2014 Ontario Economic Outlook and Fiscal Review
Chapter I: Building Opportunity, Securing Our Future

Section A: Making Every Dollar Count

A Balanced Path to a Balanced Budget

The government is committed to balancing the budget by 2017–18, and will do so in a way that is both fiscally responsible and fair.

The Province will continue to invest in people’s skills and talents; build modern infrastructure and transportation networks; create a supportive and dynamic business climate; and strengthen retirement income security for all Ontarians. This will help grow the economy, protect revenue and create jobs. The government will also continue to responsibly manage spending. From 2013–14 through to balance in 2017–18, program spending is projected to grow at an average annual rate of 0.8 per cent.

Together, these government priorities and actions to make every dollar count will help support eliminating the deficit and improve the Province’s fiscal sustainability.

Although the global economic environment remains challenging, there are signs that Ontario’s economic expansion is gaining momentum in 2014, following weak growth in 2013. However, should economic conditions persist that result in the Province’s revenue outlook falling further below the 2014 Budget projection, the government will consider other tools, as necessary, to balance the budget by 2017–18. This would be done while continuing to make critical investments in the programs and services that people depend on, such as health and education.

Ontario’s Plan to Eliminate the Deficit

Ontario’s plan to eliminate the deficit builds on its past success. For five years in a row, the government has beaten the deficit targets it established after the 2008–09 global recession. Ontario is one of the only governments in Canada to have achieved this level of success. By beating its fiscal targets, the Province’s accumulated deficit is $25 billion lower than it otherwise would have been.

The Province has overachieved on its fiscal targets in spite of a decline in the revenue outlook since the 2010 Budget. This overachievement reflects government actions to manage growth in program spending. In fact, Ontario consistently has the lowest per capita program spending among all Canadian provinces.

Ontario has been able to achieve this record against its deficit targets despite a vertical fiscal imbalance between provinces and the federal government. Both the federal Parliamentary Budget Officer and the Conference Board of Canada confirm that while the federal government is expected to be in a position to realize significant and growing surpluses in the future, the provinces and territories as a whole will face increasing challenges to achieve fiscal balance while providing essential programs and services to Canadians. Notwithstanding recent unilateral federal actions that have negatively impacted Ontarians, Ontario is taking important steps forward to deliver on its plan and build a strong and sustainable fiscal foundation.

Between 2010–11 and 2013–14, growth in Ontario’s program spending was held to an average of 1.2 per cent per year. Responsibly managing spending resulted in program spending being 16.6 per cent of gross domestic product (GDP) in 2013–14, lower than the 17.9 per cent reached in 2009–10. This has been the result of disciplined action to find efficiencies in the delivery of public services while still making critical investments in the programs and services that people depend on, such as health and education. In fact, projected program expense in 2014–15 is essentially unchanged from the 2014 Budget.

Balancing the budget by 2017–18 requires a thoughtful approach to making tough choices. Steps towards delivering on the government’s plan to balance are centred on:

  • Program Review, Renewal and Transformation;
  • Managing compensation costs;
  • Ensuring everyone pays their fair share of taxes; and
  • Unlocking the value of provincial assets.

Progress on Actions to Eliminate the Deficit

Pursuing Program Review, Renewal and Transformation

Achieving budget balance and improving outcomes for Ontarians will require changes in how government works. One of the ways the Province is bringing about change is through Program Review, Renewal and Transformation — a fundamentally new approach to multi-year planning and budgeting.

The Program Review, Renewal and Transformation planning process is designed around key principles, including looking at how every dollar across government is spent; using evidence to inform better choices and improve outcomes; working across government to best deliver services around the client; and taking a multi-year approach to identifying program transformation opportunities and achieving savings.

There will be a careful review of every government program through four lenses:

  • The relevance of the program in realizing government priorities;
  • The program’s effectiveness in achieving desired outcomes;
  • The efficiency in converting resources into results; and
  • The sustainability of the program over the long term.

Program Review, Renewal and Transformation opportunities will be identified to improve services and outcomes based on measurable results, to ensure that sustained funding goes to initiatives that work. At the same time, the government will also have to make tough choices about services that are not performing, do not link to government priorities, or no longer serve a clear public interest.

