Ontario's Long-Term Report on the Economy
Chapter IV: Long-Term Fiscal Prospects

Introduction

Chapter IV outlines the potential fiscal implications of long-term projections of Ontario’s demographic and economic trends. The chapter first discusses the importance of fiscal sustainability as a long-term objective for governments. It examines the implications of demographic trends on the Province’s fiscal outlook, and presents steps that the government is taking to support long-term fiscal sustainability. The final part of the chapter describes the relative fiscal sustainability outlook between the federal and provincial–territorial governments in Canada and argues that improved federal–provincial fiscal arrangements could help ensure that Ontario has the resources necessary to provide its residents with quality public services, now and over the long term.

The following key trends have been identified:

  • Demographic and economic trends are projected to increase pressure on the government’s fiscal position. The Province is taking a long-term approach to fiscal sustainability by transforming the way it delivers public services.
  • An aging population will increase demand for health care, which will put added pressure on health care expenditures. The Province’s “Patients First: Action Plan for Health Care” promotes the long-term sustainability of the health care system and focuses on achieving the best possible health outcomes.
  • A slower pace of labour force growth will increase pressure to invest in education and training to build up the productive capacity of the province’s highly skilled workforce. The government is investing in people’s talents and skills by transforming student financial assistance and working to ensure the long-term financial sustainability of Ontario’s universities and colleges.
  • Under current policy, provinces and territories will face increasing fiscal challenges over the long term, while the federal government’s fiscal position is projected to be more sustainable and to improve over the same period. Ontario continues to take a collaborative approach with its federal, provincial and territorial partners to find forward-looking solutions to meet the challenges collectively faced by Canadians.

Importance of Fiscal Sustainability

According to the Organisation for Economic Co-operation and Development (OECD):

Fiscal sustainability is the ability of a government to maintain public finances at a credible and serviceable position over the long term. Ensuring long-term fiscal sustainability requires that governments engage in continual strategic forecasting of future revenues and liabilities, environmental factors and socio-economic trends to adapt financial planning accordingly.1

A long-term approach to fiscal management ensures that governments will have the resources available to provide public services that residents can rely on both now and in the future, the flexibility to manage unexpected changes that may arise, and the capacity to limit the debt burden on future generations.

Overall, the government’s ability to generate revenues is largely determined by the state of Ontario’s economy. Policies that encourage long-term economic growth contribute to a sustainable revenue base — to fund the delivery of public services while ensuring the Province remains on a sustainable fiscal path.

While there are risks to Ontario’s long-term fiscal sustainability arising from demographic and economic trends, the government’s approach to managing expenses helps protect the programs and services that people rely on. This includes a continuing commitment to making strategic investments to help spur economic growth, transform and modernize public services, and ensure the integrity of Ontario’s revenue base. To keep debt at a manageable level and, in turn, protect against the impact of rising interest rates that would otherwise crowd out investments in public services, the Province is also committed to ensuring its net debt-to-GDP ratio is on a declining trajectory.

The next section discusses specific long-term demographic and economic trends in key sectors that could put increased pressure on government programs and services or place downward pressure on revenue. Following that, transformative actions that the government is taking to ensure the fiscal sustainability of programs and services are highlighted. Finally, Ontario’s fiscal sustainability is assessed in the context of fiscal federalism in Canada.

Fiscal Implications of Demographic and Economic Projections

Demand for Health Care

A number of key drivers affect the demand for, and cost of, health care services. These include demographics (population growth and aging), population health status, patients’ expectations, inflation, technology and medical practice.

With a projected population increase of 3.8 million by 2040 and a near-doubling in the number of seniors in the province, the government’s capacity for delivering the appropriate services and programs will come under increased pressure.

Health care costs make up 42 per cent of the Province’s total program expense. Other provinces are experiencing similar challenges, which are likely to continue in the future.

TABLE 4.1 Per-Capita Provincial Government Health Spending, by Age Group, Ontario, 2014, Current Dollars
Age
Group
Spending Per
Person ($)1
Share of Population, 2014
Actual (Per Cent)
Share of Population, 2040
Projection (Per Cent)
<1 10,717 1.0 0.9
1–4 1,477 4.2 3.8
5–14 1,231 10.8 10.2
15–44 1,958 40.2 35.5
45–64 3,328 28.2 24.3
65+ 11,343 15.6 25.2
65–74 7,274 8.7 10.4
75–84 12,944 4.9 9.7
85+ 24,587 2.1 5.1
Total 3,802 100.0 100.0
[1] Weighted average.
Sources: Canadian Institute for Health Information, Statistics Canada and Ontario Ministry of Finance population projections (Spring 2016).

