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Nelson Wiseman: Externals crucial to Ontario budget

U of T professor says low interest rates, low energy costs and low dollar lend Liberals a helping hand

Nelson Wiseman takes a cautious view of budget projections

Ontario has tabled a budget that promises free tuition to many college and university students and tuition relief to most. The provincial Liberals also say they are well on their way to balancing the Ontario budget in 2017-2018 – despite a formidable debt and increases in expenditures.

U of T News spoke with Nelson Wiseman of the department of political science about the lower-than-originally-projected deficit, the implications of the tuition plan and the role governments play in determining – and predicting – the state of the economy.

What do you think of the Ontario budget? Is this a good budget?

I was surprised that the fiscal situation has improved as much as it has and that the deficit is going to be so much lower than originally projected. But on reflection, I realize that a lot of the improvement – most of it – has had nothing to do with anything the government did. When you ask whether it is a good budget, it’s like asking the weatherman, “Did you do something good or bad today?” The weatherman doesn’t determine the weather. The deficit has shrunk because energy prices are a lot lower, because interest rates are so low, and because the decline in the value of the Canadian dollar allows exporters to fetch more money for their products. The government is paying less interest on the debt. The Ontario economy has benefited from low energy costs and a hot Toronto real estate market. None of this has anything to do with [government policy]. The government did sell 15 per cent of Hydro One, but that’s a one-time revenue benefit. In the future there will be less revenue from Hydro One.

The budget projects a $4.3-billion deficit for 2016-2017. Have the Liberals done enough to reduce the deficit?

It’s a small deficit compared to what they had projected a year ago. But they’re also making certain assumptions, including that the federal government will transfer more money to the province. It may, but there remains a huge debt, the largest debt of any sub-national jurisdiction in the world. The danger is interest rates spiking up. Interest rates are determined in international money markets. With higher interest rates, Ontario would really be over a barrel. Right now, even with remarkably low interest rates, Ontario spends more paying interest on the debt than it does on higher education. And the expenditure on post-secondary education is quite large.

Can the budget be balanced by 2017-2018?

I take budget projections with a grain of salt. One of the things I’ve learned is how dynamic and volatile factors are outside of the control of government. A government can control what it spends in certain areas. It can decide to give x amount of dollars to hospitals, to universities. It can’t determine what the unemployment rate will be or how many people will be on welfare. And this is what determines whether welfare expenditures will go up or down. It can’t determine whether corporations are going to make huge profits or sustain huge losses. If they make huge profits, then the government will benefit from the corporate tax. One of the projections is that the Ontario economy will grow by 2.2 per cent this year. Well it might. I think it will grow more than the Canadian economy. But it might not. What if we have a dramatic spike in oil prices or the value of Canadian dollar in the coming months? None of that is within the control of the Ontario government. We also have equalization payments from the federal government. For the last few years, Ontario for the first time has been receiving equalization payments because its economy hasn’t been doing as well as the national economy. With Ontario doing much better now, the province may not get the boost in equalization payments next year that it got this year.

Is the government sacrificing significant funds to offer tuition grants for families earning under $50,000?

My takeaway is that there isn’t any significant financial change for the government. They’ve now got various programs for grants and bursaries, so they’re consolidating and simplifying. In terms of the cost to the government, it doesn’t look like there will be any more [money], and if so, not much. The main thing they are doing is boosting families that make less than $50,000 a year. And I think that’s good. It’s not going to involve a significant boost of government money. It shuffles things around so students coming from families earning under $50,000 will benefit. In terms of the amount of money the government puts out in grants and loans and so on, it won’t make much difference.

How will Ontarians react to an increase in gas prices to tackle climate change?

I don’t think any tax increase is popular, but right now it’s easy to do. After it’s done, people forget about it in a few years. That happened in British Columbia, where there was outrage at the beginning. Here, there won’t even be outrage because gas prices now are so low.