivers, which lowers tax revenue compared to the spring outlook.

In 2018-19, total revenues are expected to decline[23] by $1.2 billion (0.8 per cent), due to a combination of policy changes and the loss of time-limited revenues.[24]

The cancellation of Ontario’s cap and trade program, ending the auction and trading of emission allowances[25], is projected to decrease revenues by an average of $1.7 billion each year over the outlook.[26] 

The 2018 Fall Economic Statement reversed several tax measures introduced in the 2018 Budget.[27] Reversing these measures are projected to decrease revenues by roughly $0.5 billion per year over the outlook.

These tax changes are estimated to reduce Ontario corporate tax revenue by an average of $0.8 billion per year from 2019-20 to 2022-23.[29]   

In the 2018 Fall Economic Statement, the government introduced the Low-Income Individuals and Families Tax (LIFT) Credit which will reduce Ontario Personal Income Tax (PIT) for low-income taxpayers starting in 2019. This tax measure is expected to reduce PIT revenues by an average of $0.5 billion each year over the outlook. 

Average 3.5 per cent growth per year from 2018-19 to 2022-23.

Grows with key economic drivers including labour income, corporate net income and household spending.

Taxation Revenue

In the 2018 Fall Economic Statement, program spending is expected to grow by 4.8 per cent to $149.2 billion in 2018-19. From 2019-20 to 2022-23, the FAO’s status quo projection assumes program spending will grow at an average annual rate of 3.5 per cent, in-line with the growth of program spending over the past four years. The FAO’s status quo projection reflects key demand and cost drivers for public services, as well as recent policy changes announced by the government.

On net, these changes are expected to reduce program spending by $1.7 billion in 2018-19, growing to $3.8 billion by 2022-23.

Health Spending increases with population growth and aging, and price inflation. 4.0 per cent

To achieve a balanced budget by 2022-23 through expense restraint alone, the government would need to limit program spending growth to 1.2 per cent per year on average from 2019-20 to 2022-23.  This would represent the slowest pace of program spending growth over a four-year period since the mid-1990s. Restraining total spending to this extent would imply that spending per person would have to be reduced by $850 (or 8 per cent) by 2022-23, after adjusting for inflation.

Alternatively, achieving a balanced budget through tax increases alone would require a significant 12 per cent increase in total tax revenue.  (See the Fiscal Risks and Budget Sensitivities section for estimates of the deficit impact of different tax increase options).

The FAO reviewed the Province’s revised spending plan against actual spending through the first three quarters of 2019-20 and found that actual spending, at $112.4 billion, was $2.0 billion lower than planned.[1]

If the pace of actual-to-planned spending continues, the FAO projects a 2019-20 budget deficit of $6.1 billion, compared to the government’s budget deficit forecast of $9.0 billion in the Third Quarter Finances.[2]

Compared to the Province’s $9.0 billion budget deficit outlook, the FAO projects $2.0 billion in net spending savings and $1.0 billion in savings from the budget reserve.

Sector 2019-20 Budget Supplementary Estimates Budget Reallocation Total Budget Changes Revised 2019-20 Budget

Health 59,973 337 62 399 60,372

otal 156,238 2,667 -139 2,528 158,766

The revised 2019-20 health sector budget is $0.4 billion higher than originally planned: Supplementary Estimates account for $0.3 billion of this increase, with additional spending for payments to physicians, drug programs and payments to Local Health Integration Networks (LHINs), which fund hospitals, long-term care homes and community programs service providers. Budget reallocations account for $0.1 billion of this increase, with additional spending for Official Local Health Agencies and municipal ambulance and emergency services.

Health 60,372 44,159 43,759 -400 -0.9

Health sector spending, at $43.8 billion, was $400 million or 0.9 per cent lower than planned through the first three quarters of the fiscal year.[6] Ontario Health Insurance Program – Ontario Health Insurance (Vote-Item 1405-1), which administers payments to physicians, was $336 million or 2.9 per cent above planned spending. Provincial Programs and Stewardship – Provincial Programs (Vote-Item 1412-1), which funds Cancer Care Ontario and other programs, was $158 million or 6.6 per cent above planned spending. Local Health Integration Networks and Related Health Service Providers (Vote-Item 1411-1), which funds hospitals, long-term care homes and community programs service providers, was $102 million or 0.5 per cent below planned spending. Ontario Health Insurance Program – Drug Programs (Vote-Item 1405-2), which administers provincial drug programs, was $283 million or 7.9 per cent below planned spending.   Health Capital Program (Vote-Item 1407-1), which funds hospital infrastructure projects, was $465 million or 37.4 per cent below planned spending.[7]

Electricity Price Mitigation Programs (Vote-Item 2206-1), which subsidizes electricity costs, was $736 million or 18.5 per cent below planned spending.[10]

Interest on debt spending, at $8.7 billion, was $673 million or 7.1 per cent lower than planned through the first three quarters of the fiscal year.

As previously discussed, the FAO estimates that actual government spending was 1.7 per cent lower than planned over the first three quarters of the fiscal year. If this pace of actual-to-planned spending continues through the fourth quarter, the FAO expects $2.0 billion in savings (or underspending) by year-end compared to the forecast in the 2019-20 Third Quarter Finances. This spending savings estimate is consistent with historical patterns, which has averaged an even larger $3.3 billion in annual savings over the past 10 years (see appendix A for more information).

Absent further decisions by the Province or changes to the revenue outlook,[13] the $1 billion reserve will not be required.

The FAO compared the Province’s budgeted spending against actual spending[14] for the last 10 years, from 2009-10 to 2018-19, and found that actual spending was, on average, $3.3 billion lower than budgeted. The savings each year ranged from $6.4 billion in 2010-11 to $0.3 billion in 2017-18. 

Lastly, the report reviews proposed 2021-22 spending by program and identifies spending trends and program changes.

In the 2021-22 Expenditure Estimates, the Ministry of Health (MOH) is projected to spend $74.1 billion in the 2021-22 fiscal year. This is an increase of $0.9 billion (1.3 per cent) from 2020-21 interim results reported in the 2021 Ontario Budget.

$9.9 billion in ‘other spending’, which mainly consists of spending related to revenues that are independently raised by hospitals and spending by the Ministry of Long-Term Care that is recorded as an expense on the financial statements of Ontario Health;[3] and

Supply Bill spending is divided into programs called votes, sub-programs called items, and then accounts. MOH has nine votes, with Health Services and Programs being the largest at $30.6 billion, or 41 per cent of MOH spending. The next largest vote is the Ontario Health Insurance Program at $23.5 billion (32 per cent), while the remaining seven program votes together comprise 14 per cent of planned MOH spending in 2021-22.

Other spending includes $4.2 billion (six per cent of MOH spending) for planned operating spending by hospitals from non-provincial revenue sources (such as donations or parking fees).

There is also a $0.4 billion capital adjustment to reflect the net amortization of hospital infrastructure projects.

Finally, other spending includes a $5.3 billion (seven per cent of MOH spending) expense adjustment for Ontario Health. This adjustment largely represents planned payments from the Ministry of Long-Term Care to long-term care home operators that will be recorded as an expense on the financial statements of Ontario Health. A corresponding negative adjustment is included as ‘other spending’ in the Ministry of Long-Term Care’s Expenditure Estimates.

An alternative way to examine MOH spending is by program area, which aggregates different Estimates spending categories by spending purpose.

