Ford’s Deficit (Mis) Calculations

Following the conclusion of the Independent Financial Commission that Ontario’s deficit in 2018-19 could balloon to $15 billion, Premier Ford immediately announced that he would form a special committee of MPPs to further examine the province’s past spending and accounting practices. He promised with great bravado that he would hold the Liberal government to account for its “reckless spending”.

This was very confusing to everyone.

Why was Premier Ford surprised by the $15 billion deficit? During the election, everyone knew that the deficit would be much higher than forecast in the 2018 Liberal Budget, for the simple reason that the Auditor General (AG) had said it would be much higher.

In her budget review in April, the AG observed that the Liberal government had not properly accounted for the true financial cost of the Fair Hydro Plan and the actuarial gains in two provincial pension plans. As a result, expenses were understated by $5 billion for 2018-2019. She concluded that the deficit for 2018-19 should be $11.7 billion, rather than the $6.7 billion projected in the 2018 Budget.

It is very likely that the Government will accept the Auditor General’s recommended accounting practices. The Public Accounts for 2017-18, which were released on September 21st, included the AG’s accounting treatment for the Fair Hydro Plan and pensions. This resulted in a deficit of $3.7 billion in 2017-18 rather than a surplus of $0.4 billion as estimated by the Liberal government.

It is inconceivable that the Conservatives did not know that the deficit would be much higher than expected, if the Auditor General’s proposed accounting treatment were accepted.

To the Auditor General’s revised deficit forecast, the Independent Financial Commission added another $3.2 billion, primarily relating to developments occurring after the tabling of the 2018 Budget.

These adjustments included the impact of slower economic growth on budgetary revenues, potential further downward adjustments from the revised slowdown in the housing market, and the impact of U.S. tax reform. These amounted to $1.5 billion.

In addition, the Independent Financial Commission also stated that the Liberal government had not identified specific measures to meet the year-end and program review savings targets included in the 2018 Budget. The proposed savings of $1.4 billion were reversed. Finally, the prudence factor was increased by $0.3 billion.

These changes added $3.2 billion to the 2018-19 deficit resulting in a deficit of $15.0 billion. This is the number that has received a large amount of media attention and generated Premier Ford’s wrath.

This deficit estimate, however, overstates the fiscal problem inherited by the Ford government for the simple reason that the Independent Financial Commission failed, for whatever reason, to exclude from its revised deficit projection the fiscal cost of the Liberal’s election promises.

Liberal election promises amounted to $5.7 billion in 2018-19. Excluding these promises reduces the projected deficit to under $9.5 billion (not $15 billion), with the increase attributable entirely to the changes in accounting treatment and to developments since the 2018 Budget.

In addition, policy decisions by Premier Ford will actually add $0.7 billion to the deficit in 2018-19. In July, the Government announced the cancellation of the “cap and trade” program and the wind down of 758 renewable energy projects. These costs were somewhat dampened by the savings from the cancellation of the Basic Income Pilot Project and reform of the OHIP+ program.

During the recent Ontario election, the Conservatives (unlike the Liberals and NDP) did not provide a fiscal projection that included the cost of their election promises for a three-year period. And here in lies the fiscal dilemma for Ford.

If a conservative estimate of Ford’s election promises were included, the “Ford deficit” could easily “balloon” to $12.4 billion in 2018-19, $12.2 billion in 2019-20 and $12.5 billion in 2020-21. Obviously Ford will have to “postpone” many of his election promises.

Premier Ford has some very difficult budget decisions to make in the coming months. The fact is the Ontario government has no fiscal room to maneuver should an economic slowdown occur. The rating agencies will be watching very closely to see if he is prepared to make tough decisions.

The creation of another special committee to examine past spending and accounting practices is not a good start. It indicates that Premier Ford simply does not understand the findings of his own Independent Financial Commission. Simply put, the increase in the deficit resulted primarily from the use of inappropriate accounting practices as noted by the AG, and developments since the election.

In trying to embarrass the Liberals, Ford has only embarrassed himself.

C. Scott Clark held a number of senior positions in the Canadian Government, including Deputy Minister of Finance from 1998-2001. He has a PhD in Economics from the University of California at Berkeley and is currently President of C. S. Clark Consulting.

From 1990 to 2005, Peter C. DeVries served as Director, Fiscal Policy Division, at the Department of Finance. In that capacity he was responsible for overall preparation of the federal budget. He is currently a consultant in fiscal policy and public management issues.

Their Blog is 3dpolicy.ca