In addition to improving outcomes for Ontarians, the government will meet its annual program review savings target of $250 million for 2014–15 and $500 million for each of the next two years, as announced in the 2014 Budget.

The President of the Treasury Board has convened a Program Review, Renewal and Transformation Sub-Committee of Treasury Board to ensure all of the government is working together towards the same objective.

A group of experts will be brought together to provide advice to the President of the Treasury Board as the government moves forward with the Program Review, Renewal and Transformation process. The group will be composed of experts from government, business, the broader public sector and other sectors with experience in leading organization change initiatives. The President of the Treasury Board will also provide an opportunity for Ontario government staff and the public to share their transformation and savings ideas.

Program Review, Renewal and Transformation will build on actions already underway to transform and modernize government programs and services, such as:

  • Acting on the recommendations of the Commission on the Reform of Ontario’s Public Services;
  • Implementing the Action Plan for Health Care; and
  • Providing targeted electricity rate mitigation.

Acting on the Recommendations of the Commission on the Reform of Ontario’s Public Services

The government is continuing to move ahead with the Commission’s recommendations — over 80 per cent are being acted on. In addition, the Province has been able to hold annual average growth in program spending to 1.2 per cent over the past three fiscal years — much lower than the 3.5 per cent growth that the Commission projected would occur if the government took no action, and in line with the recommended growth rate of around one per cent.

As part of Program Review, Renewal and Transformation, the government will continue to look at the Commission’s recommendations that present opportunities for service improvement and savings, and will report back on progress.

Implementing the Action Plan for Health Care

Since announcing the Action Plan for Health Care in 2012, the government has made fundamental improvements to the delivery of health care services while managing down the rate of growth in health spending from an average annual rate of about six per cent since 2003–04. Implementing the Action Plan’s transformational initiatives helped slow the rate of growth in health care spending to about 2.5 per cent on average over the last two years. Through targeted investments and further implementation of the Action Plan, the government is improving access to high-quality care and creating a more sustainable health care system.

Providing Targeted Electricity Rate Mitigation

The Ontario Clean Energy Benefit (OCEB) will end on December 31, 2015. To help low-income Ontarians with electricity costs, the Minister of Energy has asked the Ontario Energy Board to develop options for an Ontario Electricity Support Program (OESP), which will start on January 1, 2016. Ending the OCEB will save the government approximately $1 billion annually compared to the current level of spending on the program. The government is also moving forward with removing the Debt Retirement Charge (DRC) cost from residential users’ electricity bills after December 31, 2015, saving a typical residential ratepayer about $70 per year. As well, the government is expanding the Industrial Conservation Initiative and introduced a new stream of the Industrial Electricity Incentive program to help large businesses with their electricity costs.

Managing Compensation Costs

The government is taking a consistent, fair and principle-based approach to manage compensation costs in the Ontario Public Service (OPS) and across the broader public sector, while ensuring that service levels meet public needs.

The 2013 Budget stated that “all public-sector partners will need to continue to work together to effectively manage compensation costs within Ontario’s existing fiscal framework, which includes no funding for incremental compensation increases for new collective agreements.”

The 2014 Budget confirmed that “any modest wage increases that are negotiated must be absorbed by employers within available funding and within Ontario’s existing fiscal plan through efficiency and productivity gains or other tradeoffs so that service levels continue to meet public needs.”

Over half of the government’s program spending is on salaries and benefits.

Broader public-sector partners need to come together to manage compensation costs and control spending while protecting public services that Ontarians rely on and working towards balancing Ontario’s budget.

Labour Agreements in the Ontario Public Service

A collective agreement was reached with the Association of Management, Administrative and Professional Crown Employees of Ontario (AMAPCEO), which was ratified by both parties on August 28, 2014.

The AMAPCEO agreement includes a wage freeze in the first two years and a 1.4 per cent wage increase in each of the third and fourth years. This new agreement follows a two-year deal that included no wage increases in either 2012 or 2013 — totalling four consecutive years without an increase.

