Thursday 18 April 1991

Fiscal plan and financial projections

Ministry of Treasury and Economics



Chair: Mancini, Remo (Essex South L)

Vice-Chair: Brown, Michael A. (Algoma-Manitoulin L)

Abel, Donald (Wentworth North NDP)

Bisson, Gilles (Cochrane South NDP)

Drainville, Dennis (Victoria-Haliburton NDP)

Duignan, Noel (Halton North NDP)

Harrington, Margaret H. (Niagara Falls NDP)

Mammoliti, George (Yorkview NDP)

Murdoch, Bill (Grey PC)

O'Neill, Yvonne (Ottawa Rideau L)

Scott, Ian G. (St George-St David L)

Turnbull, David (York Mills PC)


Christopherson, David (Hamilton Centre NDP) for Ms Harrington

Stockwell, Chris (Etobicoke West PC) for Mr B. Murdoch

Clerk: Deller, Deborah

Staff: Rampersad, David, Research Officer, Legislative Research Service

The committee met at 1007 in room 151.


Consideration of the following designated matter pursuant to standing order 123: A review of the methods employed by the Ministry of Treasury and Economics in generating its fiscal plan and economic projections and of the relationship between economic and fiscal plan projections and an examination of the factors which contributed to the variance between the 1990 Ontario budget fiscal plan and economic projections and current projections and of how that variance compares to any variances experienced in prior fiscal years in Ontario and in other Canadian provinces.

The Chair: I call the standing committee on general government to order. This morning, as has been previously planned, we are dealing with one of the 12-hour motions that has been put forward by one of our colleagues, Mr Turnbull. This has been referred to and I would like to refer this to standing order 123. There is another one of these 12-hour motions we have agreed to look at at our earliest opportunity.

I understand this morning that we have officials from Treasury and Economics. I would welcome the deputy minister, Bryan Davies, and in a moment I am going to ask him to introduce officials he has brought with him today. The clerk will keep track of our time and I want to remind everyone that the agreement is for 12 hours and we are going to have to stick to our time schedule as best we can.

Mr Drainville: On a point of order, Mr Chair: I would like to raise an issue that is of some concern to our side in terms of the way we go about the business of standing order 123, and it has to do with 123(b). It says in that particular text, "The subcommittee shall make a report to the committee on a matter designated pursuant to clause (a), which shall include a precise statement of the matter to be considered." I would say the statement that has been given to the committee is neither precise nor really comprehensible. As I have read it, it would take the efforts of a PhD in English and a rather influential grammarian to be able to plow through the verbiage that has been set before us.

Let me give you an indication if I might, Mr Chair. It says, "A review of the methods employed by the Ministry of Treasury and Economics in generating its fiscal plan and economic projections and of the relationship between economic and fiscal plan projections and an examination of the factors which contributed to the variance between the 1990 Ontario budget fiscal plan and economic projections and current projections and of how that variance compares to any variances experienced in prior fiscal years in Ontario and in other Canadian provinces." Now, Mr Chair, I would say to you that as we looked at this and attempted to prepare ourselves for the onslaught that --

Mr Stockwell: What is the point of order, please, Mr Chair?

The Chair: Mr Drainville is making his point of order.

Mr Stockwell: Is there a time allocation on points of order?

The Chair: Order, please. Mr Drainville, please continue.

Mr Drainville: If the honourable member opposite would only take the time to listen instead of speaking, he would find that the issue has to do with the precise statement of the matter to be considered. Now, I realize there is a sense in which precision is something that can be considered somewhat subjective. But in any real attempt to grapple with an issue having to do with the important issues in government, we have to acknowledge that this statement is neither precise nor helpful in terms of our attempts to get at the issues of the honourable member.

So my statement to you, Mr Chair, would be to make some sort of assessment as to whether this committee can really deal with the issue as set forward here in this standing order. Who can really understand what it means to begin with?

The Chair: Thank you. On the same point of order, Mr Brown?