The chart below shows planned MOH spending in 2021-22 of $74.1 billion by major program area. The largest program areas are hospitals ($25.8 billion) and the Ontario Health Insurance Plan (OHIP, physicians and practitioners) ($17.0 billion), which combined account for 58 per cent of planned health ministry spending in 2021-22.

The hospitals program area includes provincial funding to support the operation of 141 hospital corporations, funding for specialty psychiatric hospital services, and an adjustment to account for hospitals’ total spending from provincial and all other sources.

OHIP provides funding for more than 6,000 insured services to eligible Ontario residents from various providers including physicians, hospitals, community laboratories, independent health facilities and other clinics.

The LTC homes program area provides funding to support residents in 626 LTC homes in Ontario. Funding for this program is with the Ministry of Long-Term Care (MLTC). In 2021-22, $5.6 billion in planned payments from MLTC to long-term care home operators will be recorded as an expense on the financial statements of Ontario Health.

This section examines projected health sector spending over the medium term to 2023-24 and the long-term through 2029-30. Note that in this section the FAO analyzes projected spending for the entire health sector, including both the Ministry of Health (MOH) and the Ministry of Long-Term Care (MLTC)

In the 2021 Ontario Budget, the Province projects that base health sector spending, which excludes time-limited spending related to the COVID-19 pandemic, will grow at an annual average of 3.1 per cent over the medium-term outlook, increasing from $63.7 billion in 2019-20 to $72.0 billion in 2023-24. Over the full 2021 budget forecast, including the recovery plan,[5] the Province projects average annual health sector spending growth of 2.6 per cent, reaching $82.0 billion in 2029-30.

By the end of March 2021, the Ontario COVID-19 Science Advisory Table estimated that the surgery backlog reached 245,400 procedures,[20] while the FAO estimates that the diagnostic backlog reached 1.6 million procedures.

The FAO reviewed the ministry’s programs and concluded that the Province’s health sector spending plan will not be achieved unless significant new program changes are introduced. Based on current program design and commitments, the FAO projects that health sector spending will increase from $63.7 billion in 2019-20 to $75.8 billion in 2023-24, which represents an average annual growth rate of 4.4 per cent

By 2029-30, the FAO projects health sector spending will reach $94.4 billion, representing an average annual growth rate from 2019-20 of 4.0 per cent.

Overall, the FAO estimates that the Province’s health sector programs will cost $3.7 billion more in 2023-24, and $12.4 billion more in 2029-30, than projected in the 2021 budget. In other words, if the Province is to meet its health sector spending targets, then it will need to make program changes that result in annual savings of $3.7 billion by 2023-24 and $12.4 billion by 2029-30.

For perspective, in the nine-year period from 2010-11 to 2019-20, health sector spending grew at an annual average rate of 3.2 per cent. This was a relatively slow[6] health sector spending growth rate, which the Province was able to achieve through a number of significant spending restraint measures, including:

freezing base operating funding for hospitals from 2012-13 to 2015-16;[7] reducing physician payment rates in 2013 and 2015;[8] and limiting investments in new long-term care beds, with only 611 new beds created between 2011 and 2018.[9] 

In the 2021 budget, the Province projects that health sector spending will grow by an average annual rate of only 2.6 per cent over the 10-year period from 2019-20 to 2029-30, well below the previous nine-year period, while implementing several key government policy commitments and plans which will require significant new health sector spending. This includes: Creating 30,000 new and redeveloped long-term care beds,[10] and increasing average daily direct care to four hours per day for long-term care residents.[11] Increasing hospital capacity, including the addition of an estimated 3,069 new hospital beds by 2029-30, as part of the government’s 10-year $30 billion hospital infrastructure plan. A plan to revise and expand home and community care services, including removing limits to the number of hours of service provided. Providing subsidized or free training for almost 9,000 additional personal support workers for long-term care, home care and community care expansion plans. Investing $3.8 billion in mental health and addiction services over 10 years, ending in 2026-27.

Overall, based on the FAO's analysis of these policy commitments, as well as existing health sector programs, the FAO estimates that the health sector spending plan in the 2021 budget has a $3.7 billion shortfall in 2023-24, rising to $12.4 billion in 2029-30. This means that either the Province will need to increase funding to the health sector or new spending will need to be introduced.

Over the medium term, from 2019-20 to 2023-24, the FAO projects health sector spending will grow at an annual average rate of 4.4 per cent. This is higher than the Province's annual growth rate of 3.1 per ent in the 2021 budget and results in a three-year spending gap between the FAO's and Province's forecasts of $5.7 billion from 2021-22 to 2023-24. This suggests that if the Province is to achieve its 2021 budget health sector spending plan, then new program changes that result in savings of $5.7 billion over three years are required.

The $5.7 billion cumulative spending gap is not distributed evenly among health sector program areas. The FAO estimates that a majority of the spending gap is in the hospitals program area, while there are significant spending gaps in Ontario public drug programs and community programs. Conversely, the FAO projects that the long-term care homes program will cost less from 2021-22 to 2023-24 than allocated in the 2021 budget plan.

The FAO projects that hospitals base spending will increase at an average annual rate of 3.6 per cent between 2019-20 and 2023-24. In contrast, the spending plan in the 2021 budget calls for significantly lower growth over the same period.

The largest component of hospital budgets is compensation, which comprises 60 per cent of all hospital spending. The FAO projects compensation spending will increase at an average rate of 3.1 per cent per year to 2023-24. This reflects the expectation that after current collective agreements expire by 2022, increases to compensation rates will reflect long-term trends. The compensation spending forecast also includes the Province’s plan to increase hospital capacity, which will require higher staffing levels.[12] Non-compensation expenses, which include the cost of drugs, supplies, equipment and other spending, are expected to increase by an average of 4.3 per cent per year through 2023-24, reflecting the government’s capital plan, projected demand and historic trends.

The FAO projects long-term care homes spending will grow at an average annual rate of 13.8 per cent, which is lower than the Province’s projection. The high growth in long-term care homes spending reflects the Province’s commitment to add 30,000 new and redeveloped long-term care beds, and increase daily direct care for long-term care residents to four hours per day. Overall, the FAO projection for long-term care homes spending from 2021-22 to 2023-24 is lower than the Province’s forecast. The Ministry of Long-Term Care was unable to provide the FAO with a detailed spending forecast to 2023-24 so the FAO cannot determine the reason for the projected difference in long-term care homes spending. More detailed analysis of the long-term care homes spending plan and commitments will be provided in an upcoming FAO report.

Over the 2021 budget’s recovery plan, from 2024-25 to 2029-30, the spending gap between the FAO’s health sector spending forecast and the Province’s spending plan reaches $12.4 billion by 2029-30

Overall, the FAO projects that health sector spending will grow by an annual average of 3.7 per cent from 2023-24 to 2029-30, compared to the 2021 budget projection of 2.2 per cent.

In 2011-12, real per capita health sector spending, which accounts for population levels and inflation, was $4,780. Real per capita spending reached a low of $4,411 in 2016-17 and gradually increased to $4,510 by 2019-20. Looking forward, the FAO projects that real per capita base health sector spending will grow at an average annual rate of 0.9 per cent from 2019-20 to 2029-30, reaching $4,941 by 2029-30. In comparison, the base health sector spending plan in the 2021 budget calls for real per capita spending to decline by an annual average of 0.5 per cent over the 10-year period, dropping to $4,290 by 2029-30. If this spending level is achieved, then annual real per capita health sector spending will have declined by $490 per person (or 10.2 per cent) since 2011-12.

