Ministry of Finance

Public Accounts of Ontario

2006-2007

Annual Report and Consolidated Financial Statements

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To The Honourable
James K. Bartleman
Lieutenant Governor of Ontario

May It Please Your Honour:

The undersigned has the honour to present the Public Accounts of the Province of Ontario for the fiscal year ended March 31, 2007, in accordance with the requirements of the Ministry of Treasury and Economics Act.

Respectfully submitted,

The Honourable Greg Sorbara
Minister of Finance
Toronto, August 2007

Table of Contents

Foreword
Introduction
Guide to the Public Accounts
Annual Report
Supporting Volumes
Statement of Responsibility

FINANCIAL STATEMENT DISCUSSION AND ANALYSIS

Highlights
Analysis of 2006–07 Results
2006–07 Revenues
2006–07 Expenses
2006–07 Infrastructure Investments and Borrowing Program
Government Management of Finances
Prudence in the 2006–07 Plan
Pre-Election Report
In-Year Financial Management
Interim Results
Impact on Future Planning Periods
Ten-Year Overview of Financial Results
Revenues: 10-Year Overview
Expenses: 10-Year Overview
Investing in Ontario's Infrastructure and Reducing Provincial Debt
The Value of a Responsible Approach

CONSOLIDATED FINANCIAL STATEMENTS

Auditor's Report
Consolidated Statement of Operations
Consolidated Statement of Financial Position
Consolidated Statement of Change in Net Debt
Consolidated Statement of Cash Flow
Notes to the Consolidated Financial Statements
Schedules to the Consolidated Financial Statements
Sources of Additional Information

FOREWORD

I am pleased to present the 2006–2007 Ontario Public Accounts. These accounts confirm a $2.3 billion surplus for 2006–07, the second consecutive balanced budget.

When the government took office in October 2003, Ontario was facing deficits on many fronts. Our education and health care systems were struggling. Our infrastructure investments were not keeping pace. Ontario's most vulnerable lacked a fair chance to succeed.

At the same time, Ontario faced a $5.5 billion fiscal deficit, rooted in a mismatch of revenues and expenditures between 2000–01 and 2003–04. During that period, provincial program spending increased by 21 per cent, while taxation revenue actually declined by 0.7 per cent. This imbalance created the conditions for a structural deficit.

Our mandate was clear: restore Ontario's fiscal health; address the deficits in education and skills, health care and infrastructure; expand opportunity for all Ontarians; and grow a more vibrant economy.

Our first Budget included measures to address Ontario's structural deficit, while investing in our key priorities of health care and education. The 2005 Budget launched the most significant investment in higher education in a generation. The 2006 Budget invested $1.2 billion in public transit, roads and bridges through Move Ontario.

Throughout this period, we have steadily reduced Ontario's deficit through a more disciplined approach that included a prudent fiscal planning process, measures to control spending in non-priority areas, and key investments to strengthen the Ontario economy. The 2005–2006 Public Accounts showed a balanced budget, although the structural deficit was still not fully addressed and storm clouds loomed on Ontario's economic horizon.

Rising oil prices, the high Canadian dollar and an economic slowdown in the United States resulted in a period of more modest economic growth in Ontario in the third quarter of 2006. To help mitigate the impact, we introduced a number of targeted measures in the fall of 2006 to help job-threatened or laid-off workers, fast-track infrastructure projects, encourage interprovincial trade and boost tourism.

By the fourth quarter of 2006, private-sector forecasts anticipated Ontario real gross domestic product (GDP) growth would strengthen over the next three years. The Ontario Economic Accounts for the first quarter of 2007 confirm that Ontario has returned to more healthy levels of growth, with real GDP up 0.7 per cent.

The 2007 Budget continued to invest in education, health care and infrastructure, while launching initiatives to expand opportunities for children and families and to protect the environment. It also projected another balanced budget, with indications that we were on track to post five consecutive surpluses.

Over the course of its mandate, the government has taken a number of steps to enhance transparency and accountability. The Fiscal Transparency and Accountability Act (FTAA), passed by the Ontario legislature in 2004, requires the government to publish a report on Ontario's finances in advance of a general election and to have it reviewed by the Auditor General. The Province's first Pre-Election Report on Ontario's Finances was published on April 23, 2007 and, on June 18, 2007, the Auditor General published his review. Among other things, his review confirms that the government's expense and revenue estimates are reasonable and that the assumptions, on which the projections are based, are consistent with the plans of the government.

This Annual Report, which forms part of the Public Accounts of Ontario, confirms a balanced budget for 2006–07. In fact, we have exceeded our fiscal target by posting a surplus of $2.3 billion. The results in Ontario are similar to those in most other Canadian jurisdictions, including Saskatchewan, Nova Scotia, Alberta and British Columbia, each of which achieved surpluses in 2006–07 that went well beyond budgetary plan. While the federal government has yet to release its 2006–07 public accounts, indications are that those accounts will show surpluses beyond budgetary plan.

Ontario's results demonstrate that our economy is growing and that our approach to financial management, based as it is on discipline and prudence, has been successful. The “wisdom of the practice of building a healthy dose of prudence into the budget revenue projections” was noted in the Auditor General's review of our Pre-Election Report.

This Annual Report represents, in exhaustive detail, the results of one year in this government's mandate. It itemizes, with precision, the steps we have taken to:

• make our schools better places to learn
• strengthen the reach of our colleges and universities
• reduce health wait times and build new health centres
• address the harsh realities of poverty
• build and repair infrastructure around the province
• expand opportunity in Ontario's workplaces
• create a greener and cleaner province

…and much more.

