Commission on the Reform of Ontario's Public Services

Chapter 19: Liability Management
Introduction
Chapter 19: Liability Management
No fiscal projection is a static plan. For any government, revenue and expense estimates
are generally based on economic assumptions, policy decisions and direction, and the best
available information at a given point in time. There is a lot of uncertainty that surrounds the
estimates in the plan. Once released, it becomes subject to a number of risks that could
emerge and impact the previously outlined fiscal objectives.
Any information or events that were unanticipated during the planning process present a risk
to the fiscal projection. Risks can come from uncertainty in financial markets, project failures,
legal liabilities, credit risk, accidents, natural causes and disasters, or events of an uncertain or
unpredictable nature. For Ontario, as a sub-national jurisdiction, the risk of a policy change by
the federal government continually exists.
These risks can have a positive or negative impact on the province’s actual fiscal results.
Generally, positive impacts are easier for governments to manage. For example, in cases
where economic performance turns out better than expected, the government has additional
flexibility to manage existing priorities and meet its fiscal objectives. However, if the economy
were to fall short of what was expected, then the province would feel the negative impact
through lower government revenue, higher expense and, in Ontario’s current fiscal situation,
larger deficits and increasing debt.
To help ensure that fiscal objectives are met, the Fiscal Transparency and Accountability Act
requires Ontario’s fiscal plan to include a reserve to protect against unexpected and adverse
changes in the revenue and expense outlook. In the 2011 Budget, the government included a
reserve of $0.7 billion in 2011–12 and $1.0 billion in each following year through to 2017–18.
However, the reserve in its current state does not provide enough flexibility for variances
that may emerge over this time, especially compounding errors resulting from forecasted
growth rates.
Recommendation 19-1: General risks can and should be handled through the contingency
reserve, which should be set higher than in recent budgets and should grow over time to
address the possibility of growth rate biases in the revenue projection. Modest internal risks
should be addressed through an operating reserve. The contingency reserve should be
increased to cover a 0.2 percentage point annual overestimate of revenue growth.
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