How Ontario's economy could help Doug Ford

Premier Doug Ford's government is rolling in higher-than-expected revenues, potentially giving him wiggle room to ease off on the austerity and cuts that have been the hallmark of his first 16 months in office.  

Ford's new Finance Minister Rod Phillips has an opportunity to signal such a shift on Wednesday, when he will deliver fresh fiscal numbers for 2019-20, updating the budget delivered in April by his predecessor, Vic Fedeli. 

Phillips' fall economic statement will re-do significant parts of the math from that spring budget, which projected a $10.3 billion deficit. The revision is required in large part because Ford's government was drastically overstating the deficit for much of its first year in power.

• August 2018: Fedeli and Ford claimed the 2018-19 shortfall they inherited from the Liberals was $15 billion.
• November 2018: Fedeli tweaked the deficit to $14.5 billion.
• April 2019: A few days after the fiscal year ended, Fedeli pegged the deficit at $11.7 billion.
• September 2019: When the province issued the final public accounts for 2018-19, the true deficit was shown to be $7.4 billion.

Plenty has been written suggesting the government inflated the deficit number to lay the groundwork for an agenda of spending cuts.

Setting that aside, and looking at the real fiscal picture, here's what's politically crucial for Ford's government right now: getting back to balance from a $7.4 billion deficit is a heck of a lot easier than from the $15 billion deficit. 

It means that unless the economy tanks, the PCs could find a way to keep their promise of eliminating the deficit without deep spending cuts and the public wrath that ensues.  

In an interview, Phillips offered no indication that Wednesday's statement will signal a major course change. 

"This isn't so much about grand gestures as it is about strong, consistent process and progress," Phillips said. He said the update will show Ontarians "that we have a plan to get where we're going and that that plan is on track."

Phillips said the current year deficit is less than the $10.3 billion projected by Fedeli, but would not reveal the updated shortfall number. Despite the lower-than-previously-claimed deficits, he said he is not speeding up the timetable to get back to balance, scheduled for 2023-24.  

The one hint Phillips gave during the interview that he might ratchet back the austerity a little: he said the government's budgetary path includes "an approach that reflects changing circumstances, what we're hearing from Ontarians."  

What Ford and his team have been hearing from many Ontarians is discontent with some of the government's cuts to services and spending. Here is where the political opportunity lies for Ford: the province is in better fiscal shape than the PCs had potrayed.

This is in no small part because government revenues grew significantly last year, much faster than Fedeli's low-balled predictions. One reason for his off-the-mark forecasts was his reliance on figures that Ford's independent financial commission of inquiry apparently plucked from the air: their source was "the commission's assessment."

The commission projected that Ontario's 2018 minimum wage hike and U.S. corporate tax cuts would drag government revenues down by $900 million. What actually happened:    

• Personal income tax revenue grew by $2.5 billion in 2018-19 from the previous fiscal year, reflecting low unemployment.
• Sales tax revenue grew by $1.7 billion, reflecting healthy consumer spending.
• Corporate tax revenue was up $1 billion, reflecting a 9.6 per cent increase in corporate profits.  

It means Ford's government has some fiscal breathing room to lighten up on the spending cuts. (The government has tried to spin its budget as boosting spending on health and education, but the reality is when population growth and inflation are factored in, the per-person spending in both these areas is being cut.)  

Of course, Ford's government could just as easily choose to take the fiscal breathing room as an opportunity for tax cuts, justified by economic uncertainty.

There is, of course, no guarantee that Ontario's economy will keep ticking along. History would suggest that after a decade of steady growth, a recession has to happen sometime soon. The fraught political situation south of the border leaves the new USMCA trade agreement — crucial to Ontario's export-oriented businesses — hanging in the balance. 

Economists who keep an eye on Ontario are neither predicting nor encouraging the government to shift gears significantly this week. 

"They might have a bit more room to manoeuvre, but I would advise them to stay the course at this stage," said Robert Hogue, senior economist with RBC. "I would think the government should continue on the path that it started." 

"Given what they've done in the past, I do expect them to continue to show restraint in terms of government spending," said Edgard Navarette, Ontario regional economist for Central 1 Credit Union. 

Although Navarette thinks the government could offer some targeted tax breaks to help goods-producing businesses that face bigger economic challenges right now, he says any steps the province takes must be measured and prudent.