Our plan is working. Ontario is growing again and has entered a new era of balanced budgets and sustainable surpluses. This strength provides an opportunity for us to become an even stronger province in the years ahead.

Introduction

This Annual Report, which forms part of the Public Accounts of the Province of Ontario, outlines Ontario's financial position and the results of operations for the fiscal year ended March 31, 2007. This report is one of the major financial accountability documents of the Province, wrapping up the financial results of the past year. It represents the final outcome of the Budget for 2006–07 that was released in March 2006, and explains actual financial results for the year against those planned.

The Province has taken a number of steps to improve its financial reporting to enhance transparency and accountability. Part of that effort has been to release the Budget and this Annual Report earlier and to improve their presentation. Further underlining a commitment to providing timely and useful financial information, this year the Province released Ontario's first Pre-Election Report on Ontario's Finances, in line with the requirements of the Fiscal Transparency and Accountability Act, 2004. The first document of its kind in Canada, the Pre-Election Report was independently reviewed by the Province's Auditor General, who noted that “the report enhances the accountability and transparency of the government's fiscal-planning process.”

The Financial Statement Discussion and Analysis provided in this Annual Report builds on the commitment to openness and transparency in financial information. It has been reorganized to make it easier to understand, and to highlight the financial management principles underlying improvements in the Province's financial health over the past several years.

Producing the Public Accounts of Ontario requires the teamwork and cooperation of a large number of staff in ministries, agencies and organizations in the broader public sector. In addition, the Office of the Auditor General plays a critical role in reviewing and reporting on the Province's financial statements. I would like to thank everyone who was involved in preparing the 2006–07 Public Accounts for their very important contributions.

Comments on the Public Accounts are welcome. Please share your thoughts by e-mail at annualreport@ontario.ca, or by writing to the Office of the Provincial Controller, Re: Annual Report, Ontario Ministry of Finance, First Floor, Frost Building South, 7 Queen's Park Crescent, Toronto ON M7A 1Y7.

Guide to the Public Accounts

The Public Accounts of the Province of Ontario comprise this Annual Report and three supporting volumes.

Annual Report

The Annual Report includes the Consolidated Financial Statements of the Province of Ontario and a Financial Statement Discussion and Analysis that explains the results in more detail.

The Consolidated Financial Statements are made up of several documents and schedules:

• The Auditor General's Report on the Consolidated Financial Statements expresses the opinion of the Auditor General that the statements fairly report the activities of the government in accordance with Canadian generally accepted accounting principles.
• The Consolidated Statement of Operations reports the annual deficit/surplus from operations in the period. It shows government revenues, the cost of providing services and other expenses, and the difference between them.
• The Consolidated Statement of Financial Position shows the financial resources of the Province against its obligations. The resulting figure is called net debt. The Province's accumulated deficit is its net debt less the value of its tangible capital assets and the net assets of hospitals, school boards and colleges.
• The Consolidated Statement of Change in Net Debt shows the combined impact on net debt of the Province's annual deficit/surplus and its investments during the year in tangible capital assets and the net assets of hospitals, school boards and colleges.
• The Consolidated Statement of Cash Flow shows the sources and uses of cash over the period. Government's operating activities, including the annual surplus or deficit, and changes in its financial investments, may use or provide cash over the fiscal year. Increases in debt are a source of cash, while investments in tangible capital assets and the net assets of hospitals, school boards and colleges are uses of cash.
• Notes and schedules provide further information and detail on the items in the various statements and form an integral part of the Consolidated Financial Statements. The notes also include a summary of the significant accounting policies that guide the financial statement reporting.

Supporting Volumes

• Volume 1 contains ministry statements and detailed schedules of debt and other items. The ministry statements reflect the financial activities of the government's ministries on the accrual basis of accounting, providing a comparison of appropriations with actual spending. Ministry expenses include all expenses that are subject to appropriation approved by the Legislative Assembly, but exclude adjustments arising from consolidation of government organizations whose expenses are not appropriated.
• Volume 2 contains the financial statements of significant provincial corporations, boards and commissions that are part of the government's reporting entity, and other miscellaneous financial statements.
• Volume 3 contains detailed schedules of ministry payments.

Statement of Responsibility

The Consolidated Financial Statements are prepared by the government of Ontario in compliance with legislation, and in accordance with accounting principles for governments recommended by the Public Sector Accounting Board (PSAB) of the Canadian Institute of Chartered Accountants (CICA) and, where applicable, the recommendations of the Accounting Standards Board (AcSB) of the CICA.

The Financial Statement Discussion and Analysis section of this Annual Report is also prepared by the Government of Ontario in compliance with legislation and in accordance with the financial reporting principles and practices recommended for governments by PSAB.

The government accepts responsibility for the objectivity and integrity of these Consolidated Financial Statements and the Financial Statement Discussion and Analysis.

The government is also responsible for maintaining systems of financial management and internal control to provide reasonable assurance that transactions recorded in the Consolidated Financial Statements are within statutory authority, assets are properly safeguarded and reliable financial information is available for preparation of these Consolidated Financial Statements.

The Consolidated Financial Statements have been audited by the Auditor General of Ontario and his report appears on this document.

