Commission on the Reform of Ontario's Public Services

Revenue from personal income taxes grew by only 26.2 per cent between 1993–94 and
1999–2000, an extremely weak showing given the 39.4 per cent rise in the underlying nominal
GDP during that period, but there was a reason for this. Tax revenues tend to be highly elastic
during a period of strong economic growth following a recession; that is, tax revenues typically
grow faster than GDP if tax rates are left unchanged. But over the 1995 to 1999 period,
personal income tax rates were reduced sharply. However, retail sales tax revenue increased
by 55.3 per cent and takings from corporate income taxes more than doubled. Two other
revenue sources displayed strong growth. Revenue from government enterprises rose briskly,
primarily because of the expanding lottery and gaming businesses; so did other forms of
revenue, largely as a result of increased revenues to the province from municipalities.
The government of the day transferred a number of programs to municipalities, but during a
transition period, the municipalities reimbursed the province for services it was still providing
on their behalf.
Relative to the size of the provincial economy, own-source revenues in 1999–2000 were
15.9 per cent of GDP. In 2010–11, the own-source revenue share was even lower ––
13.65 per cent. Since the <strong>Commission</strong>’s Status Quo Scenario for the next seven years
assumes that revenues will grow more slowly than the economy as a whole, this share will
decline further, to only 13.09 per cent of GDP, in the absence of any measures to increase
revenue. In Chapter 1, The Need for Strong Fiscal Action, we recommended a series of
revenue measures worth almost $2 billion by 2017–18; these steps, involving contraband
tobacco, the underground economy, collections issues, tax expenditures and additional
revenues from Crown agencies, would raise the share to 13.33 per cent by that year. Federal
transfers related to the recent economic stimulus package and transition to the HST will fall off
over the next few years; all told, transfers are expected to amount to 3.3 per cent of GDP by
2017–18, down from 3.8 per cent in 2010–11.
Matching spending to revenues by 2017–18 –– the target set out in the 2011 Budget –– was
never going to be easy. Even so, the Budget clearly signalled the need for the provincial
government to restrain spending in the seven years to 2017–18. Its scenario for the target year
put program spending at $124.9 billion; with its projection of $142.2 billion in revenue,
$16.3 billion in interest costs and a $1 billion reserve, the budget would be in balance.
114