DBRS Comments on Drummond Report: A Considerable Task Ahead, Especially if Tax Increases Are Excluded

DBRS notes that on February 15, 2012, The Commission on the Reform of Ontario’s Public Services (the Commission), chaired by Don Drummond, released its long-awaited report on the sustainability of the public services of the Province of Ontario(the Province, rated AA (low) and R-1 (middle)). The 500+-page document highlights the fiscal challenges faced by the Province and outlines an exhaustive list of recommendations primarily aimed at prioritizing services and improving efficiency in government programs in an effort to significantly curtail growth in program spending and restore balance by 2017-18, as envisioned by the Province.

As expected, the Commission draws a somewhat bleak picture of the Province’s fiscal fortunes under its status quo scenario. The projections assume no change in government program delivery and annual spending growth of 3.5%. They also incorporate the recent deterioration in the global economic outlook with growth assumptions for the 2015 to 2018 period that are lower than those used at the time of the 2011 budget. This leads to weaker revenue projections than those assumed in the 2011 budget and a doubling of the provincial deficit to approximately $30 billion by 2017-18, if no corrective actions are taken.

To address Ontario’s fiscal challenges in a sustainable fashion, the Commission put forward 362 recommendations in an effort to constrain total spending growth to a mere 0.8% annually, including 2.5% growth for healthcare and changes ranging from 1.5% to minus 2.4% for all other program areas. Reflective of its relative importance in the provincial budget, health care gets the most attention, with 29% of the recommendations. The proposed initiatives are very diverse and include, for example, aggressively negotiating the next labour agreement with doctors, encouraging hospitals to specialize, revising hospitals’ compensation framework, increasing the use of home care and nurse practitioners, and centralizing all back-office functions. All other programs are also the subject of recommendations as diverse in nature. A few recommendations also point to ways to generate modest revenue growth, although tax increases were explicitly excluded from the Commission’s mandate.

The government remains strongly committed to not resorting to tax increases to restore fiscal balance, with spending remaining the primary focus of its plan. However, the strategy fleshed out to date continues to lack details. Furthermore, spending control has been mixed since the downturn and it remains unclear whether actual progress is being achieved on some of the bolder cost containment measures outlined in recent budgets, such as securing two years of zero increase in labour costs through collective bargaining.

While still concerned by the weak fiscal outlook faced by the Province and its lengthy path to recovery, which leaves results more susceptible to deteriorating economic conditions, DBRS remains of the view that the challenge can still be overcome and expects the next budget to put greater emphasis on restraint. But will it go far enough to set the tone across the public sector and kick-start the comprehensive reform required? The longer the Province takes to initiate the difficult actions needed to curtail spending significantly, the more likely it is that tax measures will also be needed to restore fiscal balance, especially if growth fails to materialize as originally planned. As such, although flexibility remains within the current rating, lack of resolve and strong efforts to significantly curb spending growth in the next budget could be a cause for increased concerns for DBRS.

A date has yet to be announced for Ontario’s 2012 budget, and given the McGuinty government’s minority position, crafting a budget that contains the reforms necessary to put spending back on a sustainable trajectory may require some fine tuning.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating Canadian Provincial Governments,which can be found on our website under Methodologies.