Ontario’s revived budget was passed by the legislature Thursday, setting the stage for the creation of a new provincial pension plan, and tax hikes on high earners, among other measures.
The budget calls for the creation of the Ontario Retirement Pension Plan to supplement the Canada Pension Plan (CPP) and help households save more for retirement. The government indicates that the model for the new pension plan “will be developed in consultation with pension experts, business, labour, individuals, families, and communities across the province in order to ensure that a broad range of perspectives is heard.”
The plan also includes major infrastructure and education spending measures, and plans for a bill that would increase income tax rates on those earning over $150,000, which the government says will affect the top 2% of Ontario taxpayers. It also aims to eliminate the province’s deficit by 2017-2018.
“The 2014 Ontario budget lays out a positive and progressive plan to build opportunity and secure our future while maintaining an unwavering commitment to eliminate the deficit and balance the budget by 2017-18. This strong plan will help create jobs and grow the economy by investing in modern transit and infrastructure and helping Ontarians retire securely,” said finance minister, Charles Sousa.
Despite fears that the budget could lead to immediate credit rating downgrades; earlier this week, Standard & Poor’s Ratings Services (S&P) affirmed its ‘AA-‘ long-term issuer credit and senior unsecured debt ratings on the province, although the outlook is negative.
S&P notes that the government’s forecast for real GDP growth that underpins its fiscal plan is “reasonably cautious”, that Ontario’s financial management is strong, and that the province has “average” budgetary flexibility. “We also consider the province’s capital spending as a share of total expenditures to be moderate at an estimated 8.5% in fiscal 2014, although it is elevated relative to its historical average,” it says.
“Despite these strengths, we believe the province still has significant credit challenges, including its multiyear operating and after-capital deficits, and very high and increasing tax-supported debt burden,” the rating agency says.
The government plans to hold program spending to a 1% growth rate in the next two fiscal years, S&P says. “If achieved, this will support a gradual reduction in budgetary deficits, which we expect to result in a peaking of Ontario’s tax-supported debt burden at close to but no more than 270% of consolidated operating revenues by fiscal 2017.”
However, it also expresses doubt about the government’s ability to limit spending growth so strictly. S&P says that it will be a challenge for any province to sustain such low growth in spending, particularly given the continuing pressures in health care and education costs. “As a result, the government will likely have to look to revenue measures to bridge the gap,” it says.
“We believe that Ontario’s current budget plan to restore budgetary balance by fiscal 2018 may not be achievable unless the province implements additional revenue measures or takes more aggressive cost-containment initiatives in the next three fiscal years,” it concludes, adding that it expects to see spending restraint measures introduced in the coming months.