Mr Brown: Thank you, Mr Chair. Might I say I am offended by what the government has just said. This motion was put before this committee some four months ago. There have been various subcommittee meetings. There have been a lot of meetings about this issue and I wanted assurance from the Chair that this time that is being used is not part of the 12 hours and that the 12 hours will not commence until we have finished with this point of order.

Mrs Y. O'Neill: I will certainly support Mr Brown in that.

Mr Mammoliti: I would like to find out about precedents as to what, in the past, Mike Brown's --

The Chair: The precedents on what, Mr Mammoliti?

Mr Mammoliti: On whether this time that we have just used will be taken off the 12 hours.

The Chair: Very good, we will address that in a moment. Mr Turnbull

Mr Turnbull: I would say that I have had some discussions with various bureaucrats and with some economists. They did not seem to have any difficulty in understanding it, and having seen the antics in the House of time allocation from the NDP, I quite understand that it has difficulty in understanding any complex issue. So 1, too, will ask that this time that is being wasted on this foolish point of order be taken off the 12-hour designation, that the 12 hours will not start running until we have finished dealing with it.

Mrs Y. O'Neill: Are we going to talk now to the precedent that has been said about 123 in this Legislature? Or have we finished the point of order?

The Chair: We will address that in a moment. Anyone else?

Okay, Mr Drainville's point of order is that the motion put forward by Mr Turnbull does not, in fact, meet the requirements of the standing order, particularly 123(b). I want to remind all committee members that this matter was debated in the subcommittee and in the full committee late in 1990. This matter was approved by the subcommittee, I believe on 6 December 1990. The rule suggests that once the subcommittee agrees to a particular issue being discussed under section 123, it is automatically deemed that the matter be accepted by the committee.

Mrs Y. O'Neill: We have had another meeting, talking about the process.

The Chair: I believe on the 13th; we had another meeting on the 13th.

Mrs Y. O'Neill: No, just lately. We discussed how we were going to go about this process.

The Chair: Okay. I recall the discussion concerning Mr Turnbull's request. I recall the issues he wanted to face. While I would agree that the statement is, in fact, general in nature, I believe the discussion we had at the time was more specific. I believe we can accommodate Mr Turnbull's motion under standing order 123. We have 12 hours to do this. I also believe that if we are going to get to any final conclusions, we are going to have to be specific in nature as we are going through the process. I would deem that the subcommittee's acceptance of the original motion as put forward by Mr Turnbull is, in fact, in order.

The second question for the Chair to decide this morning is whether the not quite 20 minutes that we have used this morning discussing the point of order should be, in fact, deducted from the 12 hours. I have checked with the clerk, and I am reminded that there is precedence for such a decision. The time we have used this morning will not be deducted from the 12 hours. The 12 hours will commence once the committee commences its hearings on the matter as put forward by Mr Turnbull and adopted by the subcommittee and the committee. That is the ruling of the Chair, and -- is this a new point of order?

Mr Drainville: No, just a point of information. It has been 12 minutes, Mr. Chair. I just want to make sure that you are aware of that. It has not been 20 minutes. If you are going to go that route, I just want you to be precise about it, that is all.

The Chair: I appreciate that.

Mr Mammoliti: I would like to find out why you made that ruling. What is the reason?

Mr Turnbull: Because he is the Chair.

Mr Mammoliti: That is not good enough for me. Sorry. It may be good enough for the autocratic party over there, but it is not good enough for me.

The Chair: I appreciate the question and I have to be honest with the member. The Chair's ruling was based on a precedent that had already been established in legislative proceedings and I am continuing the precedent.


Mr Mammoliti: Mr Chairman, if we make points of order in the future, is it going to be deducted from the 12 hours, then, the time that we use to discuss the points of order? Or is that a decision that you are going to have to make?

The Chair: I just confirmed my view on the matter and that is, if it is a point of order to deal specifically with the subject matter that is at hand, as we go about the work during the 12 hours, then of course it is deducted from the 12 hours. If it is a procedural matter to do with how we are going to function under this particular standing order, then no, I will not deduct it from the 12 hours.

