Published in the Financial Post on March 28, 2012
By Colin Busby and Alexandre Laurin
Ontario’s controversial deficit-cutting budget, tabled Tuesday, will be passed around like a political hot potato by opposition parties at Queen’s Park. Should it get enough votes to pass parliament, it would sprinkle cost-cutting measures across provincial programs, freeze planned reductions in corporate income taxes, and reduce the likelihood of higher taxpayer contributions to public-sector pension plans, among many other initiatives.
The 2012 budget was highly anticipated by a public eager to see how the province would respond to the Drummond commission report to reform Ontario’s public services. And the province’s credit rating is under watch by two major agencies.
The ability to wrestle the province’s deficit to zero by 2017-18, and ease creditors’ fears over its finances, hinges critically on the province’s ability to highlight and curb its fast-growing debt liabilities. On this score, the budget takes some notable steps forward by showing the costs of Ontario’s major public-sector pensions. But it could have gone even further.
The revenue figures in the budget are sensible. Revenues are set to grow by 3.5% annually, on average, through 2017-18, similar to the revenue growth projections in the Drummond report.
Spending plans should also help build confidence that the deficits are being taken seriously. Over the deficit-elimination period, program expenditures are planned to grow by 0.9% annually, on average — marginally higher than, but broadly in line with, the Drummond report’s recommendations.
The 2012 budget spares health and education from the most severe cutbacks: Spending on health is expected to rise by 2.1%, on average, in the next three years; and education is expected to grow by an average of 1.7% annually. These increases, however, will be felt like cutbacks for government sectors used to see their budgets growing at average annual rates some 5% higher over the last 10 years. Spending on many other programs, however, will have to shrink.
Ontario’s net debt is now forecast to peak at 41.6% of GDP by 2014-15, one percentage point above the last budget’s peak. But the fiscal risks facing Ontario are bigger than reported debt figures suggest.
The Drummond report contained a key observation that would improve the province’s fortune with credit raters: increased transparency and better reporting of public-sector pension plans’ obligations and expenses. By looking at Ontario’s public accounts, it is difficult to locate and appreciate the real cost of public servants’ pensions for taxpayers. Taxpayer contributions to these plans have also been opaque.
As a first, the 2012 budget shows the rapidly growing historical and projected annual pension expenses for the largest public-sector pension schemes. This opens a window into the true costs of these defined-benefit plans. The cost of these pension arrangements is mounting at an alarming rate — the annual cost of these plans will nearly triple from 2008-09 to 2014-15.
The Drummond commission recommended that Ontario go even further: It encouraged the budget to show sensitivity projections around future rate of return assumptions, in case investment revenues fall short of expectations. The point is that taxpayers’ exposure to the huge risks of having to come up with a large pension funding bailout does not appear on the government’s balance sheet.
The 2012 budget, however, proposes a consultation process that should help curb taxpayer exposure to these risks. In case of a funding deficit, future pension benefits would first be reduced — to a reasonable limit — before government contribution hikes would be considered. In effect, this would cap taxpayers’ contributions to their existing levels, which in their current range of 11% to 13% of employees’ pay, have already risen considerably in recent years, and are yet scheduled to increase even more.
Other taxpayer liability risks do not appear in the 2012 budget’s balance sheet. The Pension Benefit Guarantee Fund, which assists members of failed private pension plans when there are insufficient funds to pay benefits, is a large risk for the province if investment returns remain lower than expected.
It also remains unclear if the province would take on additional financial responsibilities if Ontario’s municipal pension plans saw growing funding deficits — for instance, OMERS is currently at $7.3-billion. The same is true for Ontario’s Workplace Safety and Insurance Board, which collects premiums for workplace injury benefits, and currently accounts for an unfunded liability of $12.3-billion that is surely higher than estimated.
Should it get the majority support of parliament, the 2012 budget would take some important steps to curb Ontario’s deficit. Taxes would stay at their current levels, providing an environment for growth; revenue assumptions are realistic; and expenditure reductions firm.
More clarity on Ontario’s exposure to potential liability risks — like pensions — would improve the government’s stance in the eyes of credit-rating agencies. Though the scale of risks for Ontario is nowhere near those in Greece, creditors are increasingly on the watch for government liabilities often larger than reported. In the end, you can’t manage what you don’t measure.
Financial Post
Colin Busby is a senior policy analyst and Alexandre Laurin is the associate director of research at the C.D. Howe Institute.
