Mid-Year Update On Economic And Fiscal Performance For 2011-12
Ontario has experienced moderate economic growth for most of the last two years in spite of global economic uncertainty. In many ways, the province has recovered from the global economic recession, while other places are faced with much greater volatility. The European economy continues to present new challenges while growth in the United States, Ontario's largest trading partner, remains vulnerable to setbacks. Ongoing global economic uncertainty is affecting families here in Ontario.
As a result of pressures from outside Ontario, the provincial economy continues to face enormous challenges. The era of slower growth in much of the world will likely persist for an extended period. This means that, for the foreseeable future, modest economic growth will be the new normal in Ontario, as elsewhere. That is why the McGuinty government remains focused on strengthening Ontario's economy and job creation.
Over the last eight months, the global economy has seen a widespread, downward shift in projections for economic growth. In March, when the government released its 2011 Budget, the average private-sector forecast for Ontario's economy was real gross domestic product (GDP) growth of 2.6 per cent for 2011. This has declined to 2.0 per cent.
The degree of change is even greater for 2012. In March 2011, the average private-sector forecast placed GDP growth at 2.8 per cent but, by November, those forecasts had fallen to 1.9 per cent.
This drop in the rate of growth has an impact on Ontarians, creating uncertainty. It also has a direct impact on government revenues and how the government manages its planning, particularly when it comes to balancing the implementation of new programs and protecting public services while meeting its targets for eliminating the deficit.
Domestic demand is expected to remain a source of strength, supported by gains in household spending, a solid housing market and strong business capital investment. Growth in international demand, particularly from the United States, is expected to be modest, limiting gains to Ontario's net trade position over the forecast period.
The Ministry of Finance is projecting continued growth in Ontario's economy. Real GDP is projected to grow by 1.8 per cent in 2012, 2.5 per cent in 2013 and 2.6 per cent in 2014.
Recent Economic Developments
A number of temporary factors slowed the economy in the second quarter of 2011, including the disruption of global supply chains triggered by the devastating earthquake and tsunami in Japan, the spike in oil prices precipitated by political unrest in the Middle East and North Africa, as well as a sharp slowdown in U.S. growth over the first half of 2011. As a result, Ontario's real GDP edged down 0.3 per cent in the quarter, following seven consecutive quarters of growth over which real GDP advanced 5.6 per cent.
Recent economic data indicate that economic growth resumed in the third quarter of 2011. Quarterly forecasts by private-sector economists are all projecting steady but modest economic growth over the final two quarters of this year.
Despite the recent easing in the pace of growth, the Ontario economy has largely recovered from the global recession of 2008-09. As of the second quarter of 2011, Ontario real GDP was just 0.1 per cent below the pre-recession level.
|Pre-Recession Level||Change During Recession||Recovery to Date||Comparison to Pre-Recession Level|
|Jobs (000s)||6,709||(257)||267||10 |
|Real GDP1 ($ Billions, 2002)||532.4||(26.7)||26.3||(0.4) |
|Merchandise Exports ($ Billions)||14.3||(4.9)||3.7||(1.2) |
|Manufacturing Sales ($ Billions)||24||(7.1)||4.6||2.5 |
|Retail Sales ($ Billions)||12.9||(1.2)||1.7||0.5 |
|Unemployment Rate (Level)||6.4||Up 3.0 to 9.4||Down 1.3 to 8.1||Up 1.7|
- 1 Based on Ontario Economic Accounts, October 2011.
- Sources: Statistics Canada and Ontario Ministry of Finance.
Jobs and the Economy
A majority of the 266,800 net new jobs created over the past two years since the recessionary low in May 2009 have been good quality -- full-time with above-average wages. Full-time employment rose 237,900 over this period, while part-time employment increased 28,900. As of October 2011, employment was 10,000 jobs above the pre-recession peak in September 2008. Ontario's unemployment rate has also moved lower, falling from a recessionary high of 9.4 per cent in May 2009 to 8.1 per cent in October 2011.
Ontario has created 128,400 net new jobs so far this year, accounting for more than 45 per cent of all jobs created in Canada. The pace of job creation in Ontario is ahead of the United States and most of the G7 nations.
2011-12 Fiscal Performance
The McGuinty government has an established record of meeting its fiscal targets. The 2011 Budget forecast a deficit of $16.3 billion for 2011-12, and this economic update shows that -- at $16.0 billion -- the government is projecting it will be slightly ahead of that forecast target, despite the global economic uncertainty and volatility.
Ontario's fiscal outlook continues to project steadily declining deficits of $15.2 billion in 2012-13 and $13.3 billion in 2013-14.