Mr Mammoliti: Thank you.

The Chair: You are welcome. If it is a procedural matter, as we just discussed this morning, it will not be deducted from the 12 hours. If it is a point of order on something specific as we are going through the 12-hour debate, then it will be used up as part of the time. Do you have it?

Mr Brown: Yes.

Mrs Y. O'Neill: I just want to say to the members of the government that this 123 order, which was agreed to when the House rules were changed, is considered opposition time. I would suggest that you use it wisely, and I would suggest that we will be discussing this with our House leader and I think you should do the same, to find out what 123 orders really are. They are for the government to listen to the opposition, and that is what opposition days are all about and we have a right to be heard. I think this is unbelievable that again this committee starts off in this kind of disorderly manner of being unco-operative. We started this with Bill 4 and you are going down the same route and I am really disgusted.


The Chair: Okay. Seeing no further comment on the matter, I would like to turn the floor over to Bryan Davies, Deputy Treasurer, and ask Mr Davies to introduce the officials who are with him today.

Mr Davies: Thank you very much, Mr Chairman. I have with me today the staff members from the Ministry of Treasury and Economics whose attendance was, as I understand it, requested by the committee. They are Bob Christie, assistant deputy minister of the office of economic policy, Qaid Silk, director of the economic forecasting branch, and Tony Salerno, director of the fiscal planning policy branch.

If it is agreeable, Mr Chairman, I would like to give an overview of the processes and the results of last year that we pursued in our economic and fiscal reviews. I would think that would take about half an hour, and in it we are attempting to address the items that were embraced in the matter designated by Mr Turnbull. I had the opportunity to speak to Mr Turnbull and get an elaboration on a couple of those points and I think that in this presentation of half an hour or thereabouts, we will be able to address, to the best of our ability at any rate, the various matters that are touched on in this designated matter. So with your concurrence, Mr Chairman, I would proceed.

I have several handouts that I have left with the clerk that will assist in that and there are tables that I will be referring to as we go.

The Chair: We will give them out right away then.

Mr Davies: Okay. At the outset, I noted that in the matter designated there is reference to both fiscal plans and fiscal and economic projections. I think it is important to distinguish between a fiscal plan and a fiscal and economic projection since I think this distinction is important to appreciating the role of forecasting.

Governments, as opposed to civil servants, develop fiscal plans because they can include expenditure and revenue adjustments to alter trends that are evident in projections. The projections that we generate as professional economists in Treasury and Economics are just that. Governments have, as their purview, the amending of revenue or the adjusting of revenue and expenditure patterns that could or could not, as the case may be, alter those projected trends.

I just wanted to emphasize that at the outset, because I think it is an extremely important distinction.

For the rest of my overview, I was going to go through the queries posed in the matter designated by Mr Turnbull by first outlining how we go about constructing a forecast of an expected economic performance, or the economic forecast, and what our experience and that of others has been in this regard over the past year, because that is asked for in the motion as well.

I would then move on to talk about how we construct our revenue and expenditure components of what we call the fiscal forecast. The economic forecast deals with the economic aggregates; gross domestic product and so on. The fiscal forecast translates that and other matters into what that means for our revenue and expenditure projections.

As I will for the economic forecast, I will highlight how these fiscal components shifted over the past year. Like our economic forecasts, they did shift.

Finally, as part of my overview I will address how these variances compare with variances of other years in Ontario and, at least to the best of our capacity, given the limited amount of information that is available on other provincial jurisdictions, how our record of performance compared to those other Canadian provinces for which we have information.

Let me start then with the economic projection procedures that we follow. We follow a regular forecasting cycle. Treasury and Economics normally produces two public macroeconomic forecasts each year. One is contained in the budget -- and budgets in this province are normally brought down in the spring. We also produce a public forecast in a statement that is generally released by the Treasurer in the late fall, in part, really, as a source document for the standing committee on finance and economic affairs' deliberations as it prepares itself to assist the government in providing some pre-budget consultation advice. That economic forecast again is regularly published usually in late November or early December. So again, we have two public macro forecasts each year.

