October 4 , 2005

Toward 2025 is the first ever long-range assessment of Ontario's fiscal and economic environment produced by the Ontario government. The Fiscal Transparency and Accountability Act requires a long-range assessment of Ontario's fiscal environment within two years of each general election.

The act requires this assessment to report on the anticipated 20-year economic and demographic changes and their potential impact o n the public sector and on Ontario's fiscal policy during that period, and to include a n analysis of key issues of fiscal policy that in the Minister of Finance's opinion are likely to affect the long-term sustainability of the economy and the public sector.

Toward 2025 examines a number of economic and fiscal scenarios. Past trends were examined and used to make reasonable assumptions about the future.

In addition to the base-case scenario, alternative scenarios were produced to explore potential variations in the key underlying assumptions of the base case. The analyses are not meant to suggest that policy will not change, but that the long-term projections cannot take into account what government policy may be.

Demographic Projections and Implications

Ontario will face five important demographic trends over the next 20 years:

1. Ontario is expected to have ongoing population growth of 3.1 million - for a total population of 15.7 million by 2025;
   
   
2. population growth is projected to come primarily from immigration;
   
   
3. population growth is expected to be concentrated in the GTA, which is projected to be home to almost 7.7 million people by 2025;
   
   
4. the population is expected to have an older age structure - the share of seniors in the population will rise rapidly from 12.9 per cent in 2005 to 19.4 per cent in 2025; and
   
   
5. the growth of the core working-age population (ages 15-64) is projected to slow down considerably from 1.6 per cent in 2005-06 to 0.2 per cent in 2024-25.

A Long-Term Projection for Ontario's Economic Growth

 

The two fundamental internal factors affecting Ontario's economic growth are: total labour-force growth and growth in productivity. External factors discussed include the U.S. economy, oil prices, exchange rate, inflation and interest rates.

Toward 2025 includes a discussion of structural forces that could affect Ontario's economy - including the shift from goods to services employment and rapid change within sectors.

 

 

 

• Annual real GDP growth is projected to decline slightly (to 2.3 per cent per year by 2020-25).
  
  
• GDP per person is projected to rise from $38,000 in 2004 to $52,000 by 2025 (after adjusting for inflation), due to positive productivity growth.
  
  
• The unemployment rate, now 6.6 per cent, is projected to drop to 4.1 per cent by 2025.

Strengthening Productivity Growth

 

 

The report identifies the levers that can improve productivity growth. They include: an effective and responsive education system; a flexible labour market that supports new graduates and new immigrants; business investment that enables Ontario businesses to continue to compete effectively; research and development, including stronger ties between academia and business; a competitive tax structure; and good, functioning infrastructure. Government, business and academia all play a role in enhancing productivity.

 

Drivers of Future Health Care Costs

Health care represents a significant fiscal challenge for the Ontario Government. Given reasonable assumptions, health care's share of provincial program spending is projected to rise from 45 per cent (2004-05) to about 55 per cent (2024-25). Health care spending is projected to grow faster than GDP - averaging 6.0 per cent annually from 2009-10 to 2024-25.

• Population growth and aging, as well as utilization are key drivers of costs.
  
  
• The estimated contribution of aging to projected average annual growth in government health spending is 1.1 per cent (of the 6.0 per cent growth).
  
  
• Population growth accounts for another 1.1 per cent of the projected average annual growth in government health spending and utilization accounts for 1.5 per cent.
  
  
• Towards the end of the next 20 years, the contribution of aging relative to population growth is expected to increase as the oldest cohort of the baby boom reaches age 70.
  
  
• On average, health care costs are higher for older people. For example, in 2002, the average annual per-capita health care expenditure in Ontario was $2,239, while for those over age 85 the per-capita expenditure was $17,052.

Intergovernmental Finances

Ontario's fiscal interaction with the federal government will have a significant bearing on the province's fiscal position. Chapter 5 projects that the fiscal capacity of the federal government will continue to exceed that of the provincial government - particularly in light of the Province's responsibility for health care.

• If current policy continues unchanged, federal transfers would drop from 16 per cent of Ontario's total revenues to 13.5 per cent by 2024-25.
  
  
• Federal transfers for health, postsecondary and social programs are projected to decrease as a share of Ontario program spending from the current 24 per cent to 18 per cent in 2024-25.

Municipalities have an important and growing role in the economic future of the province and will face ongoing pressure, particularly for improvements in infrastructure.

Long-Term Fiscal Prospects

The high and low economic growth scenarios demonstrate how small positive or negative changes in costs or growth can have a profound long-term impact on Ontario. By the end of the 20-year period, for example, a small increase in productivity growth rates could compound to a significant increase in the annual real income of the average Ontario resident and could lead to budget surpluses. At the same time, a minor increase in the growth of health care costs, could, if no policy action was taken in the meantime, lead to budget deficits. The number of children in Ontario is projected to grow very slowly over the next 20 years – easing the pressure on education spending.

 

• As set out in the 2005 Ontario Budget, the government projects a budget balance in 2008-09 - or in 2007-08 if the reserve is not needed. The base-case projection indicates that the Province is expected to be on course for a series of surpluses in the following decade.
  
  
• After 2018, according to projections and absent of any policy change, there is a potential of returning to deficit, largely due to health care spending growing faster than revenues.

 

 

 

 

The projections show that Ontario's revenue growth and spending growth are very finely balanced, but that maintaining balanced budgets will continue to require careful management.

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For more information visit www.fin.gov.on.ca