This is from TD Economics (
www.td.com/economics) and while not specifically transit related, it is their take on the budget as a whole...
Budget Analysis
THE 2006 ONTARIO BUDGET
Released on March 23, 2006
HIGHLIGHTS
$1.4 deficit in FY 2005-06
Deficit still to be eliminated by FY 2008-09…
..but could be done earlier
Intention to eliminate capital tax by 2010
Infrastructure is the top spending priority
No commitment made on raising the provincial dividend tax credit
Despite an upward revision to its revenue picture, the Ontario government maintained its “go-slow†approach to deficit elimination in the 2006 budget, preferring instead to direct the incremental money to a host of areas. Similar to last year, there were few revenue initiatives in this budget, with the only one of note being a minor cut to the capital tax for 2007 and 2008 and a statement of intent to eliminate it by 2010 rather than 2012. Going forward, the government reiterated its promise to eliminate the deficit by fiscal 2008-09 at the latest. Still, barring a significant economic downturn, the groundwork appears to be laid for the government to announce that it has reached balance by 2007-08. Put another way, the government remains on track to deliver a good news budget next year, roughly 6 months ahead of the next provincial election.
Deficit estimated at $1.4 billion in fiscal 2005-06
At $1.4 billion, the estimated budget shortfall for the current fiscal year ending March 31st is estimated at half the $2.8 billion deficit than that had been planned in last year’s budget. Revenues are expected to roll in some $2.2 billion stronger than planned, largely owing to a stronger-than-expected take from corporate and personal income taxes. At the same time, debt service costs came in $0.7 billion lower than budgeted, while the government did not use its $1 billion contingency reserve set aside to protect against unforeseen circumstances. These three developments generated a positive fiscal “surprise†of almost $4 billion. However, a large share of these proceeds – about $2.5 billion – will flow out the door at year-end for a number of initiatives, notably $1.6 billion for transit projects in the GTA as well as other transportation investments. As a result, total spending growth was revised up to a hefty 7.4 per cent – in line with the increases recorded over the past two years. As a share of GDP, program spending jumped to a new 9-year high of 13.9 per cent.
Starting with this budget, the government has decided to consolidate into its annual budget the financial results of hospitals, colleges and schools, consistent with revised government accounting standards issued by the Public Sector Accounting Board (PSAB). While this move is laudable from a transparency perspective, its impacts are relatively small. In fiscal 2005-06, the estimated negative impact is $32 million, followed by a positive $104 million impact for fiscal 2006-07.
Deficit elimination plan remains largely unchanged
The government’s medium-term revenue picture has also brightened, with about $1 billion added on to last year’s budget projections for each of the next three years. In keeping with its recent practice of allocating any additional resources to the spending side, discretionary outlays have been revised up tit-for-tat, leaving the government’s deficit targets unaltered on a planning basis. While these projected deficits remain modest as a share of GDP, Ontario is likely to be one of only two provinces to remain in the red in this year’s budget season – P.E.I. being the other.
A back of the envelope calculation shows the extent to which the government has shifted its approach from tackling its deficit towards addressing its spending priorities. Compared to its inaugural 3-year deficit elimination plan in its 2004 budget – one that was extended to 4 years in last year’s budget – discretionary spending is targeted to be about $5.5 billion higher for fiscal 2006-07 than had been planned two years prior. Keep in mind that about $3 billion of that spending reflects re-directing increased federal transfers for health. Stripping this away still leaves discretionary spending some $2.5 billion higher than the initial level budgeted for 2006-07, or about double the underlying deficit forecast of $1.4 billion.
In last year’s budget, the education file took centre stage, as the government unveiled a multi-year plan to invest in the province’s universities and colleges. This year, the transportation area has scaled up the priorities’ list. In addition to planned investments in public transit, roads and highways across the province, the government has moved to create the Greater Toronto Transportation Authority to co-ordinate and improve regional transportation planning. As noted, almost $2 billion in transportation infrastructure funding was pre-booked to fiscal 2005-06, allowing the government to hold spending growth in fiscal years 2006-07 to 2008-09 at 3 per cent – in line with population growth and inflation. At $2 billion over 3 years, additional money for health continued to rank at the top end of the receivers’ list. Other areas also received significant new 3-year funding commitments, including increasing support for assistance for low-income individuals ($1.3 billion) and labour market and training ($1.4 billion). The government will also provide help to cash-strapped municipalities by taking back a share of social services that had been downloaded in the 1990s. The government will keep future spending at a moderate rate in part by setting a goal to secure modest savings of $750 million or one per cent of total program outlays, in fiscal 2006-07.
Once again, the government stuck to its vow to stay their hand on major tax cuts until after the budget is balanced. Still, the government’s newly-announced intention to accelerate its plan to eliminate the province’s capital tax was a step in the right direction, as this is the single most damaging levy on investment and capital generation. The rate would be cut by 5 per cent for 2007 and 2008. The government intends to eliminate the tax by 2010 rather than 2012 if funds are available. There was some speculation that the Ontario government would follow the lead of the federal government in eliminating double-taxation on dividend income by raising the provincial dividend tax credit. However, the government remains non-committal on the issue, indicating that it would wait until the federal changes are enacted into law, likely later this year.
With the election 18 months away, the government is well-positioned to record a balance budget by fiscal 2007-08 at the latest. Not that we see the economy performing much better than the modest growth outlook assumed in the budget – our forecasts of both real and nominal GDP increases are almost bang on those of the government. However, the government appears to be building in some caution into its revenue outlook. In fiscal 2006-07, the revenue-to-GDP ratio is assumed to drop by 0.4 percentage points, to 15.0 per cent. Granted, corporate profits are likely to come under pressure next year, as manufacturing continues to struggle. And, if the $1.5 billion contingency reserve is not needed, the zero-deficit goal will be reached in fiscal 2007-08.
Debt burden on a downward track
Although the addition of hospitals, colleges, and schools to the annual budget had little impact on the operating results, the same cannot be said for the debt. In fiscal 2005-06, the accumulated deficit dropped from $125.7 billion to $113.0 billion, reflecting the fact that the kick to assets from the addition of these sectors this year exceeded that to liabilities. As a result, the debt-to-GDP ratio is estimated to tumble from 24.3 per cent to 20.8 per cent in the current fiscal year. This is a one-time impact, however. Going forward, the debt-to-GDP ratio is projected to remain on a downward trend over the next few years, slipping to 18.5 per cent in fiscal 2008-09, which will likely keep Ontario in the middle of the pack.
In terms of gross borrowing requirements, after falling by an estimated $3.4 billion in fiscal 2005-06, the province’s total long-term needs are projected to drop further by $3.0 billion in fiscal 2006-07 and $1 billion in 2007-08, before ramping up again in fiscal 2008-09.
Bottom Line
With the government nearing its goal of balancing the budget, it will soon need to present a clear vision on where it wants to take this province in the post-deficit era. We hope that this blueprint would have at its heart a goal to raise the economy’s sagging productivity performance. Based on today’s budget, this vision is almost certain to include education, health care and infrastructure – areas that are certainly vital. However, we would hope that improved tax competitiveness finds a more prominent place on the agenda. We see today’s announcement on the capital tax as a step in the right direction. But, bolder efforts will be needed to bring Ontario’s personal and corporate income tax standing closer into line with its major Canadian and U.S. competitors. Further, this gap is only on track to widen further over the next few years, as a number of jurisdictions, including Alberta, B.C. and Saskatchewan, continue to trim their rates.
Derek Burleton, AVP & Senior Economist
416-982-2514
Sébastien Lavoie, Economist
416-944-5730