Internally, we normally do two additional forecast updates and they are produced for internal use. They are produced following the summer and winter releases of something called the national accounts, which are Canadian-wide gross domestic product data that are generated by Statistics Canada. We produce these internal forecast updates just to monitor the performance of the economy relative to our public forecasts to see if there have been any really big shifts and changes.

The trigger for revisions to a forecast is that system of national income and expenditure accounts that I referred to, the national accounts, which are released quarterly. Most private forecasters, I would point out, use the same base information to drive their economic forecasting models.

This past year, we have seen a lot of international upheavals and certainly rapidly softening economic indicators, many of which were reported in August, including the second-quarter national accounts data that came out on 31 August. That, combined with the need to be prepared to brief any incoming government or any incoming administration with the latest update that we could possibly have immediately post the 6 September election, caused us to pursue a very thorough update forecast during the first week of September because we had to await collection of data that were coming in in August, readied for presentation immediately following the election.


I will leave it to Qaid Silk to address, if the committee is interested, any of the mechanics of preparing a forecast, what the various procedures are. But I would just note that the process relies on the use of macroeconomic computer models that have certain inherent limitations in their construction. First of all, they largely project based on past trends, and for this reason they tend to be less accurate when past trends do not work any more because we are having quite a sea change or what economists call a "turning point" in the economy. So when you have such a radical change in economic conditions, the various modelling formulae that are based on more historic, more normal patterns of relationships just do not generate numbers that are as accurate as in more normal times. Furthermore, models operate on the basis of data that are available only with lags of, quite often, up to three or four months. We have to wait for the data collected by the statistical organizations in the country to become available so we can plug those data into the models and prepare updates.

Let me turn now to the results of that economic forecasting methodology of this past year. If the clerk would distribute handout 1, it has two tables attached to it that show how our economic forecast moved around in the year.

The Chair: Can I ask whether you consult outside agencies as you are beginning to make your forecast for the following 12 months?

Mr Davies: Both Bob Christie and Qaid Silk could give a much more detailed answer to that, Mr Chairman, but I would say that we monitor both their formal forecasts and talk to all the other participants who actively pursue forecasting in this province. By that I am referring to many of the chartered banks, the conference board, other economic forecasting organizations.

The Chair: Would that include having any formal meetings?

Mr Davies: I would ask my colleagues to comment on that.

Mr Silk: Once a quarter the various investment houses do come into Treasury and discuss their view of financial markets and economic markets and we talk to them. On an informal basis, as Bryan points out, we are in constant contact with people who are interested in assessing economic developments and trying to anticipate what the future holds.

The Chair: And do you do this with any international organizations, not based in Ontario?

Mr Silk: On a formal basis? Once a year we do have meetings with the Organization for Economic Co-operation and Development people when they come over. And we do have formal contacts with a couple of forecasting companies that are data resources and work in econometrics. Both of these companies are monitoring and forecasting economic activity in the United States, Europe, Japan, etc.

The Chair: So when I see the first line on page 1 of the initial handout where it refers to April budget, can one assume then that all of the conclusions that you came to at the time or you will come to in the future are not done completely in-house? The information you receive from other agencies who do this kind of work and any international body that you consult with, may that have an effect on the final numbers that you accept and put forward?

Mr Silk: If I understand your question -- and I think the deputy will come to table 2 in a minute -- we are both informed by our contacts of what other people are saying about the Canadian economy, and we obviously take into account information on what is happening currently to the economy, the data that are available from Statistics Canada. So we are informed both by what is currently happening and by other observers' views of what they think will happen. But on table 1, this is our forecast of what Ontario's future is. It is informed by both data.

The Chair: Thank you. That is all I have. Mr Davies?

Mr Davies: I have about three very brief bullet points to explain these two tables that might be helpful.

The Chair: Mr Turnbull, did you have something?

Mr Turnbull: I will defer that until after you have presented.