Colin Andersen  Deputy Minister August 7, 2007	Philip Howell Associate Deputy Minister August 7, 2007	Bruce L. Bennett, CA Assistant Deputy Minister and Provincial Controller August 7, 2007

Financial Statement
Discussion
 and
Analysis

Highlights

• The Province's financial results continued to improve, moving to a $2.3 billion surplus position in the year ended March 31, 2007, from a $5.5 billion deficit in 2003–04.

• The 2007 Budget concluded that Ontario could achieve five consecutive surpluses from 2005–06 through to 2009–10, depending on 2007–08 results. This Annual Report confirms a second consecutive surplus, for the 2006–07 fiscal year. The surplus for 2006–07 includes a number of one-time revenue gains that are not expected to carry forward into future years. Nevertheless, the Province's updated fiscal plan for 2007–08 puts Ontario clearly on track to achieve five consecutive surpluses.
• Improved financial management and strong fiscal performance have allowed the Province to eliminate the annual deficit earlier than its original goal, while at the same time improving services and making major investments in critical infrastructure.
• Total spending on the core areas of education, health care and children's and social services grew by $11.7 billion between 2003–04 and 2006–07. At the same time, the Province has made major investments in new buildings and facilities for hospitals, schools, colleges and universities, transportation and public transit systems, and other key assets.
• The Province's investments in core services and infrastructure have brought real and measurable change to the lives of Ontario's people: children and young people are doing better in school, waiting times for key medical procedures are shorter, our health care system is more responsive and effective, and stewardship over Ontario's air and water is stronger.

2006–07 Actual Results Against Budget Plan ($ billions)		Table 1
	2006–07 Budget		2006–07 Actual	Change
Revenues	85.7		90.4	4.7
Expenses
Programs	77.7		79.3	1.6
Interest on Debt	9.4		8.8	(0.6)
Total Expenses	87.1		88.1	1.0
Annual Surplus (Deficit)1	(1.4)		2.3	3.6
1 A reserve of $1.0 billion included in the Budget plan is not shown in the above results, as it was not needed during the year.
Note: Budget numbers and related variances may not add due to rounding.

• Revenues exceeded the level expected in the 2006–07 fiscal plan presented in the March 2006 Budget by $4.7 billion. The change reflected an unanticipated and time-limited increase in federal transfer payments of $0.5 billion and a one-time gain of $0.6 billion related to the initial public offering of Teranet. It also included $1.4 billion in one-time adjustments to tax revenues for earlier years. Taxation revenues relating to 2006–07, income from government business enterprises and other revenue sources were also stronger than projected.
• The government used about one-third of the additional revenues to increase overall spending on government priorities by $1.6 billion. The remaining two-thirds of the revenue increase went to further reducing the Province's accumulated deficit.
• The annual surpluses of $2.3 billion this year and $0.3 billion for 2005–06 have reduced the accumulated deficit by a total of $2.6 billion.
• Much of the information underlying these positive final results was discussed earlier this year in the 2007 Budget, which provided interim results for 2006–07. The change from the interim estimate of a $0.3 billion surplus reflects new information about revenues, as well as final expenses that were lower than estimated in the interim results.
• The results of the past four years and the improved outlook for future years underscore the wisdom of the government's careful and disciplined approach to financial management. This approach will continue to protect Ontario's fiscal health — and benefit its citizens — going forward.

Analysis of 2006–07 Results

The analysis that follows compares the actual 2006–07 results to the plan presented in the Budget of March 23, 2006.

2006–07 Operating Results against Budget Plan ($ billions)			Table 2
	2006–07 Budget	2006–07 Actual		Change
Revenues
Taxation	61.3	64.3		3.0
Federal transfers	13.6	14.0		0.5
Income from government business enterprises	3.9	4.2		0.3
Other non-tax revenue	7.0	7.9		0.9
Total Revenues	85.7	90.4		4.7
Expenses
Health	35.5	35.7		0.2
Education, postsecondary and training	17.2	17.4		0.2
Children's and social services	10.2	10.4		0.2
Other programs	14.6	15.8		1.1
Total Program Expenses	77.7	79.3		1.6
Interest on debt	9.4	8.8		(0.6)
Total Expenses	87.1	88.1		1.0
Surplus (Deficit)	(1.4)	2.3		3.6
Note: Budget numbers and related variances may not add due to rounding.

Revenues increased by $4.7 billion over the amount in the Budget plan of March 2006. The Province used about one-third of the additional revenues to increase overall program expenses by $1.6 billion to support its priorities. The remaining two-thirds of the additional revenues went to further reducing the accumulated deficit, as did savings of $0.6 billion in expense for interest on debt. The Province achieved a $2.3 billion surplus for the year, instead of the $1.4 billion deficit originally forecast in March 2006.

2006–07 Revenues

The increase in revenues above plan was due mainly to stronger taxation revenues relating to 2006–07, adjustments in tax revenues relating to earlier years, a one-time gain on the initial public offering of Teranet, an unanticipated and time-limited increase in federal transfer payments, and higher income from government business enterprises.

Taxation revenues, the largest component of revenue, were $3.0 billion higher than expected in the 2006 Budget plan, mainly because of higher Personal Income Tax and Corporations Tax revenues. Of this, $1.4 billion reflected adjustments relating to earlier years to both Personal Income Tax and Corporations Tax revenues, which does not carry forward into future years.

