Ontario Budget Highlights 2012

Overview

On March 27, 2012, the Honourable Dwight Duncan, Ontario's Minister of Finance, introduced the province's 2012 budget. The key elements of the budget include a deficit elimination plan that reduces overall program spending by $17.7 billion over the next three years while protecting core services in health care and education. The government is also moving forward on transforming the delivery models of public services that will assist in driving cost reductions. Examples include: streamlining business support programs, using office space more efficiently, pursuing public private partnerships and divesting parts of Ontario Northland Transportation Commission.

The key initiatives in this budget include:

• Implementing cost reductions of $4.9 billion over the next three years;
• Freezing the Corporate Income Tax rate (11.5%) and the Business Education Tax rate at their current levels and until the budget is balanced;
• Capping eligibility for the Ontario Clean Energy Benefit at 3,000 kWh per month;
• Changing the Ontario Drug Benefit program to ensure that senior citizens with incomes over $100,000 pay a larger share of their prescription drug costs;
• Expending the pay freeze for public sector executives (including universities, colleges, hospitals) and Members of Provincial Parliament for two more years;
• Restraining wages for physicians, teachers, school board officials and all Ontario public servants;
• Restructuring public sector pension plans into larger entities;
• Introducing legislation to create more transparency and accountability in the public sector arbitration system.

The provincial deficit for 2012 is estimated to be $15.3 billion – roughly $1 billion lower than forecast last year. The government forecasts that by 2015, the provincial deficit will be $10.7 billion.

Next Steps for Budget Approval:

The Minister tabled the Budget Bill – An Act to Implement Budget Measures and to Enact Various Acts, 2012 (or "Bill 55") for first reading. Debate on the bill will occur over the coming days and it will then require a motion to move the bill to second reading. At that point the Progressive Conservative Party ("PCs") and the NDP will have the opportunity to reject or support the bill. Since the Liberals are in a minority government situation, they need some opposition members to support the budget bill otherwise the government will lose the confidence of the Legislature and the Lieutenant Governor will be required to either call for an election or ask the opposition to form government. At this stage of debate, the PCs have made it clear that they will vote against the bill and the NDP state that they will consult with Ontarians before making any decisions. Since the NDP hold the balance of power in this Legislature, attention will be focused on their decision in the coming days and weeks.

This Bulletin provides a high level summary of the key features of the Ontario 2012 budget of interest to BLG's clients.

Electricity Sector Initiatives:

• Introduce legislation to cap the Ontario Clean Energy Benefit program for those using more than 3,000 kWh of electricity monthly. The goal would be to have the legislation in force by September 1, 2012. This restriction would save approximately $500 million over four years or 11% of the total expenditure of the program during that time frame.
• Develop a plan to conduct a comprehensive review of the electricity sector and its various agencies in an effort to improve efficiency reduce costs.
• Initiate a benchmarking analysis of Hydro One and OPG to determine how these entities can deliver further cost reductions to their operations. This will involve independent advisors to develop comparison with similar utilities across North America.
• Pursue the federal government to provide financial support and the appropriate regulatory regime to facilitate the development of an east-west grid and further develop existing interconnections with other provinces.
• Propose a new regulation under the Electricity Act, 1998, to establish the amount of residual stranded debt. It is currently estimated to be $4.5 billion.

Health Care Reform:

• Reduce the rate of growth of spending to an average of 2.1% for the next three years. This will include holding the growth of hospitals' overall base operating funding to 0% in 2012–2013. However, total operating funding will grow by 2% due to support for reducing wait times and priority treatments;
• Enhance community-based care in order to treat patients in non-profit clinics, at home and in other local facilities;
• Move to a patient centred funding model to improve care;
• Integrate primary care into the Local Health Integration Networks;
• Maintain physician compensation at their current levels;
• Changing the Ontario Drug Benefit program to include an income-tested deductible.

For high-income single seniors with an income of over $100,000 the deductible will amount to $100 plus 3% of income over $100,000.

• Promote health by reducing childhood obesity and combating smoking. This will include creating a panel of advocates, health care leaders, non-profit agencies to develop a Childhood Obesity Strategy that will target a reduction of obesity levels by 20% over five years.
• Expand comprehensive screening programs for cervical, breast and colorectal cancer.

Balancing the Budget:

Average annual growth in program spending will be held to 1% between 2012 and 2015. This includes capping compensation costs and removing administrative inefficiencies. The government's plan is outlined in the graph below:

Medium Term Fiscal Plan and Outlook:

Total revenue is projected to grow at an average annual rate of 3.5% between 2012 and 2015. Total expense is project to grow at an average annual rate of 1.5% over the same time frame. The chart below summarizes the medium term fiscal plan and outlook:

Fiscal and Economic Situation:

Ontario's real Gross Domestic Product ("GDP") has recovered from the global recession of 2008-2009. Ontario's GDP has increased in 2011 to 1.8% and the forth quarter of 2011 had real GDP 1.6% above the pre-recession level in the second quarter of 2008.

The government is planning that GDP will grow at a rate of 1.7% in 2012, 2.4% in 2014 and 2.5% in 2015. Inflation is expected to be 3.1% in 2012, 2.0% in 2013 and 22.2% in 2015. Unemployment levels are at 7.6% as of February 2012 and employment growth is expected to be 1% to 2% from 2012 to 2015.

Jobs and Prosperity Council and Fund:

The government announced it is creating a "Jobs and Prosperity Council" to provide advice on consolidating and refocusing existing business support programs and improving productivity. Experts from labour, universities and non-governmental organizations will comprise the Council.

Existing business support programs amount to $2 billion in annual spending across various government departments. The government is committed to reducing those programs that do not fit its new productivity focus. The target for savings by 2015 is $250 million.

Public Sector Pension Reform:

The budget proposes to develop a legislative framework to deal with rising pension plan deficits and pension costs that pose significant risks to the long-term viability of these income supports.

• Jointly sponsored plans: the proposed legislation would require plans to reduce future benefits before further increasing employer contributions. In limited circumstances, a limit would be placed on the amount of benefit reductions before additional contribution increases would be considered. These plans would also move toward a 50-50 employee and employer contribution model. In cases where sponsors cannot agree on benefit reductions, a new third-party dispute resolution process would be invoked.
• Single-Employer plans: as with jointly sponsored plans, move toward a 50-50 contribution model between employees and employers over the next five years. Employers would continue to be responsible for plan deficits.

In addition to these measures, the government will introduce separate legislation in the fall of 2012 to create larger public sector pension funds. This would pool investment functions of smaller public sector pension plans. Management of assets could be transferred to a new entity or to an existing large public sector fund.

Ministry of Natural Resources Transformation:

The government is moving forward with a series of legislative initiatives that aim to make the conservation and stewardship of the province's natural resources more efficient and cost effective. Key initiatives include:

• changing various key statutes, regulations and guidelines to streamline and automate spermitting processes;
• conduct resource management with a stronger regional focus and fewer field offices;
• redesign the Ministry's science and delivery activities to shift away from a species by species approach to a risk-based ecosystem/regional approach.

Additional changes will also be implemented to the Crown Forest Sustainability Act that would provide some flexibility in forest management planning and allow charging of fees. Changes to the Endangered Species Act will also be proposed to streamline approvals and permitting. Several other statutes will also be amended to better facilitate planning, job growth and other objectives of the Ministry.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.