The agreement is consistent with the fiscal plan outlined by the government, which includes no new funding for compensation increases. The cost of wage increases in 2016 and 2017 is being offset over the four-year term through changes to benefits and entitlements, making it a net zero agreement. One of these changes is the elimination of exit pay, which will reduce future costs and save taxpayers approximately $55 million this year.

The government respects the collective bargaining process and values the work of Ontario Public Service employees. The government looks forward to continuing to work with its bargaining agent partners to reach agreements that are fair and equitable to employees and to the people of Ontario in the current fiscal and economic climate.

Changes to Benefit Entitlements

As part of the 2013–14 expenditure review, the government introduced changes to bring post-retirement benefit entitlements in the public service in line with practices in the private sector and other jurisdictions, which will save the government over $1.4 billion by 2017–18.

Reforming Executive Compensation in the Broader Public Sector

The government is continuing to take action to control executive compensation costs in the broader public sector and building on the work that has already been done to manage executive compensation.

In 2014, Ontario introduced Bill 8, the Public Sector and MPP Accountability and Transparency Act, 2014, which included the Broader Public Sector Executive Compensation Act, 2014, as Schedule 1.

If passed, the legislation would allow the government to take a principle-based, long-term approach to reform executive compensation. It would apply to designated executives at hospitals, community care access corporations, school boards, colleges, universities, and the hydro entities.

The proposed legislation would authorize the government to issue a directive to collect compensation information such as salaries and salary ranges, pay at risk, and benefits. It would also authorize the implementation of compensation frameworks that could set limits on all elements of compensation — including hard caps.

The legislation would permit the audit of relevant records at a designated employer, and could require the employer to repay any amount paid to a designated executive in excess of the applicable compensation framework.

Further, on October 29, 2014, the President of the Treasury Board announced that the government plans to bring forward amendments to the proposed legislation that would further enhance the government’s authority over executive compensation by extending it to an additional 64 broader public-sector organizations.

Ensuring Everyone Pays their Fair Share of Taxes

Ontario has created a competitive and fair tax system that supports the funding of critical public services for Ontarians. When some businesses do not pay their fair share of taxes, it compromises the viability of legitimate businesses and puts them at a competitive disadvantage. Businesses that do not pay their fair share of taxes often ignore other rules, such as protecting employees and ensuring that products and services are reliable and safe. That is why it is important for Ontario to ensure a level playing field for businesses and require all taxpayers to play by the rules.

The government has taken concrete steps to address those situations where a deliberate effort is made to avoid or evade paying a fair share of taxes. Based on recommendations from the Commission on the Reform of Ontario’s Public Services, in 2013–14 Ontario’s efforts to enhance the integrity of the tax system generated over $380 million in additional revenue. Recent examples include:

  • Enhanced compliance activities (e.g., auditing) to address the underground economy and corporate tax avoidance in Ontario through a multi-year agreement with the Canada Revenue Agency. Over the four-year agreement, approximately $700 million in additional tax revenue is expected to be generated.
  • Launching a Tender Contract Tax Compliance initiative to ensure businesses engaged in procurement activity with the government of Ontario demonstrate they have complied with their tax obligations before being awarded government contracts.
  • Enhancing enforcement measures under the Tobacco Tax Act, including increased fines and impounding vehicles for those who break the law.

Building on this progress, Ontario is committed to moving forward with new measures to ensure an effective tax administration system that addresses the underground economy, corporate tax avoidance and contraband tobacco.

Underground Economy

In a tax context, the underground economy is the deliberate under-reporting or not reporting of income to avoid paying taxes required by law. It is an issue for governments around the world, and Ontario is no exception. It results in significant loss of revenues to government and compromises the viability of legitimate businesses by creating an unlevel playing field.  

Ontario is committed to addressing this challenge and is proceeding with a number of concrete measures, including:

  • Launching pilot initiatives to better coordinate and strengthen compliance activities in high-risk sectors. The focus will be on strengthening consumer protection, enhancing worker safety and curtailing tax loss.
  • Building on its Tender Contract Tax Compliance initiative launched in February 2014, the government will develop a plan to expand tax verification to financial assistance provided by government, and procurements in the broader public sector and Crown corporations.
  • Examining new methods of information-sharing across government ministries, agencies and jurisdictions to strengthen its ability to detect and mitigate the underground economy.