• Personal Income Tax revenue was $2.0 billion above plan. During 2006–07, the processing of tax returns for 2005 and other earlier years increased revenues related to those years by $1.2 billion. The increases were recorded as higher revenue in 2006–07, as was an upward adjustment of $0.1 billion related to a re-estimate by the federal government of Ontario's tax entitlement for 2003. The rest of the increase reflects stronger revenues for 2006–07 than forecast in the 2006 Budget plan.
• Corporations Tax revenue was $1.0 billion above the 2006 Budget plan. Final 2006 tax remittances for most Ontario corporations, which were received towards the very end of the 2006–07 fiscal year, were particularly strong. As well, Corporations Tax revenue for 2006–07 reflected an adjustment of $0.1 billion resulting from an underestimation of 2005–06 figures.
• Tobacco taxes were $249 million lower than projected. This decrease was offset by higher revenues from other taxes, including retail sales tax, employer health tax, land transfer tax and mining tax.

Transfer payments from the federal government were $454 million higher than anticipated, largely because of time-limited payments announced in the 2006 federal budget after Ontario's 2006 Budget was presented. The funds were contingent on the federal government's final results for 2005–06 as reported in its public accounts in the fall of 2006. This arrangement created considerable uncertainty well into Ontario's fiscal year, making effective allocation of the funds more difficult.

Income from government business enterprises was $276 million higher than expected in the 2006 Budget plan. The most significant gain was a $202 million increase from plan in the income of Ontario Lottery and Gaming, mainly reflecting stronger performance of commercial and charity casinos, lotteries and racetracks.

Other non-tax revenue, which consists mainly of fees, licences and various sales and rentals, was $901 million higher than expected. A one-time gain of $573 million resulted from the initial public offering in 2006 of Teranet, the company that operates the electronic land registration system in Ontario. Although the Province sold its 50 per cent interest in Teranet in 2003, it retained the right to share in the value of any future sale.

2006–07 Expenses

The additional revenues provided the government the opportunity to invest additional funds in high-priority program areas.

• Investments in public transit and transportation included an increase of $769 million from plan to reflect the Province's commitment to cleaner air and reduced greenhouse gas emissions. The additional spending included $352 million to municipalities for public transit infrastructure. A further $346  million went to the City of Toronto for the Toronto Transit Commission and the replacement and refurbishment of its vehicles.
• In the health care sector, expenses rose by $182 million over the $35.5  billion planned in the 2006 Budget. Investments were made to reduce wait times, cover higher costs for drug programs, and implement the Emergency Department Action Plan. As well, hospitals received more funds to improve efficiency and address operational pressures. In some areas, actual expenses were lower than planned. For example, the hospital sector ended the fiscal year with a budgetary surplus.
• Additional spending on agriculture and rural communities provided farmers with a one-time increase of $96 million in assistance to match the federal Canadian Agricultural Income Stabilization Inventory Transition Initiative. Rural municipalities got an additional $140 million to meet pressing infrastructure needs such as improving water and wastewater systems, roads and bridges.
• Municipalities were provided with an increase of $127 million in capital grants for affordable housing initiatives and $10 million for brownfield initiatives.
• In the children's and social services sector, an additional $153 million was provided to help deliver social assistance, child protection and developmental services and to allow service agencies to make needed capital investments.
• Provincial universities received additional one-time funding of $210 million.

The composition of final program expenses in 2006–07 reflected the Budget plan and these new initiatives:

Support for the core areas of health care, education, postsecondary education and training, and children's and social services all grew in 2006–07 over the previous year. Government spending in these and other areas is focused on continuing to achieve measurable improvement for people in Ontario.

Families and their children are benefiting from real improvements:

• Almost all children in junior kindergarten to Grade 3 are now in classes of 23 or fewer students. In 2006–07, 65 per cent were in classes of 20 or fewer students — more than double the 31 per cent share in 2003–04.
  
• Students in Grades 3 and 6 are doing better at reading, writing and math. The most recent results, for 2005–06, show an increase in the share of students performing at or above the standard on the provincial reading and math test, from 54 per cent in 2002–03 to 64 per cent in 2005–06.
• The high school graduation rate increased to 73 per cent in 2005–06 from 68 per cent in 2003–04. This means that 12,000 more students are graduating.
• Full-time enrolment in postsecondary education has increased by about 86,000 students since 2002–03.
• Families have improved access to quality child care through the creation of almost 22,000 new licensed child care spaces across the province over the past two years, including almost 15,000 new spaces in 2006–07.
• The number of children with autism spectrum disorder receiving intensive behavioural intervention has more than doubled since 2003, with over 1,100 children receiving these services in 2006–07.

The health of Ontarians is benefiting from real improvements:

• Wait times have been shortened for five key health services — MRI/CT scans, hip and knee joint replacements, selected cancer surgeries, selected cardiac procedures and cataract surgeries. Regularly updated information on reduced wait times is available at www.ontariowaittimes.com. The 2007 Budget added pediatric surgeries to Ontario's wait time strategy.
• The formation of 150 family health teams, in which family doctors, nurses, nurse practitioners and other health professionals work in partnership, is improving access to primary health care and increasing its effectiveness. The number of Ontarians with regular access to a family doctor has increased by 500,000 since 2003.
• The government is increasing access to health care professionals by moving forward on: hiring 8,000 new nurses since 2003; increasing first-year medical school spaces by 23 per cent; and expanding family medicine training positions by 70 per cent.
• New accountability agreements with hospitals have set funding expectations and clear performance targets, including a commitment to the principle of balanced budgets, to help ensure a sustainable hospital system for Ontario.
• The government is moving forward with more than 100 health care projects to modernize, expand and upgrade health care facilities across the province.
• Since 2004, 1.8 million children and young people have benefited, free of charge, from three new vaccines against meningitis, invasive pneumococcal disease and chickenpox.
• Between 2003–04 and 2005–06, the most recent year for which data are available, the share of Ontarians aged 15 and older who reported smoking fell from 20 per cent to 16 per cent.