Mr Davies: My suggestion is that we have two other sets of handouts of similar nature, and I certainly defer to the wish of the committee, but I thought it might be useful to give the overview and then engage in more detailed discussion, because I suspect that some of the questions might answer themselves.

If everyone has handout 1, I would just draw your attention to the first table there, which Mr Silk has already made reference to. This shows how our in-year changes occurred to our own forecast over the four periods I cited: the April budget, which came out last year on, I believe, 24 April; our July internal forecast that we generated after the first quarter national accounts would have been available; and then our September internal forecast, which we were generating out of our normal cycle, by the way, because we normally would have produced that somewhat later -- we generated that in a more hurried fashion this year because we wanted to be ready with the most up-to-date information to provide to whatever the incoming administration was so that right immediately post the election we could give the latest state of play as we saw it, so that was produced for 10 September; finally, the last forecast number on this page is the so-called autumn statement or fall statement, which the current Treasurer provided to the Legislature on 4 December. We have also included in bold at the foot of the table the actual year-end results as the world did evolve at the end of 1990.

I would just observe, by the way, on table 1 that we kept going down during the year and going down significantly. Other forecasters found themselves in the same circumstance, and that is what the second table shows. We have put in the second table ranges for each of those periods of the ranges of forecasting for the four key variables: real growth, employment growth, the unemployment rate and the consumer price index measure of inflation for a number of other forecasting bodies that are referenced in the footnote source. Then we have positioned the Treasury forecast, which is from the table 1, to show where we were in the overall scheme of things.

Later, I will be referring, as Mr Turnbull's motion requested, to the forecasting success in other Canadian jurisdictions this past year. When I get there I think you will find that they too found themselves off base, but quite frankly not as off base as we were, because the recession has really hit Ontario by far the hardest of any jurisdiction, and their variances therefore have been more modest than ours, and, for that matter, than for other forecasters of the Ontario economy.

The Chair: I believe Mrs O'Neill has a question.

Mrs Y. O'Neill: I think this is a very good way to show this. I wonder if you could settle a bit more about what you mean by "off base." Could you be a little more specific and show us just a bit more about what you mean by that term?

Mr Davies: We began with real growth of 1.7% and in December we had re-forecast that to 0.7%. That is what I was getting at.

Mrs Y. O'Neill: And that has nothing to do with a shorter projection period?

Mr Davies: By all means, as one gets more information it is very easy to forecast tomorrow. It is relatively easy to forecast the weather tomorrow; it is much more difficult to forecast the weather next year at this time, to use an analogy that I think has been somewhat apt this past year.

Mr Turnbull: The number that jumps out at me is the July number, where your Treasury forecast was rather optimistic compared with the other range. Now of course this particularly concerns me given that this was the one closest to the beginning of the election. I presume you draw, from what you have told me -- in fact, we see it displayed here -- on a range of different projections. Why would you suddenly have a significantly more optimistic view than any of the other groups?


Mr Davies: Perhaps I could ask Bob Christie to address that query.

Mr Christie: I think I would make a couple of points or note a couple of factors. With respect to the real growth forecast that you are looking at, the range has narrowed somewhat, as is common as you go through the year and get more actual information that is available to all forecasters. The range begins to narrow in. The difference here of two tenths of 1% -- I think you used the word "significant." We will talk a little bit later about the kinds of variances that are experienced in this kind of exercise year in and year out. While one would like to be perfect all the time -- and Qaid can amplify on this if he wishes -- the two tenths to four tenths of 1% discrepancy between the top of the range and areas in the range were not a matter of concern to us in the July update.

Mr Turnbull: But what I am saying is that in all other cases I think you are within the range and then suddenly you step out of the range of other forecasters and it is a more optimistic view.

Mr Christie: The other point I had wanted to make on this was that we are forecasting a number of matters, and while we were somewhat more optimistic or above the top of the range in July for real growth on the employment numbers for Ontario -- which are also very important as an alternative measure of the economy -- we were probably the most pessimistic of the forecasters.

Mr Turnbull: But you were within the range.

Mr Christie: We were the low end of the range.

