Commission on the Reform of Ontario's Public Services

The contingency reserve should be set at an adequate amount to protect against forecast
errors; it should grow over time to cover not only an error in level estimates but also to address
the possibility of any growth-rate bias. Our recommendation is that the contingency reserve
be increased to cover a 0.2 percentage point annual overestimate of revenue growth.
Our longer-term projection is implicitly based on a projection of annual productivity growth of
1.2 per cent (i.e., increase in Ontario real output per hour worked). As discussed in Chapter 1,
The Need for Strong Fiscal Action, we believe this is an appropriate assumption. However,
we are well aware that the figure is considerably stronger than the actual productivity growth
rate recorded over the past decade. Therefore, it must be considered to be at risk. It could
easily be somewhat weaker, say 1.0 per cent. That would roughly translate into a 0.2
percentage point weaker growth rate in revenues over the entire projection period. This is
precisely the sort of risk we envision when we recommend the contingency reserve be set to
cover a 0.2 percentage point risk to revenue growth in the first year of this exercise (2010–11)
and that it rise by 0.2 percentage points annually to 1.4 per cent in the target year. This
requires the contingency reserve to be $1.9 billion in 2017–18, compared to $1.0 billion in
the 2011 Budget.
Regardless of how prudent and rigorous the government is in its annual planning of revenue
and expense, there are always risks that the government cannot account for. Many of these
risks are unknown to the government at the time of budgeting. In previous years, these risks
have resulted in major one-time costs, such as the government’s response to SARS and
H1N1, or its support for the auto sector. Other risks are known at the time of budgeting, but
the scope, extent or amount of the liability are unknown. A recent example of this type of risk
is the additional forest firefighting resources the province has required. While the government
anticipated a cost for this risk, the amount and severity were unknown. Finally, the province
should plan for risks with an unknown probability of occurrence and cost. It is the unknown
element of all these risks that makes them hard to plan for.
In the past, Ontario has used the operating and capital contingency funds — or the reserve
in extreme cases — to mitigate risks in-year that would otherwise have had a negative impact
on its financial results. While this strategy has been effective, in a period of severe fiscal and
economic challenges, wholly absorbing the cost of these risks without a mitigation plan will
prove increasingly difficult if the government is committed to returning to balanced budgets.
Recommendation 19-2: Specific risks should be addressed through an explicit strategy.
Care should be taken in budget-setting processes to diligently identify any known risks of
significant fiscal magnitude, and a strategy developed to mitigate those risks.
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