Hospitals $25.8 billion Vote-Item 1416-1: $21.2 billion Vote-Item 1412-1: $0.4 billion Other Spending: $4.2 billion

The FAO estimates that this postponement of elective surgeries and diagnostic procedures will increase the surgical backlog by 11,152 procedures per week and the diagnostic backlog by 51,990 procedures per week.

The FAO estimates that it will take 3.5 years to clear the surgery backlog of 419,200 procedures and over three years to clear the diagnostic backlog of 2.5 million procedures. This estimate is based on the 2021 budget’s plan to clear the backlog and assumes hospitals operate at 11 per cent above pre-pandemic volumes for all surgeries and 18 per cent above pre-pandemic volumes for non-emergent diagnostic procedures.[23] Alternatively, if the Province were to clear the projected backlog in 24 months, hospitals would need to operate at 20 per cent above the pre-pandemic volumes for all surgeries and 29 per cent above pre-pandemic volumes for non-emergent diagnostic procedures.

Importantly, the FAO has not reviewed the Ministry of Health’s plan to clear the surgical and diagnostic procedure backlog in relation to required staffing levels, the required physical capacity in hospitals (e.g., operating room space) and other operating constraints.[24] Members of the Standing Committee on Estimates may wish to ask the ministry about its plan to clear the elective surgery and non-emergent diagnostic procedure backlog, including any revised cost estimates, new timing estimates and operational plans.

In 1990, Ontario had nearly 50,000 hospital beds, which dropped to a low of 31,500 by 1999, following a period of spending restraint and hospital consolidations. The number of hospital beds in Ontario remained at approximately this level for 19 years before the number of hospital beds started to increase in 2018.

From 2018-19 to 2021-22, the Province added a total of 2,524 new permanent beds. In addition, in response to the COVID-19 pandemic, the Province added 2,259 temporary beds in 2019-20, 4,510 beds in 2020-21 and 3,522 in 2021-22, non-cumulatively. As a result, the FAO estimates that Ontario has 38,416 hospital beds in 2021-22, of which 34,894 are permanent beds and 3,522 are surge beds. This represents an increase of 6,964 hospital beds from 2017-18 levels.

Looking forward, the ministry’s spending plan for the hospitals sector implies that the 3,522 surge hospital beds will not be maintained after the pandemic ends. As a result, the FAO assumes that surge beds will be withdrawn after 2021-22 and forecasts that the number of hospital beds in Ontario will drop to 35,134 in 2022-23. After 2022-23, based on information provided by the ministry and a review of the 10-year infrastructure plan for hospital projects, the FAO estimates that the Province will add an average of 324 hospital beds annually, reaching 37,321 beds by 2029-30.

From 1990 to 1999, the total number of hospital beds per 1,000 Ontarians decreased by 43 per cent, from 4.8 beds per 1,000 people to 2.7 beds per 1,000 people.[25] Since the total number of hospital beds remained flat from 1999 to 2017, while Ontario’s population increased, the number of hospital beds per 1,000 people continued to decline, from 2.7 per 1,000 people in 1999 to 2.2 per 1,000 in 2017. This represents a further 19 per cent decline. Going forward, the projected increase in the number of hospital beds by 2029 is expected to keep pace with population growth. The FAO estimates that by 2029, the number of hospital beds will be 2.3 per 1,000 people, up from 2.2 per 1,000 in 2017.

Finally, compared to other OECD countries, Ontario has one of the lowest number of hospital beds as a share of the population and is below the Canadian average.

Since 2011-12, federal health transfers as a share of Ontario base health sector spending have increased from 21.2 per cent to 25.2 per cent in 2019-20, as the annual growth rate of the CHT has significantly outpaced the growth rate of Ontario’s health sector spending.

the FAO projects that growth in federal health transfers will average 3.9 per cent from 2019-20 to 2029-30, similar to the growth rate of Ontario’s health spending. As a result, the federal share of Ontario’s health sector spending is expected to remain stable at approximately 25 per cent to 2029-30.

The Ontario government, through the Council of the Federation, has requested an increase in the CHT so that 35 per cent of all annual provincial-territorial health spending would be supported by federal health transfers.[29] The FAO estimates that, in 2021-22, an additional $7.1 billion in CHT funding would be required to meet the 35 per cent target specifically for Ontario, which would grow to $9.5 billion in 2029-30. In other words, this is the amount of new CHT funding that would be required if the federal government were to support 35 per cent of projected provincial health sector spending.

The Payments made for services and for care provided by physicians and practitioners transfer payment is up 8.4 per cent, or $1.3 billion, in 2021-22. The increase represents the gradual resumption of normal volumes of physician services in 2021-22 following lower utilization in 2020-21 due to the COVID-19 pandemic.

The Ontario Drug Programs transfer payment is up by 7.2 percent, or $367 million, in 2021-22. The increase is due to expected higher program utilization and drug costs.

Independent Health Facilities 58 52 -6 -9.5

Provincial Programs includes four transfer payments that support various initiatives, the largest of which is $707 million for Canadian Blood Services. Emergency Health Services includes three transfer payments that support ambulance services. Stewardship does not include any transfer payments.

Overall, the spending request for Vote 1416 is down $5.8 billion, or 16.0 per cent, from 2020-21 projected spending. The following transfer payments from Vote 1416 have the largest planned spending decreases in 2021-22 compared to 2020-21:

Operation of Hospitals – down $4.8 billion, or 19.1 per cent;[35]

Operation of Hospitals 25,287 20,452 -4,835 -19.1

The financial results of organizations controlled by the Province, including hospitals and certain provincial agencies, are consolidated into the financial results of the Province. Adjustments are made through ‘other spending’ to account for spending by hospitals and agencies from sources other than transfer payments from the Province. Net capital adjustments are also made to reflect amortization expense, largely for hospital infrastructure.

Other spending for hospital operations is up $1.0 billion, or 31.4 per cent, compared to 2020-21 projected spending. This indicates that the Province expects that there will be a significant increase in spending by hospitals from either third-party revenues or from hospital savings.

Figure 3-6: Ontario total hospital beds by type, 1990 to 2029 Year Base Hospital Beds Surge Beds Base Hospital Bed per 1,000 Population 1990 49,300 4.8 1991 47,700 4.6 1992 45,500 4.3 1993 43,100 4.0 1994 40,800 3.8 1995 39,800 3.6 1996 37,700 3.4 1997 34,600 3.1 1998 32,400 2.8 1999 31,500 2.7 2000 32,500 2.8 2001 33,300 2.8 2002 32,700 2.7 2003 31,800 2.6 2004 32,000 2.6 2005 31,900 2.5 2006 31,100 2.5 2007 31,700 2.5 2008 31,500 2.4 2009 31,200 2.4 2010 30,600 2.3 2011 30,800 2.3 2012 31,200 2.3 2013 31,700 2.3 2014 30,900 2.3 2015 31,500 2.3 2016 30,900 2.2 2017 31,500 2.2 2018 34,000 2.4 2019 34,300 2,300 2.4 2020 34,400 4,500 2.3 2021 34,900 3,500 2.3 2022 35,100 2.3 2023 35,400 2.3 2024 35,800 2.3 2025 36,100 2.3 2026 36,500 2.3 2027 36,800 2.3 2028 37,100 2.3 2029 37,300 2.3 Source: Ontario Hospital Association, Ministry of Health and FAO. Return to image

[35] The planned decrease of $4.8 billion in the Operation of Hospitals transfer payment is partially offset by a planned increase of $1.0 billion in other spending for hospital operations.

