Election budget needs a do-over

Ontario Finance Minister Peter Bethlenfalvy has the rare opportunity for a budget do-over. He can revise his flawed April budget before it is presented this August to the legislature.

The April budget, for the fiscal year ending March 31, 2023 is estimated as revenues of $180 billion, spending of $199 billion and a deficit of $19.9 billion.

A proper budget do-over will have a higher projected deficit. However, that deficit will reflect both ignored realities and Ontario’s evolving needs.

Four of the most needed changes are:

Inflation — replacing 2.5 per cent with reality

The expected inflation rate is a major factor in the annual adjustments for the province’s spending, and to a lesser extent, its revenues. For fiscal 2023 (all years are fiscal years), the budget estimates inflation as 2.5 per cent. With each of 2024 and 2025, the budget estimates an annual inflation rate of 2.1 per cent in each year.

However, the Bank of Canada’s latest numbers peg inflation as 7.7 per cent, three times Ontario’s expected inflation rate.

In this situation, the Ford government’s alternatives are: increasing spending to continue delivering the current level of services; or reducing services to fit what has been budgeted.

The recommended decision is to adjust for realistic inflation in Ontario’s spending and revenues for 2023 and to the end of 2025. The deficit in the August budget will be higher than $19.9 billion, but the March 2023 actuals will reflect such an objective do-over.

Interest rates — 2.5 per cent for bond borrowing is history

April’s budget also forecast the interest rate for 10-year bonds as 2.5 per cent. However, the current yield is 3.4 per cent, 36 per cent higher than estimated.

Similarly, the April budget’s projected a 2.1 per cent rate for threemonth treasury bills. Current T-bill yields are 2.1 per cent, 24 per cent higher than the budget’s estimate.

Responding to surging inflation, the Bank of Canada is expected to soon increase lending rates by a further 0.75 percentage points.

The budget discloses that the province’s interest expense will increase by $700 million for each percentage point increase in borrowing costs. On that basis, Ontario’s interest expense may well be $1.5 billion more than April’s estimate of $13.5 billion. To be credible with Ontarians and Bay Street, the minister must revise his interest rate forecasts and interest expense.

Repealing Bill 124

Our annual inflation rate is now 7.7 per cent. Bill 124 limited salary increases to 1 per cent annually for a “moderation period” that effectively ended Dec. 31, 2021. However, Bill 124 still prohibits any compensation catch-up after the “moderation period.” This legislation has affected employee morale, recruitment and retention in health care, other not-for-profit sectors and the broader public service.

While Premier Doug Ford recently said Ontario will raise teacher salaries by more than 1 per cent, how much more is unknown for teachers and for other sectors

Bill 124 needs to be repealed now to improve the labour climate and allow post moderation period free collective bargaining.

Electric vehicles incentives

Ontario’s growing electric vehicle sector had several pages of the budget devoted to all its aspects, except one key factor: there is no Ontario incentive to nudge Ontarians into their first electric or hybrid vehicle.

The auto sector needs strong domestic demand as well as export sales.

Now is the time to act. For example, waiving the sales tax on the first $30,000 of any new electric or hybrid vehicle would be a strong incentive for more Ontarians and Ontario companies to make the change to an electric vehicle

The April budget was titled “A Plan to Build.” Minister Bethlenfalvy’s budget do-over can be “A Better Plan to Build” giving the Ford government a credible start to its next four years.