Ontario's environment is benefiting from real improvements:

• Between 2003 and 2006, the reduction in electricity generation from coal plants resulted in a 29 per cent decrease in carbon dioxide emissions, the equivalent of taking two million cars off the road for a year. Over the same period, coal plants' emissions of sulphur dioxide fell by 44 per cent and nitrogen oxides by 46 per cent.
• In 2003, there were only 10 windmills in the province. More than 700 are now in place or contracted for, and one of the largest solar farms in the world is being developed in Ontario.
  
• Through the Clean Water Act, Ontario enjoys some of the best-protected drinking water in North America.
• Ontario is permanently protecting 1.8 million acres of green space on the outskirts of cities through its 2005 greenbelt legislation.
• Since becoming law in 2005, the Places to Grow Act has helped ensure sustainable growth in Ontario. The first growth plan, for the Greater Golden Horseshoe area, was released in June 2006 after extensive consultation with stakeholders and communities and is now being put into action.

The Province has achieved these results while meeting another of its commitments: modernizing government and making it more efficient. It has reduced ongoing expenses by $806 million a year through program reviews, exceeding its target of $750 million.

2006–07 Infrastructure Investments and Borrowing Program

Under the ReNew Ontario initiative, Ontario has committed to invest more than $30 billion in infrastructure with its partners by 2010 to improve quality of life and build on the province's economic advantages. The focus is on such priority areas as health and education, as well as investments to strengthen Ontario's communities and economy.

In 2006–07, as part of ReNew Ontario, the Province provided $6.4 billion for infrastructure — highways, hospitals, schools, college and university buildings and equipment, and water and wastewater systems — across Ontario. This included $2.6 billion in expenditure on tangible capital assets owned by the Province and by hospitals and colleges. The Province also provides capital-related funds to school boards, which are consolidated in its financial statements.

In addition, the Province's expenses included other infrastructure expenditures and funds for capital purposes provided to universities, municipalities, social service agencies and other organizations that deliver important public services. These included investments in water and wastewater systems and other infrastructure to protect the environment. These investments totalled $3.9 billion and were reflected in the Province's operating statement. The increase in these expenses of $1.1 billion over the Budget plan reflected the government's decision to provide additional funds for capital projects to its transfer partners because of strong in-year financial results.

Like a family buying a house, the Province borrows to invest in major assets that will provide decades of service to Ontarians. The Fiscal Transparency and Accountability Act defines provincial debt as the Province's total liabilities less its total assets, which include highways, bridges, government buildings and the net assets of hospitals, colleges and school boards. This approach, in which the impact of borrowings to invest in capital is offset by the value of the assets, is similar to the way families and individuals net the amount of their mortgage against the value of their home to calculate net worth.

In accounting terms and on the Province's financial statements, the difference between total liabilities and total assets is referred to as the “accumulated deficit” rather than provincial debt.  Accumulated deficit, or provincial debt, decreased by $2.4 billion during 2006–07, from $109.2  billion as at March 31, 2006 to $106.8 billion as at March 31, 2007. This improvement was made up of the surplus of $2.3 billion plus an adjustment of $0.1 billion that is discussed in Note 4 to the financial statements.

Rating agencies and investors look at the Province's net debt, which equals its total liabilities less its financial assets, in assessing creditworthiness. Net debt decreased by $0.8 billion to $141.1  billion during 2006–07. This improvement reflected the Province's $2.3 billion surplus, partially offset by increased net investment of $1.2 billion in its own tangible capital assets and an increase of $0.3 billion in the net assets of hospitals, school boards and colleges.

The Province's “total debt,” on the other hand, simply records all borrowings. In 2006–07, the bulk of the funds for the Province's investment in capital assets were provided by a net increase of $2.0 billion in total debt, which stood at $157.3 billion as at March 31, 2007.

Government Management of Finances

A major responsibility of governments is to manage public finances in a responsible way. Good financial management starts with a sound budget. The budget sets out a fiscal plan that reflects government priorities in the allocation of public finances.

Financial management must also address changing circumstances as the fiscal year unfolds. If revenues are less than expected, the government's flexibility to respond is limited. This problem can be compounded because some costs tend to increase as slower economic activity causes revenues to fall. It is therefore good public policy to ensure that fiscal targets are still achievable even if outcomes are worse than expected. This starts by using cautious forecasts for revenues and building other elements of prudence into the budget plan.

Prudence in the 2006–07 Plan

The 2006 Budget followed the government's practice of outlining the major risks to the plan and their potential impact, with detailed information appearing on pages 85 through 89 of the 2006 Budget papers.

To help protect the plan from the unexpected negative impacts that might result from these or other risks, the Budget plan for 2006–07 included these prudent elements:

• Revenue projections were based on a projection of real GDP growth of 2.3 per cent in 2006, as opposed to the private-sector average projection of 2.6 per cent.
• Contingency funds for both operating and capital that together totalled about 1.3 per cent of total expected expense provided protection against higher spending due to unforeseen events.
• The forecast for interest on debt expense was deliberately cautious (Note 3 to the Consolidated Financial Statements discusses the management of interest-rate risk and other risks relating to the Province's borrowing program).
• A reserve, separate from the contingency funds, of $1.0 billion was included to protect against unforeseen adverse events.