Overall program expense in 2022–23 is projected to be unchanged from the outlook presented in the 2022 Budget. New commitments announced since the release of the 2022 Budget will be funded through existing contingencies within the fiscal plan.

As a result of faster-than-expected nominal GDP growth and the lower deficit forecast than at the time of the 2022 Budget, the net debt-to-GDP ratio is projected to be 40.4 per cent in 2022–23, 1.0 percentage point lower than the 41.4 per cent forecast in the 2022 Budget.

The next steps in the government’s Plan to Build Ontario will be outlined in the 2022 Ontario Economic Outlook and Fiscal Review, to be released by November 15, 2022.

Revenues in 2022–23 are projected to be $1.2 billion higher than forecast in the 2022 Budget, mainly reflecting higher taxation revenues. The increase in taxation revenues is due to stronger 2022 nominal GDP growth expectations, as a result of higher-than-projected economy-wide inflation in 2022.

Revenues in 2022–23 are projected to be $1.2 billion higher than forecast in the 2022 Budget, mainly reflecting higher taxation revenues. The increase in taxation revenues is due to stronger 2022 nominal GDP growth expectations as a result of higher-than-projected economy-wide inflation in 2022.

The $1.0 billion reserve has been maintained as part of the current fiscal outlook.

Notes: Numbers may not add due to rounding. Current outlook primarily reflects information available as of June 30, 2022.

The forecast for Total Taxation Revenue increased by $1.2 billion compared to the 2022 Budget, due to stronger nominal GDP growth reflecting higher-than-projected economy-wide inflation in 2022. The increase in nominal GDP is expected to be broad-based, impacting wages, consumer spending and corporate profits

As a result, the revenue projections for Personal Income Tax increased by $941 million, for Sales Tax by $597 million and for Corporations Tax by $417 million. These increases are partially offset by a $787 million decrease in Land Transfer Tax, due to slowing activity in the housing market.

Expectations for Ontario’s real GDP growth have also been revised lower. Among recent private-sector forecasts, the average projected real GDP growth for 2022 is 3.6 per cent, slightly lower than the 2022 Budget planning assumption of 3.7 per cent.

The 2022–23 First Quarter Finances planning assumption for real GDP growth in 2022 is 3.5 per cent, 0.1 percentage points lower than the private‑sector average for prudent planning purposes.

Expectations for Ontario’s nominal growth have been revised higher since the 2022 Budget as GDP inflation has risen due to strong economy-wide price increases amid supply chain constraints and strong demand. Among recent private-sector forecasts, the average projected nominal GDP growth for 2022 is 9.1 per cent, above the 2022 Budget planning assumption of 6.7 per cent. The 2022–23 First Quarter Finances planning assumption for nominal GDP growth is 9.0 per cent, 0.1 percentage points lower than the private-sector average for prudent planning purposes.

Over the next four years (2020-21 through 2023-24), the FAO projects average annual revenue growth of 3.7 per cent.

he FAO’s baseline projection also adopts the government’s spending plan,[1] which limits program spending increases to 1.4 per cent per year on average.[2] On this basis, the FAO projects a rapid improvement in Ontario’s fiscal position, with an almost balanced budget in 2021-22 and a large $8.7 billion surplus by 2023-24. This dramatic improvement in the budget balance is driven primarily by the government’s plan to significantly limit program spending.

Importantly, the government’s fiscal plan includes tax cuts and spending programs that have not been publicly disclosed. The FAO’s baseline projection excludes these unannounced measures because they are not reflected in current legislation and have not been formally proposed by the government. However, implementing the unannounced measures would delay the achievement of a balanced budget and result in an additional $13.5 billion in net debt by 2023-24.

The government’s fiscal plan hinges on successfully limiting the growth in program spending in order to deliver new tax cuts while still balancing the budget by 2023-24. If the government achieves its spending plan, program spending would be reduced by $1,070 per person, or by 10 per cent, over the next five years.

However, based on the FAO’s analysis, the demand for public services will exceed the government’s planned program spending by approximately $5 billion by 2021-22, after accounting for the government’s measures to cut costs. There is a significant risk that the fiscal plan will not provide sufficient resources to meet future ongoing demand for key public services.

he International Monetary Fund (IMF) downgraded its global economic growth projection to 3.0 per cent this year, the slowest pace since the 2008 global financial crisis and a considerable downward revision from the IMF’s spring forecast

For advanced economies, growth is expected to slow sharply from 2.3 per cent in 2018 to 1.7 per cent in 2019, with weaker growth in all G7 countries

Under the FAO’s baseline projection,[18] Ontario’s budget would improve rapidly over the outlook, with an almost balanced budget in 2021-22 and a large $8.7 billion surplus by 2023-24.

Significantly, the government’s fiscal plan[19] incorporates provisions for unannounced tax cuts and new spending programs that delay the achievement of a balanced budget and result in higher provincial debt.

However, based on the FAO’s analysis, the demand for public services will exceed the government’s planned program spending by approximately $5 billion by 2021-22, after accounting for the government’s measures to cut costs. There is a significant risk that the fiscal plan will not provide sufficient resources to meet future ongoing demand for key public services.

Over the next four years, the FAO projects total revenue growth will improve, averaging 3.7 per cent per year, but will remain below the average annual gains of 4.6 per cent over the 2013-14 to 2017-18 period. Overall, the FAO’s revenue projection has improved since the spring outlook, reflecting the 2018-19 Public Accounts, which reported $2.9 billion in higher revenues than previously expected.[20]

In the 2019 Fall Economic Statement, the government projected total revenue would reach $165.4 billion by 2021-22, about $2 billion lower than the FAO’s projection. This is largely the result of lower taxation revenue. The lower tax revenue forecast in the government’s projection is mainly due to the inclusion of unannounced tax cuts, starting in 2021-22.[27] While the government has not provided details on design or implementation, the FAO estimates that the tax cuts assumed in the government’s forecast will reduce revenues by about $2.3 billion in 2021-22, growing to about $3.8 billion by 2023-24.

The 2019 Fall Economic Statement raised overall program spending growth in 2019-20 and 2020-21 compared to the 2019 budget.[28] For 2021-22, program spending is planned to increase by 1.2 per cent, unchanged from the 2019 budget.

Beyond 2019-20, the Fall Economic Statement increasingly limits spending growth in the three largest sectors.

For 2019-20, the government increased its planned spending in the Health, Education, and Children’s and Social Services sectors.[31] Despite these higher funding allocations, planned spending in 18 out of 24 ministries is lower in 2019-20 compared to actual spending in 2018-19. Program spending in Colleges and Universities, Energy, Northern Development and Mines, Municipal Affairs and Housing, and Indigenous Affairs is expected to decline by a combined $1.7 billion this fiscal year compared to 2018-19. For additional details, see Appendix Table 4.  

Since the 2019 Ontario Budget, the government has announced further changes to a number of previously announced policies, particularly for social services.[30] In addition, the Fall Economic Statement included higher spending allocations for the Health sector due to greater-than-anticipated demand for health services, and for Education due to higher funding for childcare programs. 