Mr Turnbull: And you are saying that two tenths of 1% is not a significant variance. I would suggest that when you are talking about as a percentage of the range, it is a significant overshoot of the range.

Mr Christie: As a per cent of the range it is large; as a per cent of the economy it is relatively small.

Mr Silk: Also, if I may point out, in our December forecast we were outside the range. The range was minus 0.8 to plus 0.3. We had forecast at that point 0.7. As Mrs O'Neill pointed out, obviously everybody had a lot more information about 1990 by December, but none the less we were outside the range and we were quite happy to be outside the range. It turned out that the actual later on was also outside the range of other forecasters. We were slightly closer to the range, if you like, or close to the actual.

So as I was saying in answer to the Chairman's question earlier, we do take into account other information and other people's assessments and we try to develop our own. At times we tend to be in the range; at times we tend to be outside.

Mr Turnbull: Do you internally produce a range of numbers?

Mr Silk: We definitely produce risks and, in terms of any specific shock that we think is an important shock that is likely to happen, we try to assess the implications of that for the forecast.

Mr Turnbull: How many different numbers would you typically produce in a range, your internal forecasting?

Mr Silk: For any given forecast?

Mr Turnbull: Yes.

Mr Silk: No, we are forecasting basically one number. We are modifying that number through the year. We are recognizing that there are both what one might call upside risks and downside risks and we are trying to get the central tendency, we are trying to balance those risks and stay within the middle, recognizing fully, as this table shows, that in fact there are both sides of it, and also being quite alert and informed of the fact that there is a range provided by the fact that other forecasters are forecasting.

Mr Turnbull: So you have produced one number and then you contrast that with the other numbers from the other forecasters.

Mr Silk: And all of those forecasters are only forecasting one number as well, recognizing fully that there are risks on both sides.

Mr Brown: I just have a question of clarification. When we talk about these ranges, are we talking about numbers specific to Ontario, so these are other forecasts specific to just the Ontario economy?

Mr Silk: Yes. They will also be forecasting Canada, and some of them forecast, obviously, other provinces. What we have shown in this table is their view for Ontario, compared to our view for Ontario.

The Chair: And I am assuming that it is as simple as it appears on page 2, where you just take the lowest range that has been provided by the organizations listed, and you take the highest number as provided by these organizations? It is just that simple?

Mr Silk: Yes.

Mr Davies: What I now propose to do is move on to our revenue and expenditure projection methodology, and the normal cycle that we follow there, and then to indicate how our performance ensued this past year on that front. The two are obviously related.

Our annual budget economic forecast is really the major determinant affecting our base revenue growth, particularly for taxation revenue sources, which comprise almost 80% of the total revenue sources. Non-tax sources, such as fines and penalties, fees and licences and so on are adjusted in individual or discrete fashion to reflect inflation, and federal payments represent a number of cost-share agreements that are formula driven. We then add budget revenue moves or adjustments, and these are added or subtracted from the base to get our total revenue forecast at the beginning of each year.

There is a large number of variables affecting individual revenue sources, and rather than even attempt to summarize these here, I will leave it to Mr Salerno to address any specific queries you might have, but I would note that in forecasting any individual revenue element one has to look at a variety of factors, the economic forecast and other indicators. There are a host of complex issues that impact on any particular revenue source, behaviour patterns of individuals not the least.

Revenues are monitored on an ongoing basis, and advice is provided to the Treasurer. More formal assessments are undertaken on a quarterly basis, and those of you in this room will be familiar that they are reported to the Legislature and to the public in a publication called Ontario Finances, which is produced quarterly and lays out in detail, ministry by ministry, our expenditure forecasts, and in detail, revenue source by revenue source, our adjusted revenue numbers. Those reports come out for the quarter ended 30 June, in July; for the quarter ended 30 September, in October; and for the quarter ended at the end of the calendar year, 31 December, in January. The final quarter is reported in the spring budget.