Eliminating the deficit by 2017-18 and maintaining balanced budgets beyond that time as demographic trends exert increasing pressure on government programs will require a fundamental reform of the delivery of public services. The government has appointed the Commission on the Reform of Ontario's Public Services to make recommendations for its consideration in time for the 2012 Ontario Budget.
Financial and economic developments in Europe are a stark lesson in the importance of a serious and sustainable fiscal plan. From 2007 through 2009, the interest rates on Spanish and Italian government bonds were similar to those paid by Ontario. By early November of this year, those countries pay from 2.4 to 3.2 percentage points higher on 10-year government bonds.
That means more tax dollars are going to service debt instead of protecting schools and hospitals. Disciplined fiscal management will keep this from happening in Ontario.
Ontario's finances must be put on a long-term, sustainable path. Past experience has shown that deep, arbitrary, across-the-board cuts do not work. They do not deliver true fiscal sustainability and they would unravel the progress Ontarians have made in improving schools and hospitals and preparing the province for the economy of tomorrow.
The 2011 Budget outlined a plan to hold growth in overall program spending to 1.4 per cent until the budget is balanced in 2017-18. Given the continuing slow rate of growth expected in both the global and Ontario economies, the Commission on the Reform of Ontario's Public Services is expected to recommend that the target for spending growth should be one per cent. The government will consider this and other advice as it prepares the 2012 Budget.
Ontario will meet the challenge of lower economic growth through long-term, fundamental reforms to the way government works. The McGuinty government will build on its track record of reforms to education, health care, taxes and the electricity system. The government will focus more than ever on how to get the best value and the best services for Ontario families.
In 2008, when the global recession hit, the McGuinty government took action to support those who needed help the most. In today's economic environment it will continue to make smart investments to encourage economic growth and job creation. Strong financial management and a competitive economy are the foundation of quality schools and hospitals, and strong public services contribute to a greater quality of life.
Government Revenue and Expense
The province's total revenue for 2011-12 is projected to be $443 million lower than the 2011 Budget forecast. Excluding the impact of the one-time loan repayment from Chrysler Canada Inc. and other first-quarter changes, the revenue forecast is $778 million lower than the 2011 Budget, mainly reflecting the impact of slower economic growth on Ontario's revenue.
The 2011 Budget plan included a $700 million reserve in 2011-12 to protect against the potential impact of events that could deteriorate the province's fiscal performance. The reserve for 2011-12 has been reduced by $500 million to counter the impact of slower economic growth on Ontario's fiscal performance. This amount is less than the $778 million decrease in revenue since the first quarter.
Program expense has been maintained at 2011 Budget levels. Total expense is projected to decrease by $264 million. This is primarily due to lower interest on debt expense resulting from lower interest rates than forecast at the time of the 2011 Budget and the lower deficit in fiscal 2010-11.
|Budget Plan||Current Outlook||Change Since Budget|
|Interest on Debt||10,290||10,097||(193)|
- 1 Budget plan revenue and expense have been restated from what was shown in the 2011 Budget to reflect a fiscally neutral accounting change. See note at the bottom of Table 11 for more information.
- 2 Excluding the impact of the one-time loan repayment from Chrysler and other first-quarter changes, total revenue declined by $778 million.
- Note: Numbers may not add due to rounding.
Total revenues are expected to rise to $116.3 billion by 2013-14 based on the Ministry of Finance's economic outlook.
Ontario's medium-term revenue outlook is lower largely due to lower taxation revenue and a downward revision to Ontario's Equalization entitlement for 2011-12, as a result of a federal government calculation error.
Total expense is projected to grow to $128.7 billion by 2013-14 -- below the forecast included in the 2011 Budget -- primarily due to lower interest-on-debt expense.
|Interest on Debt2||9.5||10.1||10.6||11.7|
- 1 In the 2011 Budget, the interim projection for the 2010-11 deficit was $16.7 billion.
- 2Interest on Debt expense is net of interest capitalized during construction of tangible capital assets of $0.2 billion in 2010-11, $0.3 billion in 2011-12, $0.3 billion in 2012-13 and $0.4 billion in 2013-14.
- Note:Numbers may not add due to rounding.
Long-Term Public Borrowing
The forecast long-term public borrowing requirement for 2011-12 is $35 billion. As of November 15, 2011, $24.3 billion, or 70 per cent, of the long-term borrowing requirement was completed.
The province has been able to continue to extend the term to maturity of its debt while locking in interest rates below the forecast used in the 2011 Budget. The weighted-average term to maturity of long-term provincial debt issued so far in 2011-12 is 11.6 years, compared to 12.8 years for 2010-11 and 8.1 years for 2009-10. This term to maturity extension reduces refinancing risks and helps offset the impact of expected higher interest rates in future years on the province's interest-on-debt costs.