The Parliamentary Assistant to the Minister of Finance, Laura Albanese, will monitor and report on the government’s progress on these initiatives.

Ontario also needs a strong federal partner in combating pervasive and technologically sophisticated tax evasion. The government has requested for several years that the federal government release a national strategy and action plan to address the underground economy. A clear national strategy and action plan are imperative to ensuring that effective compliance efforts are effectively coordinated with provinces.

Corporate Tax Avoidance

Ontario, in conjunction with the Government of Canada, has taken substantive action to better address corporate tax avoidance.

Most recently, the Taxation Act, 2007, was amended to enhance oversight of aggressive tax avoidance transactions. The resulting new disclosure rules are similar to those put in place by the federal government and Quebec, and position Ontario to more effectively address egregious tax practices.

Ontario is committed to adopting best practices to ensure companies pay their fair share of tax and do not employ elaborate tax planning schemes that undermine the intent of the Province’s tax laws. Accordingly, the government is monitoring the Organisation for Economic Co-operation and Development’s (OECD) project on base erosion and profit shifting.

Ontario will continue to work with the federal government to identify and adopt new measures to curtail aggressive corporate tax avoidance.

Contraband Tobacco

The low price of contraband tobacco undermines the integrity of the Tobacco Tax Act and the Smoke-Free Ontario Strategy. The government is committed to addressing this challenge and will proceed with several important initiatives to do so.

It intends to establish oversight of raw leaf tobacco in the province effective January 1, 2015. To that end, a draft regulation was posted on Ontario’s regulatory registry from September 2, 2014, to October 31, 2014, to solicit feedback and suggestions. This feedback will be taken into account as the government finalizes the regulation.

This critical initiative will help to effectively impede the flow of raw leaf tobacco to contraband tobacco product manufacturers and address some of the concerns raised by law enforcement agencies.

First Nation Partnership

Ontario respects the ceremonial value and economic development importance of tobacco to First Nation communities. The government recognizes this as it works to build a strong, sustainable partnership with First Nation communities.

In this regard, two pilot projects with the Chippewas of the Thames First Nation and the Mohawk Council of Akwesasne continue to advance, with the goal of reaching agreements on community-based tobacco regulation on-reserve and revenue-sharing.

Ontario will also launch a formal review of the First Nation Cigarette Allocation System in early 2015. As part of this review, the government will appoint a facilitator who will work with First Nation communities and other stakeholders across the province, such as industry and public health experts. It will listen to stakeholder perspectives, identify issues with the current system, and make recommendations for improving and modernizing the allocation system.

Unlocking the Value of Provincial Assets

The government is continuing to pursue opportunities to unlock economic value from its assets, including shares in General Motors; an extensive real estate portfolio that includes the Liquor Control Board of Ontario (LCBO) head office lands, Ontario Power Generation’s (OPG) head office building and Seaton and Lakeview lands; and assets under review by the Premier’s Advisory Council on Government Assets — LCBO, OPG and Hydro One.

Net revenue gains from sales of qualifying assets will help build a new generation of public infrastructure to improve the Province’s long-term competitiveness and the well-being of all Ontarians.

Premier’s Advisory Council on Government Assets

In April 2014, the government appointed the Premier’s Advisory Council on Government Assets to provide balanced and transparent recommendations as it takes action to maximize the value of key provincial assets; generate a better return; and invest in the new transit and transportation infrastructure to help expand the economy, boost productivity, improve competitiveness and create jobs for Ontarians.

“We asked the council to find ways to improve customer service, increase efficiencies and unlock the full value of Hydro One, Ontario Power Generation (OPG) and the Liquor Control Board of Ontario (LCBO), which includes other aspects of Ontario's alcohol retail landscape. These assets are important to the people of Ontario. They help fund core services such as health care and education, and must continue to do so for decades to come.”

Premier Kathleen Wynne, October 17, 2014.

The Council’s work has been guided by three key principles:

  • The public interest remains paramount and protected;
  • Decisions align with maximizing value to Ontarians; and
  • The decision process remains transparent, professional and independently validated.

