Commission on the Reform of Ontario's Public Services

Chapter 1: The Need for Strong Fiscal Action
In short, we cannot count on robust economic growth alone to resolve our difficult
fiscal challenges.
Ontario’s three per cent increase in real GDP in 2010 reflected its recovery from the recession.
At the time of the 2011 Budget, private-sector forecasters were predicting an average of only
2.7 per cent real annual growth in the four years from 2011 to 2014; the government scaled
this back to 2.6 per cent for planning purposes. By November, the private-sector forecast
average for this period had fallen to 2.3 per cent and the government, in its 2011 Ontario
Economic Outlook and Fiscal Review, reduced this to 2.2 per cent for planning purposes.
Few forecasters have looked out to 2018, the period covered in the <strong>Commission</strong>’s mandate.
We accept the government’s planning assumptions for economic growth out to 2014 from
the 2011 Ontario Economic Outlook and Fiscal Review, but beyond that, we take a cautious
approach — one dictated by our view of Ontario’s economic capacity and its ability to grow.
No matter how much demand exists for Ontario’s goods and services, there is a limit to the
level and growth rate of its potential output, both to what the province can produce and how
fast its economy can grow without causing rising inflation. If an economy is already running at
full capacity (or potential), there are limits to the speed at which it can continue to expand in
the long term. A recession reduces actual output below potential, and, during the recovery
period, the economy can exceed the speed limit and grow rapidly until its actual output returns
to full capacity. After that, the growth rate must fall back to the slower pace that keeps inflation
in check.
There is no firm measure of Ontario’s potential long-term real growth rate, but most estimates
centre around two per cent annually, recognizing that the actual figure could be half a
percentage point larger or smaller. Such variations can quickly accumulate to large
differences. An economy growing at 1.5 per cent annually expands by 6.1 per cent over
four years; at 2.5 per cent annual growth, the four-year expansion is 10.4 per cent.
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