How COVID-19 blew up the Doug Ford government's budget

How COVID-19 blew up the Doug Ford government's budget

Little more than two weeks ago, Premier Doug Ford told an audience that the OPP had delivered a confidential copy of the provincial budget to his house so he could work on it over the weekend.

In the 16 days since then, everything has changed, and that budget got tossed into the shredder. 

As global stock markets crashed and much of the Canadian economy ground to a standstill amid the COVID-19 pandemic, Ford and his Finance Minister Rod Phillips had to start from scratch to sketch out a new spending plan, released Wednesday.  

The plan is full of caveats and careful wording, completely understandable given the circumstances. But underpinning all of the budget numbers is one key assumption: that the province's economy will not contract overall in the coming year —an assumption that could prove quite wrong. 

"The COVID-19 outbreak has had a negative impact on the global, Canadian and Ontario economies," says the document, stating the obvious. "The severity of the economic impact will depend on how widespread the outbreak becomes and how long it lasts." 

In other words, it's impossible to forecast what will happen to Ontario's economy over the next year, and the ripple effect on government revenues. But the government's spending plan must be based on forecasts, so the Ministry of Finance makes this one: that the province's GDP will neither grow nor shrink in 2020-21, but stay stagnant. 

Adrian Wyld/Canadian Press

A senior finance ministry official says that forecast was made last week, and was pegged slightly below the average growth rate predicted by private sector economists at that time. But a week is an eternity in the rapid-fire spread of COVID-19, and that forecast is already looking rosy. 

The major banks have issued new updates in the past few days, all predicting economic contraction in 2020. 

On Wednesday, Scotiabank revised downward its forecast for Ontario, predicting the province's economy will shrink by 5.6 per cent in 2020. Also Wednesday, TD issued a new forecast for the Canadian economy, a 4.2 per cent retraction. RBC's latest forecast came on Tuesday, calling for a 2.5 per cent drop in Canada's GDP. 

Here's the problem for Ontario's budget: its revenue predictions are already based on outdated forecasts. 

Some of the most optimistic assumptions in the fiscal plan are that COVID-19 will do relatively little to reduce government revenues in the coming year, compared with 2019-20.

The fiscal update forecasts a 0.8 per cent drop in personal income tax revenues, meaning just $300 million less in provincial coffers, despite the widespread layoffs announced in the past few weeks.

The government is predicting a 1.3 per cent drop in corporate tax revenue, just a $200 million hit to the treasury. 

If the economy does contract in 2020, those tax revenues could be billions less, making the deficit far higher than the $20 billion already forecast. 

Ontario is clearly hoping the economic hit from COVID-19 will be a very short, albeit sharp, shock, to be followed by a big rebound as non-essential businesses fire up again, driven by pent-up demand from consumers freed from the constraints of social distancing. 

There is also reason to believe that measures from the Bank of Canada, as well as Ottawa's $107 billion COVID-19 rescue package, will keep the bottom from falling out. 

Finally, Ontario does have a strong, diversified economy when it isn't locked down by a virus, and it is well positioned to bounce back once the worst of the pandemic is over.  

But the impact on provincial finances won't be clear for months. In the next two years, it will be fascinating to watch how the PC government deals with running a deficit that is far larger than Doug Ford likely ever dreamed would exist even under a spendthrift Liberal government. 

Ontario 2020-21 spending plan highlights 

  • Health budget rises by $3.3 billion, an increase of 5.5% over last year
  • Education budget rises by $484 million, an increase of 1.5% 
  • Electricity price subsidy now totals $5.6 billion