In 2016, seniors accounted for 16.4 per cent of the province’s overall population, with approximately 2.3 million of Ontarians aged 65 or older. As noted in Chapter I: Demographic Trends and Projections, the number of seniors living in Ontario is projected to nearly double to 4.5 million by 2040, with the share of seniors in Ontario’s population projected to be 25.2 per cent, up notably from today.

Public expectations and societal influences are other factors affecting demand for health care. For example, knee or hip replacements that support more active lives may drive up system costs, while reduced social acceptability of smoking may lower costs.

Inflation is a key driver of health care expenditures. Inflationary pressure tends to be higher in health care than in the rest of the economy because health care services are generally labour intensive and can be affected by the high costs associated with the introduction of new medical technology and drugs.

Price increases will likely continue in the future but the impact could be offset by increased efficiencies. Medical progress, which can enhance people’s life span and quality of life through investments in research and development towards new medical treatments, may also offer the potential for long-term savings in the health care system. For example, advances in genetics may help alleviate health care costs by identifying patients who would benefit from pharmaceutical interventions rather than treating larger undifferentiated groups of patients. Furthermore, the dissemination of evidence-based best practices in health care can reduce unnecessary treatments and testing and increase the effectiveness of services for patients. Ultimately, these factors can work towards generating efficiencies that lead to lower costs and a more sustainable health care system.

Demand for Education and Training

Enrolment in elementary and secondary schools is determined primarily by the number of children aged 4 to 17. The number of children in this age group has been declining recently in Ontario as the large cohorts of the baby boom echo move out of this age group. From 2016 to 2040, however, the number of elementary school-age children is projected to rise by about 0.8 per cent annually on average. The 4–13 age group is projected to grow by 21 per cent from 1.48 million in 2016 to 1.80 million in 2040 — significantly greater than the 1.8 per cent decline seen over the past 20 years. Due to regional variations in the growth of the children’s population, school enrolment will rise in some regions and fall in others.

The secondary school-age group (ages 14–17) is projected to decline by about 1.4 per cent over the next two years before resuming growth to reach 765,000 by 2040 — 22.5 per cent higher than today’s level of 625,000.

In the postsecondary sector, demographics play a somewhat smaller role in determining enrolment because attendance is not universal. While enrolment growth is expected to slow over the short to medium term, especially beyond the Greater Golden Horseshoe, postsecondary enrolment will continue to be highly influenced by a combination of demographics and demand, reflecting both economic conditions and the skills needed for employment.

Demand for Children’s and Social Services

Children’s and social services sector programs support people with disabilities, low-income families, and children and youth. Expenditures in the sector are driven primarily by economic conditions, and social and demographic factors.

Economic realities, in particular, labour market conditions, are drivers of the Ontario Works program, which supports vulnerable Ontarians in financial need, and the Ontario Child Benefit (OCB). For example, the OCB is an income-tested benefit provided to low- to moderate-income families. The overall number of recipients is largely determined by the number of children in Ontario families, as well as the strength of the labour market. Likewise, demand for Ontario Works increases during economic downturns as people who become unemployed require financial supports and other services.

The Ontario Disability Support Program (ODSP) provides income and employment supports to eligible Ontario residents who have disabilities. The ODSP caseload has been growing steadily since the program’s introduction in 1998. Growth is driven by a number of factors, including an increase in the diagnosis of mental illness. Between 2006–07 and 2012–13, the ODSP caseload grew by about five per cent per year, on average. Since 2013–14, the ODSP caseload growth has slowed to about three per cent per year, on average. In 2015–16, there were an average of 335,933 ODSP cases per month.

About 42,000 adults with developmental disabilities access a range of targeted services and supports (such as residential supports, direct funding, and specialized and clinical supports). Demand for developmental services is driven by a number of factors, including general population growth; increasing complexity of support needs; medical advances that enable individuals with developmental disabilities to live longer; and caregivers, predominantly aging parents, who are no longer able to care for their adult children with developmental disabilities at home.

Additionally, there has been an increasing demand for early intervention and special needs services for children and youth. The reported prevalence of certain specific disorders, such as Autism Spectrum Disorder (ASD), has increased over time. For example, there are an estimated 40,000 children and youth with ASD in Ontario, and prevalence estimates have grown from 1 in 150 to 1 in 68 within the last decade.

Demand for Other Government Expenditures

The Province invests in economic development, justice and other government programs to encourage growth and productivity, keep communities safe, support environmental stewardship and sustainable development, and ensure that government services are delivered efficiently and responsively.