To restrain program spending growth over the medium term, the government is implementing a variety of measures, including:

consolidation of the province’s Local Health Integration Networks (LHINs) and other provincial health agencies into Ontario Health,[32] integration of supply chains, reforming OHIP+ to cover only children and youth without pre-existing drug plans, and restricting base hospital operating funding growth to less than one per cent annually over the outlook;[33]

Over the 2019-20 to 2021-22 period, Ontario’s population is expected to increase by over 750,000 people (or 5.3 per cent)[34] while the share of seniors in Ontario’s total population will also rise, placing additional demands on the health care system. During the same period, consumer prices are projected to increase by a cumulative 6.2 per cent, raising the cost of purchasing goods and services and putting upward pressure on public sector wages.

In contrast, based on the Fall Economic Statement, the government plans to increase program spending to $155.9 billion by 2021-22, or $11.4 billion less than the FAO’s status quo projection.

Over the past 18 months, the Ontario government has announced a broad range of program changes and efficiency targets intended to achieve cost savings that lower program spending.[35] In addition, the government recently passed Bill 124,[36] which limits public sector compensation growth to an average annual increase of 1.0 per cent, providing further cost savings.[37]

In total, the government’s policy changes and wage restraint could amount to $6.6 billion of potential cost savings if successfully implemented. This suggests that the demand for public services will exceed the government’s planned program spending by approximately $4.8 billion by 2021-22, after accounting for the government’s cost-saving measures.[38]

In the absence of $5 billion in higher spending to fund the expected demand for public services, the government could:

announce additional program changes that would reduce costs; identify and achieve further efficiency gains in the delivery of public services; or restrict access or underfund current programs, which could affect the quality of existing public services.

The extent to which the government’s fiscal plan will deliver a sustainable improvement to Ontario’s finances depends on the success of the government’s transformational changes to public services, particularly in the areas of health and education.

Transformational changes to public services that lead to permanent efficiency gains are possible but have generally been difficult to achieve.[40] Furthermore, while the reduction or elimination of government programs is also an option, this has proven challenging to implement and sustain. As a result, governments have often relied on temporary measures to manage and restrain public spending. However, temporary measures can result in a “catch-up” period where additional spending is used to address built-up budgetary pressures.

Avoiding a period of “catch-up” spending beyond the medium-term outlook will depend on how the current government achieves cost reductions, and the extent to which transformational changes to public services permanently improve efficiency.[41]

Based on the FAO’s projections, if the government achieves its plan of significantly restraining program spending, it would create enough fiscal capacity to allow the government to introduce the unannounced tax and spending measures and still achieve a balanced budget by 2023-24. The FAO estimates that implementing the government’s unannounced measures would result in a gradual decline in the deficit over the outlook, and a surplus of $3.2 billion by 2023-24. Implementing the unannounced measures would also result in an additional $13.5 billion in net debt by 2023-24.

[27] These unannounced tax policy changes include reductions in personal income tax and other taxes beginning in 2021-22 and were also incorporated into the 2019 budget’s revenue outlook. See page 15 of the FAO’s 2019 Spring Economic and Budget Outlook for more details.

Launched a Roadmap to Strengthen Home and Community Care to help keep Ontarians safe and healthy in their communities as they age, including an investment of $750 million over three years that supports improved access to care and better consistency and quality of care.

Completed a series of provincial stakeholder engagement sessions as part of a palliative care consultation and announced a new investment of $75 million over three years to improve access to community-based hospice and palliative care.

Increased safety in long-term care homes with continued investments for resident care, specialized investments for behavioural supports, and an ongoing commitment to annual inspections of every long-term care home in the province.

Announced an investment of $222 million over the next three years for the First Nations Health Action Plan

Provided support and stability to the health care workforce, including funding to improve primary care recruitment and retention of nurses and other interdisciplinary team members, as well as personal support worker (PSW) wage increases.

Access: Providing Timely Access to the Right Care

Ensuring that patients who want a primary care provider have one.

Implementing the expanded scope of practice of registered nurses to allow them to prescribe some medications directly to patients.

Connect: Delivering Co-ordinated and Integrated Care in the Community and Closer to Home

Developing a capacity planning framework to help support the provision of care in the most appropriate setting possible across the health care continuum — hospital, long-term care and community — by reducing the rate of Alternative Level of Care, lowering hospital readmission rates, implementing the Home and Community Care Roadmap, improving palliative care in all settings and making capital investments where appropriate.

Responsible fiscal management remains an overarching priority for our government — a priority echoed strongly in our 2016 Budget. Thanks to our disciplined approach to the province’s finances over the past two years, we are on track to balance the budget next year, in 2017–18, which will also lower the province’s debt-to-GDP ratio. Yet this is not the moment to rest on our past accomplishments: it is essential that we work collaboratively across every sector of government to support evidence-based decision-making to ensure programs and services are effective, efficient and sustainable, in order to balance the budget by 2017–18, maintain balance in 2018–19, and position the province for longer-term fiscal sustainability.

Having made significant progress over the past year in implementing our community hubs strategy, I encourage you and your Cabinet colleagues to ensure that the Premier’s Special Advisor on Community Hubs and the Community Hubs Secretariat, at the Ministry of Infrastructure, are given the support they need to continue their vital cross-government work aimed at making better use of public properties, encouraging multi-use spaces and helping communities create financially sustainable hub models.

Improving the safety and quality of life for those living in long-term care homes today and in the future, by considering necessary investments, including staffing, and by advancing the Enhanced Long-Term Care Home Renewal Strategy as quickly as possible and ultimately eliminating all four bed wards in Ontario’s long-term care homes.

Continuing to work toward a balanced budget by 2017-18, without compromising the investments needed to support citizen-focused services and stimulate economic growth.

Working with the President of the Treasury Board to effectively manage the fiscal plan, including developing a strategy to meet fiscal targets and ensure fiscal sustainability moving forward.

Lowering the net debt-to-GDP ratio to its pre-recession level of 27 per cent.

Reducing electricity costs for business by ending the debt retirement charge effective April 1, 2018, nine months earlier than previously estimated.

Supporting the initial board and members of the Investment Management Corporation of Ontario (IMCO) as they work to pool investment assets, lower administrative costs and improve risk-adjusted investment returns.

Continuing to be a national leader in strengthening retirement security while taking the necessary steps to implement the agreement in principle to enhance the Canadian Pension Plan.

Conducting a review of the solvency funding framework for defined benefit pension plans and consulting stakeholders in the development of a new framework.

Facilitating an open and productive relationship with the Financial Accountability Officer, and ensuring all ministers are aware of the need to respond in a consistent and timely manner, and seeking to further the government’s open data strategy.

Work with Ontario municipalities to increasingly target the Ontario Municipal Partnership Fund to rural and northern municipalities that face the greatest fiscal challenges. Going forward, oversee the fair allocation of substantial new Ontario investments in municipal infrastructure to help put municipalities on a financially sustainable footing, while helping the government meet its responsibility to protect key public services such as health, education and infrastructure.

Responsible fiscal management remains an overarching priority for our government — a priority echoed strongly in our 2016 Budget. Thanks to our disciplined approach to the province’s finances over the past two years, we are on track to balance the budget next year, in 2017–18, which will also lower the province’s debt-to-GDP ratio. Yet this is not the moment to rest on our past accomplishments: it is essential that we work collaboratively across every sector of government to support evidence-based decision-making to ensure programs and services are effective, efficient and sustainable, in order to balance the budget by 2017–18, maintain balance in 2018–19, and position the province for longer-term fiscal sustainability.