In an October 17th speech, the Council’s Chair, Ed Clark, laid out the Council’s initial findings on ways to maximize the value of these Government Business Enterprises (GBEs) to the Province. The Council provided its initial report earlier in November. The Council agreed with the government’s overall strategy to consider divesting non-core assets if it was in the public interest to do so. Reducing ownership would provide the government with funds to further invest in infrastructure that could deliver high societal and economic returns to the province without adding to Ontario’s overall debt or increasing the deficit.

With respect to OPG, Hydro One and the LCBO, the Council was of the view that the government should retain ownership of these core strategic GBEs. At the same time, the Council found that these companies could significantly improve their performance and that the Province could dilute its interest in some non-core assets where government ownership is not critical. Doing so would bring greater returns to Ontarians and ensure the long-term sustainability of the assets, allowing Ontario to grow faster, create jobs and increase productivity.    

Beverage Alcohol: The Council examined the three quasi-monopolies that dominate Ontario’s liquor distribution system: the LCBO, the privately owned Beer Store and off-site Winery Retail Stores.

It found the LCBO does not sufficiently use its buying power to lower costs and recommended gradually introducing a new pricing strategy to achieve higher negotiated margins that benefit Ontarians through higher dividends to the Province. The Council also recommended that the LCBO enhance the customer experience through a focus on new store formats and creating an online marketplace to make a broader selection of products available to retail consumers.

The Council found that Ontarians and brewers benefit from the Beer Store’s low-cost quasi-monopoly but that Ontarians deserve a fair share of the profits generated by the beer producers. It also recommended that changes be made to provide greater transparency and to ensure that all producers, including craft breweries, be treated equitably at the Beer Store. In addition, the Council was of the view that the sale of 12-packs of beer should be extended to LCBO stores.

The off-site Winery Retail Stores are a smaller quasi-monopoly owned by six producers, and the stores are grandfathered under international trade agreements. The Council proposed engaging the owners to achieve a fairer tax system so that, again, Ontarians get a fair share of the profits realized from this quasi-monopoly as well as finding ways to allow domestic producers to have outlets, or access to new private outlets consistent with international trade agreements.

OPG: Ontario Power Generation has two distinct businesses: a complex nuclear business and a more stable hydro/thermal business. The Council recommended that OPG focus on ensuring that the Darlington nuclear refurbishment project be delivered safely, on budget and on schedule. The Council found that OPG should consider, in future, creating an internal structure as if they were two separate entities focused on very different businesses — one nuclear, the other, non-nuclear.  The Council also suggested that the government consider strengthening project management experience on OPG’s board to help support the Darlington refurbishment.

Hydro One: Hydro One’s transmission and distribution services are important to the province’s electricity system. The Council found that Hydro One should pursue operational efficiencies and retain the transmission business as a core asset, but separate the electricity distribution business currently integrated in Hydro One Networks. The Council also recommended bringing in private-sector capital to facilitate consolidation of local distribution companies and have the Province dilute its interest in the distribution business in Hydro One Networks and Hydro One Brampton.

“The Province should take action now to act as a catalyst and achieve savings over the longer-term. Two entities that are key to unlocking this jam are Hydro One Brampton and the distribution business in Hydro One Networks. We would propose using them both to spur industry consolidation. Not force consolidation. Consolidation will facilitate efficiencies, reducing costs which will reduce electricity rates from what they would have been. It will also improve adaptability of the system and create companies which can grow and create jobs.”

Ed Clark, October 17, 2014.

The Council’s initial findings also indicate areas for improvement in relation to total compensation practices at these GBEs. Sustainable arrangements are in the best interest of all, as indicated by the Council. The Council has stated it believes that it is very important to have the right process, to talk through and understand possible solutions.

The government agrees with the Council’s initial findings, and is asking the Council to move to the second phase of its review, during which it will broaden its commitment to a collaborative and transparent process and deepen the relationships it has established with all parties. This will bring the Council closer to its goal of reaching agreement with the appropriate parties. 