Some sector programs are demand-driven, while others are mandated by statutory or regulatory requirements. For example, Ministry of Labour enforcement staff protect workers by enforcing the Occupational Health and Safety Act and Employment Standards Act, 2000. Over the long term, demographic changes such as population growth, as well as the performance of the Ontario economy, are expected to continue being key drivers of demand for government programs.

Future Cost of Infrastructure Investment

Investment in public infrastructure provides economic benefits over the short, medium and long term by supporting jobs, enhancing productivity, and increasing Ontario’s competitiveness. These investments also impact the government’s finances by adding to its borrowing needs with the potential to increase provincial debt over time. When infrastructure projects are completed, they affect the Province’s fiscal position for decades through interest on debt, amortization and ongoing maintenance costs associated with the investments.

Amortization expense refers to the consumption of a capital asset over its estimated service life. Once a capital asset is ready for use, amortization expense begins and remains as a non-discretionary expense on the Province’s books over the asset’s projected service life. The Province’s amortization expense is forecasted to grow steadily as infrastructure projects from the government’s 12-year, $160 billion capital plan come into service.

“…we believe that the infrastructure investment plan provides support to the strategy to boost Ontario economic activity in the medium term….”

David Dodge and Richard Dion
Infrastructure Investment for Longer Term Growth in Ontario

Necessary expenditures for maintenance and repairs, to maintain the level of services provided by infrastructure, will also have important fiscal implications over the long term. According to the Centre for Spatial Economics’ forthcoming analysis of the economic benefits of Ontario’s infrastructure plan, the assets funded by the plan remain productive and promote long-term economic growth through ongoing spending on repairs and replacement. (Chapter II: Economic Trends and Projections provides additional information on the study by the Centre for Spatial Economics.) This ensures that the boost to competitiveness for businesses in the province from the initial investment in infrastructure does not diminish over time.

Ontario Government Revenues

Taxation revenues represented about 72 per cent of Ontario government revenues in 2015–16. The impact of the aging population on economic growth is expected to contribute to slower taxation revenue growth than in the past, reflecting tax provisions for seniors and generally lower tax rates on retirement incomes. However, increasing withdrawals from tax-advantaged retirement savings vehicles by seniors over time will lead to an increasing taxable income base that is not reflected in measured gross domestic product (GDP). Income from these savings withdrawals increased at an average annual pace of 8.0 per cent over the past 25 years, double the pace of overall income growth of about 4.0 per cent — increasing from 5.2 per cent of total income in 1991 to 9.2 per cent in 2015.

This trend is likely to be more pronounced in the long term as a larger share of seniors in the population draws on their retirement savings. While this income tends to be taxed at relatively lower effective tax rates due to provisions of the personal taxation system,2 it will still boost revenues above what would be expected based purely on GDP projections.

Federal transfers to Ontario accounted for about 18 per cent of total Ontario revenue in 2015–16 and this share is projected to remain the same in the near term. Federal transfers include major ongoing Government of Canada transfers, such as the Canada Health Transfer and the Canada Social Transfer, as well as funding for infrastructure projects and labour market programs. While the long-term trend in federal transfers is uncertain, future agreements should be responsive to the anticipated demographic change and growth in demand for services, as well as the expected provincial expenditure pressures.

Net income from Government Business Enterprises (GBEs) accounted for four per cent of total Provincial revenues in 2015–16 and is projected to remain roughly the same in the near future. Many of these businesses, such as the Ontario Lottery and Gaming Corporation, Liquor Control Board of Ontario and Ontario Power Generation, are mature businesses and, over the long term, growth in their net income would be driven by economic growth.

Other non-tax revenues comprised about seven per cent of total Provincial revenues in 2015–16 and over the medium term. This category has a variety of revenue sources including vehicle and driver registration fees, proceeds from the auctioning of cap-and-trade allowances, the projected net impact of the Province’s planned asset optimization strategy and electricity sector-related revenues such as power supply contract recoveries, which are fiscally neutral as the recovery amounts are set to fully offset power supply contract expenses, and the debt retirement charge (DRC), which was removed from residential electricity bills as of January 1, 2016.

Other non-tax revenues can be expected to decline slightly in the near term, reflecting government policy decisions such as the legislated end of the DRC for remaining electricity bills as of April 1, 2018, and lower projected revenues from power supply contract recoveries as the contracts expire. Over the longer term, most non-tax revenues can be expected to grow in line with total population growth and inflation. Future growth in proceeds from cap-and-trade allowance auctions, which is estimated to account for 18 per cent of other non-tax revenue in 2017–18, is more uncertain.