Responsible fiscal management remains an overarching priority for our government — a priority echoed strongly in our 2016 Budget. Thanks to our disciplined approach to the province’s finances over the past two years, we are on track to balance the budget next year, in 2017–18, which will also lower the province’s debt-to-GDP ratio. Yet this is not the moment to rest on our past accomplishments: it is essential that we work collaboratively across every sector of government to support evidence-based decision-making to ensure programs and services are effective, efficient and sustainable, in order to balance the budget by 2017–18, maintain balance in 2018–19, and position the province for longer-term fiscal sustainability.

Responsible fiscal management remains an overarching priority for our government — a priority echoed strongly in our 2016 Budget. Thanks to our disciplined approach to the province’s finances over the past two years, we are on track to balance the budget next year, in 2017–18, which will also lower the province’s debt-to-GDP ratio. Yet this is not the moment to rest on our past accomplishments: it is essential that we work collaboratively across every sector of government to support evidence-based decision-making to ensure programs and services are effective, efficient and sustainable, in order to balance the budget by 2017–18, maintain balance in 2018–19, and position the province for longer-term fiscal sustainability.

Program spending is projected to increase by 1.7% per year on average from 2014-15 to 2017-18. If the Cap-and-Trade proceeds and new federal transfers are spent on new initiatives, the growth in all other program spending would be just 0.8% per year, well below the 1.4% average annual growth in program spending recorded since 2010.

The revenue projections in the 2016 Budget are based on 4.3% average growth in nominal GDP (the broadest single measure of the tax base) over the outlook, with strong gains in both labour income and corporate surpluses. This pace of nominal GDP growth is significantly above the 3.2% average rate of growth of the past three years.

While the budget assumption of 2.2% real GDP growth over the outlook is prudently below the average private sector forecast, the budget assumes nominal GDP growth slightly above that of private sector economists, reflecting an outlook for higher economy-wide price gains.

The budget forecast also relies on a significant shift in the key drivers of real economic growth for Ontario, with strong gains in exports and business investment expected to offset more moderate growth in household spending. While this shift is possible, given the lower Canadian dollar and the strengthening U.S. economy, it has yet to occur.  In 2015, Ontario’s real exports posted growth of just 0.7%.

The budget’s relatively optimistic forecast for nominal GDP growth forms the foundation for the revenue outlook. The budget also incorporates a number of significant additional revenue assumptions, including new revenue from the Cap-and-Trade program, additional transfers from the federal government, as well as proceeds from the government’s planned asset sales.

The Province expects to receive revenues of $1.9 billion by 2017-18 from the sale of permits under the new Cap-and-Trade program, which are legislatively required to be used to fund Greenhouse Gas reduction initiatives.

The budget also assumes new federal transfers of $0.7 billion in 2016-17 and $1.3 billion in 2017-18. This assumption appears prudent given the federal government’s additional funding commitment of $4 to $5 billion per year from 2016-17 to 2018-19 and Ontario’s population-based share of federal transfers. The details of the federal government commitment will be clarified with the release of the federal budget on March 22. 

Finally, the 2016 Budget recorded $2.7 billion in revenues in 2015-16 from the partial sale of Hydro One, reporting the financial impact across a number of revenue categories. However, the government has not provided complete details on the impact of the sale on the fiscal plan.

Excluding the spending associated with these two new revenues sources, the growth of all other program spending falls to an average of 0.8% per year from 2014-15 to 2017-18, below the 1.4% average annual growth recorded over the past four years. 

according to Statistics Canada data, growth in provincial public sector employment and wages were both higher in 2015, relative to 2014.

As the economy strengthens and inflation rises, wage and other cost drivers will place increasing pressure on the government’s aggressive plan to restrain program spending.

According to the budget, net debt is projected to increase to $296.1 billion in 2015-16, up from $284.6 billion in 2014-15. As a result, the Province’s net debt-to-GDP is forecast to peak at 39.6% in 2015-16 before edging down to 38.9% of GDP in 2017-18. In the budget, the Province reiterated its commitment to reduce net debt-to-GDP to 27%, but did not provide a timeline.

The Province’s plan continues to rely on relatively optimistic assumptions for revenue growth combined with aggressive plans to limit the growth in program spending

Overall, the government is projecting a deficit of $32.4 billion in 2021–22, an improvement of nearly $700 million from the outlook presented in the 2021 Budget.

As a result, the government is taking the prudent step of setting aside $2.2 billion of this revenue for the Time-Limited COVID-19 Fund.

Program expenses are projected to be $2.2 billion higher than forecast in the 2021 Budget, primarily due to funding allocated towards the Time-Limited COVID-19 Fund, which will ensure the Province continues to maintain the flexibility necessary given the ongoing uncertainty related to the pandemic and the future pace of economic recovery.

Program expense in 2021–22 is projected to be $175.2 billion, $2.2 billion higher than forecast in the 2021 Budget, largely due to new funding allocated to time-limited resources. Other new initiatives in response to the impacts of the pandemic have been accommodated through the existing fiscal framework.

Given the ongoing risks — including the rise of the Delta variant and continued uncertainty regarding the evolution of the public health and economic situation, Ontario will continue to employ this flexible approach by allocating $2.2 billion in new funding towards the Time-Limited COVID-19 Fund.

As a result of faster than expected economic growth and the lower deficit forecast than at the time of the 2021 Budget, the net debt-to-GDP ratio is projected to be 48.1 per cent in 2021–22, 0.7 percentage points lower than the 48.8 per cent forecast in the 2021 Budget.

he forecast for Total Taxation Revenue has increased by $950 million compared to the 2021 Budget, due to stronger economic growth projected in 2021

Projected Government of Canada Transfers increased by $1.9 billion since the 2021 Budget, mainly due to additional one-time funding through the Federal Budget Implementation Act (Bill C-30) and amendments to the Federal-Provincial Fiscal Arrangements Act to support COVID-19 recovery.

$235 million in additional support made available for property tax and energy cost relief to eligible businesses that were required to close or significantly restrict services due to provincial public health measures;

In addition, the government has allocated $2.2 billion to the Time-Limited COVID-19 Fund, which will ensure the Province continues to maintain the flexibility necessary given the ongoing uncertainty related to the pandemic and the future pace of economic recovery.

Private sector forecasters, on average, project Ontario real GDP to rise by 5.4 per cent in 2021

Accordingly, the 2021–22 First Quarter Finances planning assumption for real GDP growth has been increased to 5.0 per cent in 2021, while maintaining the prudence applied in the 2021 Budget. Chart 2: Ontario 2

Population growth, population aging and price inflation are three core drivers of health care costs.*

From 2011-12 to 2016-17 health sector spending growth was consistently slower than the growth in its core cost drivers. Even with the additional health care funding in the 2017 budget, health sector spending is only projected to outpace the growth of health care cost drivers in a single year – 2018-19.

* There are other factors that influence health care costs, including: the introduction of new health care services (or the removal of old ones), the adoption of new technologies and medications, efficiency measures, rising incomes, government policies, and the underlying health of the population.

Health spending is growing slower than its core cost drivers every year except 2018-19

From 2011-12 to 2015-16, annual health sector expense grew by only 2.4 per cent on average.