Ministries tend to spend below budget, since program spending above plan requires approval. To reflect this, the Budget includes a global amount each year for spending below plan. The amount of such year-end savings in the 2006 Budget plan was projected at $700 million, or about 0.8 per cent of total expected spending.

Pre-Election Report

In 2007, for the first time, the Budget was followed by the Pre-Election Report on Ontario's Finances, as required by the Fiscal Transparency and Accountability Act for years in which a general election is scheduled. As also required by the act, the Auditor General reviewed the report, which outlined the approach to planning used by Ontario for several years.

The Auditor General observed that in addition to being required by the act, prudent financial planning in Ontario reflected the recommendations of an independent panel in 1995 and “has been the norm over the last decade — in nine of the last 10 years, the government exceeded its original fiscal targets and therefore had more funds available at year-end than what was expected.”

The Auditor General's review of the Pre-Election Report concluded that the revenue and spending estimates for the period it covered and the assumptions underlying them were reasonable. Much of the discussion of revenue forecasting focused on taxation, which is the largest component of revenues. An assessment by an independent expert of the models and methods used in forecasting revenues from four major taxes concluded that these were consistent with what is considered to be best practice among revenue forecasters.

In-Year Financial Management

During 2006–07, the Ontario Government managed both upside and downside risks to the fiscal plan. After the first quarter, it revised its deficit projection from the $1.4 billion in the Budget to $0.9 billion, if the reserve were not needed, to reflect new information.

In response to concerns about the potential impact of slower economic growth, the government announced a stimulus package in the Fall Economic Outlook and Fiscal Review, released in October 2006. The measures focused on four key areas: providing services and programs to help job-threatened or laid-off workers; fast-tracking infrastructure projects to generate immediate economic activity and job creation; boosting interprovincial trade; and launching a new campaign to encourage Ontarians to vacation in Ontario. Some of the funds for these measures came from the net proceeds of the Teranet initial public offering.

Late in the fiscal year, tax processing data and other information suggested revenues would be higher than expected. The Province actively examined options for additional investments in strategic areas. Ministries had been asked to identify potential initiatives well before year-end to ensure time for suitable analysis. Details on all in-year approvals are included in Volume 1 of the Public Accounts. The Province continues to work with the Auditor General, its transfer partners and ministries to improve the openness and transparency of processes for deciding on year-end grants. An updated directive on transfer payment accountability, clarifying the approvals process for grants and providing controls in line with the size of the allocation, also supports that goal.

To ensure that future spending would be equal to or less than what a prudent forecast of ongoing revenues could support, the Province did not use one-time or time-limited revenues for initiatives with significant expense impacts that went beyond the availability of the funding source.

Interim Results

The Province provided interim estimates of results for 2006–07 in the 2007 Budget, tabled in March of this year.

At the time the 2007 Budget was finalized on March 16, the interim estimate of total revenues was $3.4  billion higher than in the Budget plan. The improvement over plan grew to $4.7 billion in final results, reflecting new information unavailable at the time of the 2007 Budget.

• Revenues from Corporations Tax were $369 million higher in the final results than the interim numbers. The variance between the interim estimates and final results arose from stronger tax receipts after the 2007 Budget was finalized. Personal Income Tax revenues were $370 million higher than in the interim estimate, reflecting new information from the processing of 2006 tax returns. Taxation receipts from all other sources increased by $81 million. 
• As well, income from investment in government business enterprises was $208 million above the interim numbers. Revenue from other sources was $368 million higher, largely because of higher recoveries by ministries of previous years' expenses.
• These increases were somewhat offset by lower receipts of federal government transfers than estimated in interim results, leaving a net increase of $1.3 billion in total revenues against interim figures.

Similarly, the receipt of additional information after the 2007 Budget allowed greater accuracy in the estimate of spending for the year. Total spending by ministries and consolidated organizations such as hospitals, colleges and school boards was $705 million lower in final results than the interim estimate.

Impact on Future Planning Periods

Ontario is not alone in achieving better results than expected in recent years. All provinces that have released their public accounts for 2006–07 have reported better revenue results than expected. In 2005–06, the public accounts of all provinces and the federal government showed they exceeded their budget plans.

Like other Canadian governments, the Province must assess the extent to which the outcomes of a single year might affect future years.

Developments since the 2007 Budget confirm that Ontario is clearly on track to achieve five consecutive surpluses. The Province is projecting a balanced budget in 2007–08, even if the reserve is needed.  The updated medium-term plan takes into account the portion of higher revenue from 2006–07 that carries forward into 2007–08 and the remaining years covered by the plan, and reflects the fact that most of the increase is being invested in priority program areas.

In his review of the Pre-Election Report, the Auditor General noted that because of prudent planning practices, “it is quite possible that the estimated deficit of $400 million for the 2007/08 fiscal year could turn out to be a surplus and the estimated surpluses of $300 million for 2008/09 and $400 million for 2009/10 could approach $1  billion.” The medium-term fiscal plan remains consistent with that view.