Other Jurisdictions’ Perspectives

Recently released long-term economic and fiscal projections for Canada by the federal government suggest that population aging and resulting slower labour supply growth are expected to slow Canada’s economic growth, hence contributing to a lower growth rate of government revenues.3 These factors would constrain the capacity of governments to continue to maintain the growth rates of public expenditures at levels as high as in the past. Meanwhile, population aging is also expected to increase pressure on public expenditures, particularly for age-related programs such as elderly benefits. The budgetary balance for the federal government is expected to turn positive only at the end of the projection period. However, the federal debt-to-GDP ratio is projected to be maintained at roughly current levels over the near to medium term, but is expected to decline over the long term.

The U.S. Congressional Budget Office (CBO) estimates that total spending on major health care programs (Medicare, Medicaid and the Children’s Health Insurance Program) will increase from 5.5 per cent of GDP in 2016 to 8.9 per cent of GDP in 2046.4 The CBO expects that health care costs per beneficiary will rise in part because of the effects of new medical technologies and rising personal income.

The United Kingdom’s 2015 fiscal sustainability report recognizes that an aging population will put upward pressure on public spending, mainly driven by increased health spending, state pension costs and long-term social care costs.5 Health spending is projected to rise from 6.2 per cent of GDP in 2019–20 to 8.0 per cent of GDP in 2064–65, increasing as the population ages.

New Zealand’s 2016 long-term report notes that population aging is projected to apply fiscal pressures through slower revenue growth (resulting from less labour force participation) and increased expenses (primarily through the New Zealand Superannuation Fund and health care).6 Additionally, government spending on health care is projected to increase from 6.2 per cent of GDP in 2015 to 9.7 per cent of GDP in 2060.

Australia’s 2015 long-term report identifies population growth and aging as important challenges facing public finances. 7 Under the favourable “proposed policy” scenario where all announced and outstanding policy measures are implemented, Australian government health expenditure is projected to increase from 4.2 per cent of GDP in 2014–15 to 5.5 per cent of GDP in 2054–55. As well, in 2014–15 dollars, health spending per person is projected to more than double from around $2,800 in 2014–15 to around $6,500 in 2054–55.

Addressing Fiscal Sustainability

The Shifting Gears progress report by the Mowat Centre and the University of Toronto examines how well governments in Canada and across the OECD are doing in terms of returning to fiscally sustainable positions, and prescribes short- and long-term solutions to achieve fiscal sustainability.8 The report emphasizes that Canadian governments should aim to promote fiscal sustainability beyond simply eliminating deficits. Instead, focus should be placed on transforming how governments deliver public services through accountability, transparency and measurement grounded in evidence, to maintain sustainable budgets over the long term.

Productivity growth is a critical driver of economic prosperity. Slower growth constrains a government’s ability to generate revenues and jeopardizes its long-term fiscal sustainability. Chapter II: Economic Trends and Projections addresses economic growth and productivity in depth and provides examples of how to improve the productivity and growth potential of Ontario’s economy. However, focusing on promoting economic growth and productivity to ease potential impacts on Ontario’s revenues is only part of the Province’s efforts. The government is also promoting long-term fiscal sustainability by supporting initiatives that promote the efficient and effective delivery of public services, as well as ensuring revenue integrity and addressing the underground economy.

Transforming and Modernizing Public Service Delivery

Areas of provincial jurisdiction, which represent the largest proportion of provincial program spending, will have significant impacts on the long-term sustainability of Ontario’s fiscal position. As discussed earlier in this chapter, an aging population will put increased pressure on Ontario’s health care expenditures. Also, slower labour force growth will increase pressure to invest in building the skills of Ontario’s workforce and supporting workers’ ability to fully participate in employment.

In light of these challenges, the government has taken a coordinated approach to ensuring that Ontarians receive services in a modern and efficient manner by transforming services and managing costs to promote long-term fiscal sustainability.

Transforming Government and Managing Costs

A cornerstone of Ontario’s approach to transforming the delivery of public services is Program Review, Renewal and Transformation (PRRT) — Ontario’s fiscal planning and expenditure management approach that also provides a continuous review of programs. By collaborating across ministries, the government is taking a coordinated approach to ensuring that programs are relevant, effective, efficient, sustainable and meeting the needs of Ontarians. Program Review, Renewal and Transformation is helping the government achieve better outcomes and free up resources to reinvest in key priorities, such as health care and education.

To improve programs, PRRT focuses on evidence-based decision-making, gathering and analyzing the best available information to improve how planned outcomes are identified and achieved across government. This includes redesigning policies to support greater efficiency and cooperation within government, modernizing program delivery, and changing or ending programs that are no longer meeting people’s needs.