In 2017-18, the Canada Health Transfer funding formula was changed, reducing the growth of federal health transfers going forward. Even so, the revenue from federal health transfers will continue to grow faster than Ontario’s planned health sector spending, with the result that federal transfers will continue to fund an increasing share of the Province’s health sector spending from 2017-18 to 2019-20.

However, in the 2017 Ontario Budget, the Province announced an additional $6.9 billion in health sector spending from 2017-18 to 2019-20. This raised the planned annual growth rate of Ontario’s health sector from 1.8 per cent to 3.2 per cent during the 2015-16 to 2019-20 period.

For analysis of health care cost drivers in the medium-term, the FAO focuses on the core cost drivers of population growth, population aging, and price inflation, but excludes the impact of enrichment, which is more difficult to fully quantify

Of the $5.7 billion in new health sector spending, 97 per cent was allocated to four program areas: hospitals, OHIP, Ontario Drug Programs and other programs. Some of the new health sector spending was allocated to existing programs, and some was used to fund new initiatives. In particular:

The vast majority of the $1.9 billion increase to hospitals is to fund existing programs.

The 2017 budget raised planned expense growth in the largest health program areas significantly

For hospitals, the 2017 budget raised planned average annual expense growth from 0.9 per cent to 2.7 per cent from 2015-16 to 2019-20.[7]

Planned expense growth for long-term care homes was increased from 2.3 per cent to 2.6 per cent.

Planned expense growth for community programs was increased from 4.7 per cent to 5.1 per cent.

The FAO expects that consumer price inflation will average 1.9 per cent from 2017 to 2019. Since health care delivery is more labour intensive than other sectors of the economy, health care prices typically rise at a faster pace than overall consumer prices.[11]

Health Care Enrichment: Enrichment is the change in health care spending not accounted for by population growth, aging or inflation. Enrichment includes factors such as the introduction of new health care services (or the removal of old ones), the adoption of new technologies and medications, efficiency measures, rising incomes, government policies, and the underlying health of the population, among other things.[

Since 2012, the Province has restrained the growth of health sector spending primarily by: imposing a four-year freeze in base operating funding to hospitals, increasing hospital efficiency, and restraining wage growth in the health sector. Going forward, it is not clear to what extent the Province can continue to rely on temporary measures, such as wage restraint, to limit health sector spending growth to below the growth in its core cost drivers. Unless the Province can continue to find significant efficiencies, there is a risk that additional spending will be required to avoid reductions in health care access or quality in the coming years.

Over the planning period (2017-18 to 2019-20), the FAO projects that the core cost drivers of health spending will grow by an annual average of 4.3 per cent, while the Province plans to grow total health spending by an annual average of 3.7 per cent over the same period.

While this 3.7 per cent growth in total health spending is only somewhat below the growth of core health care cost drivers over the planning period, total health sector expense includes spending on new programs, such as OHIP+, and $1.2 billion for a pension accounting adjustment, which will not directly relieve budget pressure in existing health services.[14]

To focus on existing health care services, the FAO removed funding for new initiatives (i.e. OHIP+) and the $1.2 billion pension accounting adjustment from the 2017 budget’s planned health sector spending. This reveals that the Province plans to grow spending for existing health care services by 2.9 per cent, which is well below the expected 4.3 per cent average rate of growth in core health care cost drivers over the planning period.

Excluding new initiatives and the $1.2 billion pension accounting adjustment, the 2017 budget plan projects slower growth in most program areas than the projected growth of core health care cost drivers

Only Ontario Drug Programs and community programs are forecast to grow at a faster rate than overall core health care cost drivers from 2017-18 to 2019-20. Planned funding growth rates for hospitals, OHIP, long-term care homes and other programs are all well below the 4.3 per cent growth rate of core cost drivers.

In other words, funding increases for existing services in these program areas will not keep pace with the health care cost pressures associated with population growth, aging and price inflation.

To slow health care spending growth to below its core cost drivers, there are a number of strategies jurisdictions can use including: improving the efficiency of health care service delivery, temporarily cutting planned spending (such as wage restraint or postponing maintenance), and reducing/rationing health care, eliminating select services, or allowing the quality of existing services to deteriorate. The following identifies some important recent developments in Ontario’s health sector that contributed to slowing expense growth since 2012-13, and analyzes how these measures could impact the health budget in the coming years.

From 2012-13 to 2015-16, hospital funding restraint and funding reform resulted in the cost of a standard hospital stay in Ontario decreasing by 1.8 per cent while the national average increased by 5.4 per cent.[18] According to the Ontario Hospital Association, these cost savings were achieved through efficiency gains, such as reducing the length of time patients stay in hospitals, as well as through temporary measures such as deferring hospital maintenance and equipment purchases.[19] Restraining the wage growth of hospital workers also contributed to the cost savings.

Going forward, from 2017-18 to 2019-20, the Province plans to continue growing hospital spending more slowly than the growth of core health care cost drivers. This will require additional permanent efficiencies within the hospitals program area to avoid reductions in health care quality or access.  

Since wages comprise the majority of health care costs, for OHIP and hospitals in particular, wage restraint has been an important aspect of slowing health sector expense. From 2004 to 2011, hourly wages in Ontario’s broader health sector grew at a faster pace than the average for all industries. However, since 2012, hourly wages in Ontario’s broader health sector have grown more slowly than the rest of the economy, and have not kept pace with price inflation

As of March 2018, the Ontario Medical Association is entering binding arbitration with the Province, and the OMA has noted that a key priority is redressing the 2015 fee cuts. To the extent that physician fees are raised in the next agreement, it could put upward pressure on the OHIP program area’s budget in the coming years.

With so many indicators of health care “quality”, it is difficult to identify key trends, and to link these trends to recent health sector expense restraint. The FAO analyzed wait time data for major procedures since 2011 and surgeries since 2013, and found that 46% of wait times showed improvement, 40% showed deterioration and 14% remained constant.[21] The FAO also analyzed emergency wait time data and found that overall, total time spent in the emergency room has decreased since 2011, but wait times have been increasing since 2015.[22] Overall, the wait time data shows a mix of system improvements and deteriorations, however, there are also recent indications that hospitals are becoming overcrowded.[23]

Since 2012, a freeze in base operating funding to hospitals and wage restraint have been significant contributors in slowing health sector expense growth. Even with the additional health sector spending in the 2017 budget, hospital and OHIP program area spending is set to grow more slowly than their core cost drivers. It is not clear to what extent the Province can continue to rely on temporary measures (e.g. wage restraint) to achieve budget targets. Unless the Province can find significant efficiencies within the OHIP and hospital program areas, there is a fiscal risk that more spending will be required to avoid reductions in health care access or quality. In the years beyond 2019-20, budgetary issues in Ontario’s health sector will only become more acute, as Ontario’s growing and aging population will put additional upward pressure on health care costs over the long-term.[25]

Beginning in 2017-18, the funding formula for the CHT was changed to reflect the growth in Canada’s nominal GDP.[29] Ontario will also receive $4.2 billion in additional federal transfers over the next ten years for home care and mental health initiatives.[30] As a result, the growth rate of federal health transfers[31] to Ontario will be reduced from 6.0 per cent to 4.5 per cent from 2017-18 to 2019-20.[32]

Beyond 2019-20, the FAO projects that federal health transfers will grow by 3.8 per cent annually over the long-term[33] under the current funding formula.[34] The FAO also projects that Ontario’s health care cost drivers will grow by an annual average of 4.8 per cent over the long-term.[35] Therefore, under the new CHT funding formula, the growth of federal health transfers will not keep pace with the anticipated upward pressure of health care cost drivers on health sector expense.