At the same time, the Auditor General's review identified a strengthening Canadian dollar as a risk to the economic outlook. The review concluded that the flexibility provided by prudent planning should more than offset any impact. It was noted that this “underlines the wisdom of the practice of building a healthy dose of prudence into the budget-revenue projections.”

In line with this view, the Province remains prudent in its medium-term fiscal targets because of the greater fiscal and economic risks and uncertainties that exist further into the future. In addition to the appreciating Canadian dollar, these include higher oil prices and interest rates and a slowing U.S. economy. The Province will provide a financial update as of the end of the second quarter.

Ten-Year Overview of Financial Results

The government committed in 2003 to returning Ontario's fiscal plans to a sustainable path. The prudent approach of the past four years has achieved that goal, as the Province recorded surpluses in 2005–06 and 2006–07, eliminating the deficit ahead of schedule. An updated fiscal plan has projected a balanced budget for 2007–08, for a third consecutive surplus.

The commitment to financial sustainability was a response to a structural deficit that emerged as a result of cuts to taxation rates starting in the mid-1990s. Initially, taxation revenues increased because of continuing economic growth. As rate cuts continued and economic growth slowed, however, revenues flattened. Taxation revenues, the largest ongoing component of revenues, fell by $1.5  billion between 2000–01 and 2001–02.

Slower economic growth put pressure on expenses, which had been tightly constrained for much of the period. The mismatch between expense and revenue growth became most pronounced in 2003–04, when assumed revenues did not materialize and spending rose above plan, resulting in a deficit of $5.5  billion.

The government took steps to improve the management of financial risks and the ability of fiscal plans to absorb unexpected shocks. It introduced the Fiscal Transparency and Accountability Act, which required Budget plans to include a reserve against adverse unforeseen events. In line with the requirements of the act, the government put in place a fiscal recovery plan to eliminate the deficit. The plan was based on a disciplined approach to spending, making government more efficient, focusing on results in key areas, and ensuring a sustainable base for taxation revenues. This analysis focuses in particular on the outcomes of that plan.

The outcome of careful financial management has been a steady improvement in results from operations, including the second straight surplus recorded in the fiscal year just ended. The updated fiscal recovery plan presented in the 2005 Budget projected that the Province's deficit would be eliminated by 2007–08 if the budgetary reserve was not needed and no later than     2008–09 even if it was. Better financial results helped the Province to eliminate the deficit in   2005–06, well ahead of schedule, while allowing spending to grow at an average annual rate of 6.1 per cent. This was well below the average annual growth rate in revenues of 9.7 per cent over the same period.  

When revenues can accommodate the expected growth in expenses over time, a fiscal plan is sustainable. Many expenses for government arise from important public needs that must be met on an ongoing basis, such as health care, social programs and education. The government's actions over the past three years have strengthened financial management by relying on only those revenues known to be sustainable to fund major ongoing public needs. This approach will continue.

Revenues: 10-Year Overview

Revenues have grown in recent years largely because of economic growth, changes in taxation policies, increased transfer payments from the federal government, and changes in the electricity sector.

The largest element in the Province's revenues is taxation, currently accounting for a roughly 70 per cent share of the total. Tax revenue is generally sensitive to economic conditions, and the 5.3 per cent  average annual increase over the past 10 years is closely in line with economic growth, as measured by nominal GDP, of about the same rate.  

While taxation revenue responds to economic changes, its components respond in differing ways. Corporations Tax tends to be the most volatile. This component fell sharply in 2001–02 and remained stagnant for the next two years, reflecting difficult economic conditions and tax-rate cuts. It has rebounded over the past three-year period, growing at a faster rate than the economy.

Personal Income Tax, Retail Sales Tax and other taxation revenues were generally flat from 1999–2000 through to 2003–04. While not as volatile as Corporations Tax, growth in Personal Income Tax revenues has accelerated in the past three years, also contributing to the improved revenue picture. Personal Income Tax is progressive — that is, taxable income is subject to higher taxation rates as it rises — so revenues from this source grow faster than incomes overall. Personal Income Tax revenues have also been boosted by strong growth in capital gains income and improved tax administration practices by the Canada Revenue Agency. The growth in other taxation revenues after 2003–04 also reflects in part the introduction of a health care premium in 2004.

Transfer payments from the federal government have grown faster than overall revenues in the past several years. By 1998–99, after major cuts in previous years, federal transfer payments amounted to only 8.1 per cent  of the Province's revenues.

The federal government moved into a surplus position in 1997–98, and only after that point began restoring transfers to provinces and territories. It frequently provided these increases by using part of its year-end surplus to allocate additional transfers to the provinces. This generally happened after provincial fiscal plans were announced. As well, these additional transfers were of limited term and were often for specific purposes consistent with federal priorities.

It is much more difficult for the Province to rely on transfers of this type for implementing its fiscal plan and supporting its own priorities over the long term. So, while federal transfers reached 15.5 per cent of the Province's revenues by 2006–07, much of the increase was provided on a less certain basis than ongoing transfers, such as the Canada Health Transfer and Canada Social Transfer.

Income from government business enterprises, which include Ontario Power Generation Inc., Hydro One Inc., the Liquor Control Board of Ontario and Ontario Lottery and Gaming, has generally reflected economic conditions as well as factors specific to the sector in which each enterprise operates. For example, as of April 1, 2005, Ontario Power Generation began receiving regulated prices on the output from some of its assets, which has tended to improve its net income.  