The government has established a new Centre of Excellence for Evidence-Based Decision-Making to build capacity to assess how programs are performing, using evidence to inform choices and lead change in critical public services. In addition, the government has established the Behavioural Insights Unit (BIU) to collaboratively assess policies, programs and services and offer low-cost ways to improve them, in alignment with PRRT goals. Behavioural science adopts a multidisciplinary approach, drawing on concepts and methodologies from social and cognitive psychology, economics, neuroscience and sociology, to understand and design for human behaviour. Applying a behavioural science lens to the design of policies, programs and services has been shown to promote more efficient processes, deliver more human-centric services and improve outcomes.

Consistent with the principles of PRRT, the government is also developing a Digital Government Action Plan to promote more efficient delivery of public services, connect with Ontarians and shift government culture to deliver the best possible customer experience. While government investments in information technology remain stable, operational changes have resulted in managing increased demand for more services over the past decade. This was done through initiatives that lower information technology costs and improve how technology supports the delivery of government programs and services.

To enhance access to public services, the government is embarking on transformation and modernization initiatives, one of which is the modernization of transfer payment administration. This initiative seeks to alleviate the burden on transfer payment recipients by modernizing the processes and rules for administering payments. As a result, delivery partners can spend more time and effort on planning, coordinating and achieving the project or program outcomes they have committed to deliver for Ontarians. As a first step, the government is implementing a “one-window” common registration system that will help transfer payment recipients to easily submit and update information online.

The government is also working to modernize ServiceOntario by making it easier and more convenient to access services through multiple channels including in person and online. ServiceOntario will continue to use its expertise and robust infrastructure to transform government service delivery. This includes working with its ministry partners to streamline processes, reducing the effort required by customers, maintaining the integrity of customer information, and improving the customer experience on all services.

In addition, the government is transforming the way benefit programs are delivered. By shifting from a program-by-program to a client-focused approach, beneficiaries will have easier access to income-based benefits, while ensuring programs are administered efficiently and sustainably.

Transforming Health Care

Beyond these overarching transformative changes, the Province is also focused on transforming health care delivery by creating a flexible health care system that can accommodate future demands. Ontario’s “Patients First: Action Plan for Health Care” focuses on improving the health care experience of patients and their families and achieving the best possible health outcomes. The plan promotes sustainability of the health care system by helping Ontarians get faster access to patient-centred care throughout the province; offering better-coordinated care at or closer to home; providing information to help people make the best decisions about their health; and protecting Ontario’s publicly funded health care system for the future through evidence-based care and funding.

With increasingly complex drug regimens and advances in pharmaceuticals, drug prices have been rising steadily, placing increased pressure on provincial health care costs. To improve long-term sustainability, Ontario continues to pursue affordable drug access for patients, in partnership with federal, provincial and territorial governments, including a coordinated process for approving new and expensive drugs for people who need life-saving medications.

Ontario’s participation in the pan-Canadian Pharmaceutical Alliance and leadership in hosting the office offers opportunity for more cost-effective treatment for those in need.

Transforming Postsecondary Education

The government is transforming student financial assistance to ensure that financial support is transparent, timely and better targeted. As announced in the 2016 Ontario Budget, the Province is discontinuing tuition and education tax credits, beginning in fall 2017. Revenue from the elimination of these tax credits will be reinvested to support the new Ontario Student Grant or other postsecondary, education, training and youth jobs programs. Grants are more effective than tax credits at targeting financial support to students with the greatest needs and providing support upfront.

The Province is working closely with its postsecondary partners to design new formulas to fund colleges and universities that will ensure continued student success and improve sustainability.

Ensuring Revenue Integrity and Addressing the Underground Economy

The underground economy refers to any activity that is unreported or underreported for taxation purposes. When individuals and businesses deliberately ignore their tax and other legal obligations, they put the safety of workers and consumers at risk. Participating in the underground economy also creates an unfair competitive advantage for illegitimate operators over businesses that follow the rules. The result is lost revenue to fund public services that Ontarians rely on.