The Ministry of Finance and the LCBO will work with the Council to develop a system of negotiated mark-ups that would replace the LCBO’s current fixed mark-up structure and would obtain further value from its suppliers on behalf of Ontarians. These parties will also work to develop additional store formats that deliver an enhanced customer experience. 

The Council will represent the interests of the Crown in discussions with the Beer Store and its owner-brewers to determine how additional value might be obtained on behalf of Ontarians while protecting the consumer interest. The Council will also explore how additional growth and retail opportunities for craft brewers could be created.

Similarly, the Council will represent the interests of the Crown in discussions with the wine industry and owners of off-site Winery Retail Stores to determine how additional value might be obtained from the stores on behalf of Ontarians and how additional growth as well as retail opportunities for other small wineries could be created.

The Council will be guided in its work by advice from government and other external experts.  In particular, the Council will seek to ensure the social responsibility mandate that accompanies the sale of beverage alcohol is upheld. As well, the Council will work with the Ministry of Finance and the Ministry of Economic Development, Employment and Infrastructure to ensure that all recommendations respect Ontario’s obligations and requirements under various trade agreements and trade laws.

In this second phase, the Council will be working on developing an implementation plan for Hydro One’s distribution businesses, which also includes Hydro One Brampton.

The Council will also look at options such as:

  • Considering sales, mergers or amalgamations that allow the Province to dilute or reduce its interest in Hydro One Brampton and the distribution business currently in Hydro One Networks;
  • Bringing in private capital to help spur consolidation to build economies of scale; and
  • Facilitating efficiencies with local distribution companies that benefit ratepayers while also allowing the Province to extract financial value from its assets.

With respect to separating the core transmission business from the distribution segment currently contained in Hydro One Networks, an implementation plan would include addressing the potential transition implications and costs of separating the distribution and transmission businesses, with the goal of extracting financial value of Hydro One’s distribution assets and maintaining the value of Hydro One’s transmission assets to the Province.

The Council will also work in a constructive manner with its partners across these three GBEs to ensure that agreements and employment terms are sustainable, fair to all parties and incorporate the recommendations provided in previous reports.

The Council will work with the Ministries of Finance and Energy as well as other affected ministries to keep the government apprised of its progress.  Its activities and recommendations will inform the Province’s 2015 Budget process.

Optimizing the Value of the Province’s Real Estate Portfolio

The government has now moved forward with the process to sell the LCBO’s head office lands by releasing a Request for Proposals (RFP) on September 4, 2014, and expects the transaction to close in 2015. This sale will ensure that Ontarians get greater value out of this public asset.

The government is also performing due diligence and exploring opportunities for moving forward with the sale of the OPG head office. Other real estate assets continue to be revitalized, including the former Lakeview generating station property in southeastern Mississauga and the Seaton Lands in Pickering.

Net revenue gains from the divestiture of qualifying assets will allow the Province to fund the Trillium Trust to invest in infrastructure, including roads, bridges and transit. These would help expand the economy, improve competitiveness and productivity, and create jobs for Ontarians.

Chart 1.1: Ontario’s Plan to Eliminate the Deficit Remains on Track

This chart shows Ontario’s plan to eliminate the deficit, including a projected decline in Ontario’s deficits from 2014–15 through 2017–18. The current fiscal projections are a deficit of $12.5 billion for 2014–15, a deficit of $8.9 billion for 2015–16, a deficit of $5.3 billion for 2016–17 and a return to balance for 2017–18.

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Chart 1.2: Ontario’s Record against Deficit Targets

This chart shows Ontario’s actual deficits versus deficit targets from 2009–10 through 2013–14.

In the 2009 Ontario Economic Outlook and Fiscal Review, Ontario projected a $24.7 billion deficit for 2009–10. The actual result for 2009–10 was a deficit of $19.3 billion. The 2010 Budget projected deficits of $19.7 billion for 2010–11, $17.3 billion for 2011–12, $15.9 billion for 2012–13 and $13.3 billion for 2013–14. The actual deficits over the same period are $14.0 billion for 2010–11, $13.0 billion for 2011–12, $9.2 billion for 2012–13 and $10.5 billion for 2013–14.

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