Commission on the Reform of Ontario's Public Services

Chapter 1: The Need for Strong Fiscal Action
We can — and do — hope for better. But we cannot count on the kind of revenue growth the
government expects and, more importantly, we must not make firm budget plans on the basis
of that hope. Rather, we must adopt the “cautious assumptions” for fiscal policy — the first
principle set out in the Fiscal Transparency and Accountability Act. We must apply that
principle to our projections for provincial revenues and then work to fit our spending plans to
match the revenue projections. This is not strictly a case of hoping for the best and planning
for the worst, as the old adage goes; we are planning not for the worst, but for an outcome
we think more likely. We can hope too that another adage will apply: underpromise and
overdeliver. If the economy and revenues exceed our assumptions, future governments
will be left with the pleasant task of deciding what to do with the resulting surpluses.
Related to the revenue outlook is the usual contingency reserve that budgets include for
reasons of prudence — in case revenues fall short of the budget forecast. The 2011 Budget
set the contingency reserve at $700 million per year in 2011–12 and $1.0 billion in all
subsequent years. Such a static approach, however, might not cover the impact of long-term
trends that give rise to forecast errors. Projections are not only subject to short-term
uncertainty emanating, for example, from the fragile global recovery. There is great uncertainty
over longer-term trends such as productivity growth as well, which affects our assumed rate of
economic growth and therefore our assumed revenue growth. We assume productivity growth
of 1.2 per cent annually, but it could just as easily come in at only 1.0 per cent. A persistent
shortfall in productivity growth would then have a compound effect on our projected revenue
growth. Accordingly, we have set the contingency reserve to cover the possibility of
overestimating the growth rate in revenue by roughly 0.2 per cent per year. From 0.2 per cent
of revenue in the first year of this exercise (2011–12), our reserve rises by 0.2 percentage
point per year to 1.4 per cent in the target year (2017–18), when the cushion would amount
to $1.9 billion.
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