According to Statistics Canada, the country’s underground economy is estimated to be 2.4 per cent of annual GDP. In Ontario, about $16.7 billion in annual economic activity can be attributed to the underground economy, particularly in the residential construction, retail trade, and accommodation and food services industries, which account for more than half of the total value of the underground economy.9

As announced in the 2016 Ontario Budget and 2016 Ontario Economic Outlook and Fiscal Review, the government is taking the following measures to combat the underground economy:

  • Extending the residential roofing pilot project to help ensure compliance with health and safety obligations;
  • Strengthening the Province’s ability to identify and address the underground economy through enhanced information-sharing;
  • Partnering with natural gas utilities to help homeowners work with certified energy auditors and reputable contractors;
  • Launching a pilot project in the retail and hospitality sectors to test security software that will identify the use of electronic sales suppression technology; and
  • Addressing contraband tobacco through a balanced approach of partnerships and compliance activities including enhancing the oversight of raw leaf tobacco.

The government will continue to find ways to educate the public and raise awareness among businesses and workers about the risks and potential liabilities associated with participation in the underground economy, and will continue to take concrete actions to level the playing field with businesses that follow the rules.

Federal–Provincial Fiscal Sustainability

Ontario’s long-term fiscal sustainability, in the face of demographic, economic and social challenges, should not be looked at in isolation of the broader fiscal federalism context. In fact, the contribution of current federal–provincial fiscal arrangements in Canada has an important impact on the fiscal state of provinces such as Ontario — these fiscal arrangements can provide opportunities to address these challenges.

The vertical fiscal imbalance refers to the relative capacity of each order of government to raise its own revenues to fund its own expenditures. Provincial and territorial governments lack the revenue resources required to meet their constitutional expenditure responsibilities — including vital public services such as health care, education and social services, which are sensitive to demographic factors. In contrast, the federal government collects more revenue than is needed for its responsibilities. This structural fiscal imbalance between orders of government in Canada is expected to persist over the longer term if left unaddressed, particularly as changing demographics increase the demand for the services that provinces and territories provide, which will have significant impacts on their sustainability over the long term.

For the federal Parliamentary Budget Officer’s (PBO) analysis, fiscal sustainability means that government debt does not grow continuously as a share of the economy. In its most recent Fiscal Sustainability report, released in June 2016, the PBO reiterated its long-standing findings that under current policy, subnational governments are not in a fiscally sustainable position over the long term, due, in particular, to challenges associated with population aging.10 The PBO found that subnational governments will have an unsustainable and increasing net
debt-to-GDP ratio over their entire projection period. The federal government, on the other hand, is not only fiscally sustainable, but also would be in a position to eliminate its net debt entirely in 50 years.

The recent federal 2016 “Update of Long-Term Economic and Fiscal Projections” is also consistent with the findings of the PBO. The federal update shows that while the federal government, in the absence of any further policy changes, would incur deficits over much of the forecast horizon, the baseline scenario estimates that the federal debt-to-GDP ratio is projected to remain constant after 2018–19 and will decline beginning in the early 2030s.11 These projections reinforce the PBO’s conclusion that the federal government is in a fiscally sustainable position, as government debt does not grow continuously as a share of the economy.

The projected decline of the federal net debt-to-GDP ratio indicates that the federal government has fiscal room to reduce taxes or increase spending. The PBO estimates that the federal government could reduce taxes or increase spending by an amount equal to 0.9 per cent of GDP each year, while maintaining, over the long term, its net debt-to-GDP ratio at its current level, which would keep it fiscally sustainable.

According to the PBO, for subnational governments, achieving fiscal sustainability over the long term would have to be done by raising revenues, receiving higher transfers from the federal government, reducing program spending or some combination of these three.

The implications of the vertical fiscal imbalance, combined with a projected increasingly unsustainable position over the longer term, will limit the ability of provinces and territories to make the necessary investments to strengthen their economies and maintain the public services that Canadians expect and deserve.

Addressing Federal–Provincial Fiscal Sustainability

Federal–provincial fiscal arrangements have played a key role within provinces and territories in the past, providing the necessary stable and flexible support for them to invest and innovate in key areas such as health care and education. These past arrangements and a collaborative partnership between orders of government have helped produce and ensure the continued sustainability of the quality public services that Canadians enjoy today.

Fiscal arrangements between the federal and provincial and territorial governments have the potential to play a major role in the fiscal sustainability of provinces and territories over the long term — to the benefit of all Canadians. Going forward, arrangements should reflect a principled approach, where transfers are flexible and predictable, allowing provinces and territories to allocate funds towards priorities without imposing unexpected fiscal costs. It is also important that arrangements be allocated in an equitable manner and be adequate to address the needs and demands of Canadians, to share the risks and opportunities facing the federation over the long term, and protect the sustainability of public services for the future.