Finance Minister Charles Sousa is expected to update the government’s budget projections in a fall economic statement later this month. He hinted on Wednesday his new numbers will not look as bleak as Mr. LeClair suggests.

“We’ve overachieved our estimates year over year, and we’re doing so because we control our spending,” Mr. Sousa told reporters following Question Period. “Ontario is leading Canada in growth.”

While Mr. Sousa provided few specifics, he suggested the government may have done a better job of restraining expenses than he projected in the budget. It is also possible that growth in tax revenue – which has lagged economic growth for the past four years – will finally catch up, which could provide more money to the treasury than previously anticipated.

Last spring’s budget projected deficits of $8.5-billion for this year and $4.8-billion next year before returning to balance the following year. But Mr. LeClair calculated that if government growth remains at its rate of 1.4 per cent and revenue grows by 3.3 per cent, the province will still have a $3.5-billion deficit in two years instead of a balanced budget.

“If the government spends less than they were planning this year, if nominal GDP growth comes in at what the targets think the forecast is, if revenue grows in line with nominal GDP and if spending is in line with the 1.4 per cent in each of the next two years – then a balanced budget would be the outcome,” he said.

+ The budget plan also assumes program spending growth averaging 0.5 per cent annually over the next three years, below the 1.4 per cent pace of program spending growth over the past four years. The planned growth in spending is also well below the expected growth in population and price inflation — key drivers of government expenditures.

However, to balance the budget in 2017-18, the pace of deficit reduction must accelerate sharply to over $4 billion per year in 2016-17 and 2017-18. Given the government’s ambitious plans to limit program spending growth combined with relatively robust assumptions for revenue growth, the FAO developed alternative scenarios to assess the risks of the government not achieving its fiscal targets.

These alternative scenarios demonstrate that the risks to the government’s current fiscal plan are significant and biased downwards. In particular, if program spending continues to rise at its recent pace and if revenue growth is somewhat more moderate than projected in the budget (but still faster than the past four years), a deficit of approximately $3.5 billion in 2017-18 would be expected, in the absence of other policy actions.

During the 2030s and 2040s, the FAO projects a steady deterioration in Ontario’s budget balance, reflecting faster growth in program spending and interest payments compared to revenues. Ontario is not projected to balance its budget over the long term. By 2050-51, the deficit widens to -1.6 per cent of GDP, similar to the rate recorded during the pandemic.

Over the next 30 years, demographic changes will contribute to significant fiscal challenges for Ontario. Slower labour force growth will result in more moderate economic growth, leading to slower revenue gains. The aging baby boom cohort will continue to put pressure on Ontario’s health care system. Given these trends, persistent and rising budget deficits are projected to cause a steady increase in Ontario’s debt burden over the long term,  prompting concerns about the province’s fiscal sustainability.

Overall, the FAO projects that Ontario’s finances will remain largely manageable over the long term although fiscal flexibility will be constrained. The FAO projects that all four fiscal indicators will improve in the 2020s. However, in the 2030s and beyond, growth in program spending and interest payments will outpace revenue gains, increasing pressure on the province’s finances. By 2050-51, growing deficits will raise the debt burden to near its high point during the pandemic while interest expense as a share of revenue will climb above its historical average.

Several factors exist that could undermine Ontario’s fiscal outlook over the long term.

The FAO projects that Ontario’s budget will remain in deficit over the projection period.

The budget deficit as a share of GDP is projected to remain relatively stable until 2030, after which it deteriorates to -1.6 per cent of GDP by 2050-51, similar to the pandemic period. The deterioration in budget balance reflects faster growth in program spending and interest payments[6] compared to revenue gains.

Historically, Ontario’s net debt-to-GDP ratio has grown significantly after each major economic downturn and generally remained stable at those elevated rates in subsequent years. The FAO projects that Ontario’s net debt as a share of GDP will decline modestly until the mid-2030s, after which the trend reverses as smaller primary surpluses and faster growth in interest payments[8] lead to increased borrowing. By 2050-51, the net debt-to-GDP ratio reaches 41.0 per cent, close to its peak observed in 2020-21.

Risks to Ontario’s Fiscal Outlook

In the FAO’s projection, the government is not expected to achieve a balanced budget.

The COVID-19 pandemic resulted in a temporary increase in government spending over the short term, rising from 18 per cent of nominal GDP in 2019-20 to a high of 21 per cent in 2020-21. As the temporary COVID-19 spending fades, the FAO projects that total spending as a share of GDP will decline to 17 per cent by 2023-24.[13]

Ontario faces capital expenditure pressures, including an infrastructure backlog of $16.8 billion in 2020 that is expected to reach $22.7 billion by 2029-30, and the impact of climate change which will raise the cost of maintaining Ontario’s infrastructure as climate hazards become more extreme.[11] Adapting public infrastructure to withstand climate hazards will also require significant investment. Addressing these infrastructure funding gaps would require additional capital spending and would increase the province’s borrowing and debt levels in the FAO’s current projection.[12]

The FAO projects a gradual increase in interest rates over the projection, consistent with most economic forecasters. However, if interest rates rise faster and higher than expected, this will put considerable pressure on Ontario’s finances – see Box 1 below.

In the long term, the FAO projects average annual real GDP growth of 2.0 per cent, slower than the historical average of 2.3 per cent.

Over the remainder of the projection, total spending is expected to rise steadily as a share of GDP to around 19 per cent by 2050-51. This increase is driven primarily by the ongoing rise in health care expenses, which are projected to grow faster than the economy. In contrast, spending on education and all other programs[14] will decline as a share of GDP over the projection, consistent with long-term historical trends. By the 2040s, higher debt interest payments will also contribute to the rising GDP share of total government expenditures.

The demand for public services generally increases as the population grows and ages. Public sector wages and the cost of providing public goods and services will also increase as prices rise.

Based on the FAO’s outlook for increased inflation, faster growth in the school-age population, and continued impacts from population aging, program spending is expected to grow modestly faster over the projection, averaging 4.0 per cent during the 2020-21 to 2050-51 period.

Health sector spending is projected to grow at an average annual rate of 4.9 per cent per year, in line with historical trends. While health inflation is projected to be somewhat higher than the historical experience, especially in the next two years, Ontario’s population growth is projected to ease over the projection. In addition, the impact of aging on Ontario’s health care expense is projected to be broadly in line with the historical experience

Education sector spending is projected to grow at an average annual rate of 3.3 per cent per year, somewhat faster than historical trends.

‘All other’ programs, which includes all program spending not accounted for in the health and education sectors, is projected to grow at an average annual rate of 2.9 per cent per year, somewhat slower than historical trends.

Over the long term, the FAO projects total revenues will remain stable at 17 per cent of GDP,[24] as revenues grow at an average annual rate of 3.9 per cent during the 2021-22 to 2050-51 period, weaker than historical experience and reflecting slower growth in federal transfers and other revenue.

Total taxation revenue is expected to grow at an average annual rate of 4.0 per cent, consistent with the FAO’s economic projection, which expects very strong growth over the next several years as the Ontario economy rebounds from the pandemic

The pace of tax revenue growth slows in the post-pandemic period as economic growth moderates.