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Austerity looms for Ontario

Ontario is facing an era of austerity. The government of Premier Dalton McGuinty has tabled a 2012 budget that includes pay freezes for government workers, a halt to planned reductions in corporate taxes, a willingness to reduce public sector pension benefits and increased drug costs for high-earning seniors.

The budget contains no tax increases.

In total, the province says it will eliminate $17.7 billion in planned spending over the next three years -- with $12.8 billion in savings coming from pay freezes for physicians, teachers and other school board employees, public servants and cuts across the "broader sector." The government says it has no money in this budget for pay increases for new collective agreements with public workers.

The government says it will introduce legislation to cap public sector pay if negotiations with unions founder.

"We will maintain our respect for our partners in the public sector. We will respect the collective bargaining process, but we have to achieve these fiscal numbers," Finance Minister Dwight Duncan said.

The budget, called "Strong Action for Ontario", will hold annual growth in program spending to 1 percent over the next three years. That's in sharp contrast to the 6.5-percent average annual growth in program spending over the past five years.

"This is the most sweeping budget this province has ever seen," Duncan told reporters before the budget was released.

But the budget falls short of implementing all of the recommendations -- particularly in the education sector -- put forth in Don Drummond's February report that called for a "wrenching reduction" in spending. Drummond, a former TD economist tasked with finding a plan to reform the province's public sector, called for a cap on spending increases of 1 percent for the education sector to 2017, while the budget plans for increases of 1.7 percent over the next three years.

"The budget is a clear first step in response to the Drummond report," Sonya Gulati, an economist at TD, said. "It is an austerity budget and speaks to the need to reform the way services are delivered in Ontario. It responded to the Drummond Report and put some of those recommendations into reality."

The Liberal government maintains that it will forge ahead with these changes and eliminate the deficit on time -- and do so without raising taxes. It also says it will be able to increase revenues by $4.4 billion over the next three years.

The budget calls for a freeze on corporate taxes at 11.5 percent until the provincial books are balanced in 2017. Corporate income taxes were scheduled to fall to 11 percent on July 1, 2012 and to 10 percent in 2013.

The government expects that freezing corporate taxes will save it $1.5 billion over the next three years.

It is also plans to freeze the province's Business Education Tax (BET) reduction program -- a property tax levied on businesses -- beginning in 2013 and will only resume lowering the BET rate when the budget is balanced.

PENSION PLAN OVERHAULS

Public pension plans will experience major changes in the way they are funded.

The budget pushes for public sector workers in jointly sponsored pension plans -- where employees and employers share the costs of their benefits -- to reduce their future benefits or increase contributions before turning to their employers or the provincial government for top-ups when plans are in deficit positions.

Public sector workers of single-employer pension plans -- where the provincial agency is solely responsible for funding shortfalls -- will be moved to shared plans over the next five years.

"We're dealing with difficult pension questions that have not been death with up to now," Duncan says.

The budget also says the McGuinty government will introduce legislation in the fall that would pool many of the province's smaller pension plans, which it expects will offer greater investment opportunities and higher returns. The province currently has more than 50 plans with less than $1 billion in assets.

SPENDING ON HEALTH TO SLOW

The province's health sector, which consumes more of its budget than any other program, will experience a significant pull back in spending. The budget expects average annual growth spending to fall to 2.1 percent -- less than the 2.5-percent growth penciled in by Don Drummond and far below the average 6.1-percent growth since 2003.

Doing so will entail increased costs on prescription drugs for high-income seniors. Seniors with an annual income over $100,000, will now pay an income-tested deductible.

It will also require a cap on physicians' pay at current levels and moving to what it calls a "patient-centred funding" model over the next three years. The government says this new model means medical facilities will be funded based on the types and volumes of services they provide.

EDUCATION PROGRAMS MAKE THE GRADE

But the McGuinty government refused to back down on its focus on education. It is sticking to its plan to roll out all-day Kindergarten by 2014; keeping its 30 percent rebate for full-time undergraduate and college students; and holding the line on smaller class sizes. The Drummond report called on the government to scrap all-day Kindergarten and increase class sizes.

Teachers' salaries, though, will be in the spotlight, as the government proposes a two-year wage freeze and elimination of banked sick days.

DEFICIT LOOMS

The budget comes as Ontario looks for ways to address its $15.3 billion deficit. The government says that without making changes in the 2012 budget, that deficit figure would increase to almost $25 billion by 2014-2015.

Drummond said last month that if the McGuinty government continued down its current spending path, it would face a $30-billion deficit by 2017-2018.

"Ontario faces more severe economic and fiscal challenges than most Ontarians realize," Drummond said. "We can no longer assume a resumption of Ontario's traditional strong economic growth and the continued prosperity on which the province has built its public services."

The cost of servicing Ontario's debt is currently about $10 billion, the third largest expense behind health and education. The province currently spends more servicing its debt than on colleges and universities.

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