As they stand now, fiscal arrangements may not be fully adequate to support provinces and territories in maintaining the quality and accessibility of public services. For instance, recent changes to the Canada Health Transfer — limiting growth in federal funding to the rate of economic growth — will put enormous pressure on provincial and territorial health care systems over the long term. An article published in July 2016 by the Institute of Fiscal Studies and Democracy (IFSD) at the University of Ottawa, led by Canada’s former Parliamentary Budget Officer, Kevin Page, stated that the federal cash share of health funding is down considerably from when the Canada Health Act was passed. Furthermore, it was noted that “federal spending in this sector is projected to fall steadily over the long term, given the current program structure and weaker growth rate formula.”12

Provinces and territories are facing increasing cost pressures to meet the health care needs of Canadians, which include changing demographics and an aging population, inflation in the health sector, and adaptation to new and expensive technologies, practices and drugs. There is general consensus among experts that health care costs will only grow as a share of provincial/territorial budgets, and as a share of the economy as a whole. The Conference Board of Canada projects that future health costs will grow at an average rate of 5.2 per cent. This conclusion is supported by findings from other experts, including the PBO and the Fraser Institute.

The implications of the recent change to the Canada Health Transfer growth rate — from six per cent to a floor of three per cent in 2017–18 — mean that federal health funding to the provinces and territories is estimated to grow at a lower rate, over the medium to longer term, than the projected growth in health care costs. This discrepancy will put additional pressure on provincial/territorial budgets, while insulating the federal government’s fiscal plan from health care pressures. According to the IFSD, “the [federal government is] in a fiscally sustainable position today thanks in large part to the change in the health care [growth rate]… This point is key because health care is the number one budget line item of Canadian provinces and territories, and aging populations will only push this expense further.”13

Over the last several years, provincial, territorial and municipal governments have led the way with infrastructure investments that are laying the foundation for Canada’s economic growth and for strong, prosperous communities. The federal government has recently committed to new investments in this area, which will help to support provincial and territorial plans. New infrastructure commitments by the federal government are a step in the right direction towards a more committed federal partner; however, more needs to be done to support the existing plans and the work currently underway by provinces and territories. This includes ensuring that federal funding agreements provide provincial and territorial governments with greater flexibility to direct federal funding towards existing priorities and do not impose unexpected fiscal costs on provinces and territories.

The challenges associated with an aging population and slower economic growth are expected to present significant fiscal challenges, particularly for provinces and territories. A strong, collaborative federal–provincial partnership founded on predictable, flexible and adequate fiscal arrangements, which share the risks and opportunities facing the federation over the long term, is critical to ensuring that all Canadians have access to quality public services now and in the future.

Footnotes

1 OECD (2013). Government at a Glance 2013, OECD Publishing. www.oecd-ilibrary.org/governance/government-at-a-glance-2013_gov_glance-2013-en.

2 In Ontario, there are non-refundable tax credits (for 2016) for the first $1,384 of pension income and up to $4,888 of income for people aged 65 and over who have low to middle incomes. Seniors also have the option of transferring pension income to their spouse for tax purposes.

3 Canada Department of Finance, “Update of Long-Term Economic and Fiscal Projections,” 2016.

4 United State's Congressional Budget Office, “The 2016 Long-Term Budget Outlook.”

5 United Kingdom Office for Budget Responsibility, “Fiscal Sustainability Report,” June 2015.

6 New Zealand Treasury, “2016 Statement on the Long-Term Fiscal Position.”

7 Treasurer of the Commonwealth of Australia, “2015 Intergenerational Report: Australia in 2055.”

8 Jennifer Gold, Josh Hjartarson, Matthew Mendelsohn and Reuven Schlozberg, “Fiscal Sustainability and the Future of Public Services: A Shifting Gears Progress Report,”Mowat Centre and the University of Toronto, School of Public Policy and Governance.

9 Statistics Canada, “The Underground Economy in Canada, 2013,” 2016, www.statcan.gc.ca/daily-quotidien/160620/dq160620b-eng.pdf.

10 Subnational governments include provincial, territorial, local and Indigenous governments.

11 Federal debt represents accumulated deficits, i.e., it consists of net debt less non-financial assets.

12 Kevin Page, Sahir Khan and Helaina Gaspard, “We Need Health Care and Innovation, Tied Together by Sustainable Finances,” The Globe and Mail, July 19, 2016.

13 Randell Bartlett and Kevin Page, “Our Leaders Need to Offer Canadians a New Vision for Health Care,” The Globe and Mail, December 20, 2016.

Chart Descriptions

Chart 4.1: Ontario Government Program Spending

This line chart shows the share of Ontario’s total program spending by sector for the period from 1980–81 to 2015–16. The share for health care in total program spending rose from 31.8 per cent in 1980–81 to 41.7 per cent of total program spending. The remaining sectors of total program spending include education and training which rose from 24.8 per cent in 1980–81 to 26.7 per cent in 2015–16; children’s and social services, which rose from 9.9 to 12.7 per cent; and other government expenditures, which fell from 33.5 to 18.9 per cent, respectively.