In total, revenue from all sources has grown at a faster rate than the economy over the past 10 years — 6.2 per cent, as opposed to 5.2 per cent. This rate, however, reflects several factors on which the Province cannot rely over the long term, such as transfers from the federal government reflecting its year-end surpluses, and, in 2006–07, one-time adjustments and gains like the Teranet transaction. 

Expenses: 10-Year Overview

Increased revenues over the past three years have allowed the Province to focus on funding its priorities in the largest sectors — health, education, postsecondary education and training, and children's and social services. Together, these sectors represent almost three-quarters of the Province's expenses. It has also made major investments in public transit and other infrastructure needs through transfers to municipalities and other public organizations.

The largest expense area is health care, which comprises the expenses of hospitals, payments to physicians and other practitioners, drugs and other health-related programs. Spending on health care has grown fairly consistently over the past 10 years. It reached $35.7  billion in 2006–07, or about 45.0 per cent of program expenses.

Access to many health care programs is provided through a government statute or regulation to anyone who meets eligibility criteria. For example, all Ontario residents over the age of 65 are eligible for drug benefits. Programs must accommodate the public's need for such services, which has contributed to the continuing growth of the sector.

Since 2003–04, the government has addressed the needs driven by the spending constraint of previous years and has invested in key priorities. In particular, it budgeted for growth in expenses for schools, postsecondary education and the needs of families. Because results have been better than planned over that period, the extra funds have been used to increase those commitments and make strategic investments in other priorities.   

Investing in Ontario's Infrastructure and Reducing Provincial Debt

One of the Province's most important activities is investing in infrastructure that is critical to economic growth and quality of life: public transit and other transportation systems, hospitals, colleges, schools and universities. The ReNew Ontario program, launched in 2005, is on track to meet its five-year investment goal of $30 billion.

Over the past two years, the Province has invested more than $12 billion, directly and through transfers to its partners in the broader public sector, to address major gaps in infrastructure across Ontario.

Investments in Ontario's electricity infrastructure are essential to support and enhance the province's economic competitiveness and high quality of life. Since 2003, about 3,900 megawatts of new electricity generation, conservation and demand management have come online. In addition, about 7,200 megawatts of new electricity generation projects are underway. New generation sources include 18 electricity contracts with the Province's Ontario Power Authority for renewable energy projects to provide a total of 1,300 megawatts of new supply, as well as 98 contracts for more than 500 megawatts under the Renewable Energy Standard Offer Program.

These generation projects also include investments by the Province's electricity generation corporation, Ontario Power Generation Inc. In addition, the Province's electricity transmission and distribution corporation, Hydro One Inc., is investing to maintain and improve its wires infrastructure. In total, Ontario Power Generation and Hydro One invested more than $5.0 billion to maintain and expand their capital assets from 2003–04 to 2006–07.

As noted, the Province borrows to invest in capital assets, with the value of the assets providing an offset to the borrowing when looking at provincial debt (or accumulated deficit, as it is known on the financial statements). Provincial debt changes from year to year, with annual surpluses from government operations having the effect of decreasing it, while annual deficits increase it. 

The accumulated deficit or provincial debt currently stands at its lowest point in the past 10 years. At the end of the 1997–98 fiscal year, it was $112.7 billion. It increased the following year because of the Province's operating deficit. The accumulated deficit jumped sharply in 1999–2000, the year in which the Province consolidated about $20 billion in stranded debt from the electricity sector.

In 2002–03, the Province adopted the recommendations of the Public Sector Accounting Board (PSAB), the Canadian authority on government accounting, related to accounting for its tangible capital assets in the Public Accounts. This reduced the accumulated deficit by almost $14 billion, as the value of the Province's infrastructure was recognized in its books.

The accumulated deficit fell by a significant amount again in 2005–06, when the Province followed guidance from PSAB to consolidate Ontario's hospitals, school boards and colleges in its accounts. The decrease in accumulated deficit was $16.6 billion, reflecting past investments in these sectors.

These major changes were in addition to the normal year-by-year impact on the accumulated deficit of annual deficits and surpluses. Between 1997–98 and 2003–04, the cumulative impact of deficits less surpluses was an increase in the accumulated deficit of $8.4 billion. The accumulated deficit rose by $1.5 billion in 2004–05. It has fallen, however, in the past two fiscal years as a result of surpluses of $298 million in 2005–06 and $2.3  billion in 2006–07, and stood at $106.8  billion on March 31, 2007.

The ratio of provincial debt to GDP (or accumulated deficit to GDP in accounting terms) is a key measure of future demands on the economy to pay for past government decisions. The ratio is now 19.1 per cent, down considerably from 31.4 per cent 10 years ago. This decline is due in part to the accounting changes discussed above, and reflects that the rate of growth in the accumulated deficit has been slower, on average, than the growth in the economy. The decline has been especially strong over the past three years, in part because of the two consecutive surpluses.

The Value of a Responsible Approach

The strong results of the past several years and the improved outlook for the future illustrate the value of responsible financial management. Prudent planning often provides better-than-expected results that give government more fiscal flexibility, which allows the government to make additional investments in important priorities, including programs and the reduction of accumulated deficits.

Responsible financial management over the past four years based on prudent and disciplined planning has turned Ontario's fiscal situation around. The outlook for five consecutive budgetary surpluses will reduce future demands on Ontario's resources. But the results go far beyond that benefit. They also include better health care, a stronger education system, more support for families, and investments in infrastructure to help Ontario build on its economic advantages.

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