Note: Beginning in 1993–94, Education includes Education Property Tax, which was earlier excluded.

Return to Chart 4.1

Chart 4.2: Older Age Groups in Ontario, 1990–2040

This chart shows the number of seniors (i.e., individuals aged 65+) in Ontario by age group for the period 1990 to 2040, where numbers for 2016 to 2040 represent Ontario Ministry of Finance projections. In 1990, the total number of Ontario seniors was 1.17 million and accounted for 11.3 per cent of the province’s overall population. By 2040, the total number of seniors is projected to grow to 4.49 million and account for 25.2 per cent of the population. Those aged 65 to 74 currently represent the largest share of all seniors in Ontario, making up 56.2 per cent of all seniors in 2016. That share, however, is projected to decline as baby boomers transition into the 75–84 and 85+ age groups in the longer term.

Return to Chart 4.2

Chart 4.3: Price Increases in Health Care — Ontario

This bar chart shows the annual average per cent change in prices (that is, inflation) for both health care and the economy as a whole for five-year sub periods from 1982 to 2015. Since 1982, the annual average change in prices for health care has generally been higher than the economy as a whole as measured by the GDP deflator (3.4 versus 2.7 per cent).

Return to Chart 4.3

Chart 4.4: Elementary, Secondary and Postsecondary Source Population in Ontario, 1990 to 2040

This chart shows the number of people in Ontario by age groupings normally associated with enrolment in specific levels of education, for the period from 1990 to 2040. The chart includes three age groupings: elementary (ages 4–13), secondary (ages 14–17) and postsecondary (ages 18–24). Data for the period 1990 to 2016 represent actual estimates from Statistics Canada, while data for 2017 to 2040 represent Ontario Ministry of Finance projections. The number of Ontario children aged 4 to 13 has been fairly stable over the last 10 years, but is expected to grow from 1.5 million to 1.8 million from 2016 to 2040. The number of secondary age Ontarians (14–17) declined slightly over the last decade, but is projected to grow from 625,000 to 765,000 from 2016 to 2040. The total number of Ontarians aged 18 to 24 has been on the rise since 1997, reaching 1.35 million in 2016. While in the near term, population growth of this age group is expected to decline, the age group is expected to increase by 220,000 between 2023 and 2040.

Return to Chart 4.4

Chart 4.5: Ontario Government Revenues

This line chart shows taxation revenue, Government of Canada transfers, income from Government Business Enterprises and other non-tax revenue as a percentage of Ontario total revenue from 1990–91 to 2015–16. The chart shows taxation revenue declined from 81 per cent of total revenue in 1990–91 to 72 per cent of total revenue in 2015–16. Over the same period, Government of Canada transfers increased from 12 to 18 per cent, income from Government Business Enterprises increased from 2 to 4 per cent, and other non-tax revenue increased from 5 to 7 per cent of total revenue.

Return to Chart 4.5

Chart 4.6: Income from Retirement Savings Withdrawals Subject to Personal Income Tax — Ontario

This line chart shows income from retirement savings withdrawals subject to Ontario PIT as a percentage share of total income from 1991 to 2015. The chart shows the percentage share increased from 5.2 per cent in 1991 to 9.2 per cent in 2015.

Return to Chart 4.6

Chart 4.7: Government of Canada Transfers

This line chart shows Government of Canada transfers as a percentage of Ontario total revenue from 1992–93 to 2015–16. The chart shows Government of Canada transfers as a percentage of total revenue declined from 15 per cent in 1992–93 to 7 per cent in 1998–99 due to federal fiscal restraint measures, increasing overtime to 21 per cent in 2010–11, initially due to the 2003–04 health accord and later due to HST transition assistance, stimulus funds and Equalization payments. The percentage declines to 18 per cent in 2015–16 due to lower Equalization payments and the end of time-limited assistance.

Return to Chart 4.7

Chart 4.8: Projected Government Sector Net Debt

This chart compares the projected net debt-to-GDP ratio of the federal government to the net debt-to-GDP ratio of subnational governments, which includes provincial, territorial, local and Indigenous governments, over the 1990 to 2090 period. The graph shows an improving fiscal position for the federal government and deteriorating fiscal position for subnational governments. Figures reflect the Parliamentary Budget Officer’s 2016 Fiscal Sustainability Report.

Return to Chart 4.8