We do not swing around our revenue forecasts each time we see an isolated variance in a revenue flow. Rather, changes to revenue forecasts are not undertaken until all cash flow and economic factors have been confirmed. If we moved every time we saw one number change, a variance from what we thought was going to occur in, say, the month of April, and what actually did occur, we would be bouncing up and down with a great degree of frequency. But what we do look for are trends in patterns, and those trends in patterns become evident on a quarterly basis, normally.


Mr Turnbull: Excuse me, can I ask one question? The first quarter, finances section, as compared with the revised outlook, you are reporting different items under revenue and expenditure items there.

Mr Davies: I would just point out, Mr Turnbull, that what we are doing in these tables, and I will speak to this table very specifically now, is isolating the major changed factor. There are many other factors that are altered, obviously. Any individual account would have altered, but some balance one another out. What we have attempted to do here is isolate, as was isolated in the first-quarter Ontario Finances that was published in July, the highlights of the more significant changes and the changes in trends.

Perhaps I could draw the rest of the committee's attention to the table that Mr Turnbull has already referred to, which is in handout 2 and which shows the progression of our fiscal outlook, detailing the revenue and expenditure and deficit changes throughout the course of the year. It shows that, consistent with the deterioration evident from our economic forecast, the deficit increased from a slight surplus, evident even in the first quarter report released in July, to some $700-million deficit level in the numbers we were able to generate for 10 September, to $2.5-billion deficit in the second-quarter finances released at the end of October.

I would really emphasize here the point that I made at the outset of my presentation: that the numbers shown in September reflected policy decisions already in place. They did not attempt to reflect any fiscal plan that an incoming administration would apply to these numbers. These were projections based on what we call a no-policy-change projection, which was the way we generated the numbers for September.

Over the course of the year, on the revenue side, major declines were reported for retail sales tax, corporations and land transfer taxes, while expenditure increases were related in great part to social assistance case loads, as well as discretionary measures introduced by the government that assumed office, I guess technically in October, but which was elected on 6 September.

Mrs Y. O'Neill: I would like to just go back to the beginning when you said you did not want to go into how you make up the forecast.

Mr Davies: I will be pleased to.

Mrs Y. O'Neill: You talked about behavioural patterns. I would like you to say a little bit more about that, if you would, and I would like you also to give me two or three other components, just so we will have a context in which to put the development of these figures.

Mr Davies: I will, perhaps, turn to Mr Salerno to help me out on this, because he is more expert in this field than I, but retail sales numbers are driven not only by disposable income but by changes in people's psychological perceptions of whether they want to run the risk of going out and making a purchase if they feel their job might be vulnerable. With our modelling, it is very difficult to capture the traditional patterns, especially in times of such radical change in economic circumstances, as I called it earlier. If we see a blip, as we call it, in one month, we usually wait till we see whether it is continuing into a second or third month.

Another example, and this is a very complex area and one that I know certainly has caused difficulty for treasurers of this province, and I suspect for other members of the Legislature as well, is the difficulty in forecasting personal income tax proceeds, because the way the personal income tax works, at least in this province, is that the federal government collects the personal income tax on behalf of this province. They pay us essentially on account. They estimate how much they will be collecting on behalf of the province of Ontario, and then they pay us. Their estimate of that is their guess of how much total personal income tax they are going to get, so that is the first level of estimation. They have to estimate what they think they are going to get.

We then have to estimate whether their estimate is accurate or not, because they make in-year adjustments to us, and as many of you who have been in the Legislature for a number of years know, in recent years those adjustments have been significant, and have been significant on the upward side through the strong growth of the latter years in the 1980s. There were some other years, and an unfortunate year for the Treasurer of the day, where the in-year adjustment went the other way, where the federal government had realized that its estimates, on which we had, in part, relied, proved to be quite wrong, and we had to reduce our personal income tax forecast. Those are just a couple of examples.

Mrs Y. O'Neill: Could you just say a little bit about something that is very high profile right now? That is the GST cross-border. Are these components or behavioural patterns -- have you done a lot of work in Treasury on that kind of behavioural change?

The Chair: Could we save that particular question for a little later?

Mrs Y. O'Neill: Yes. Could I just have a yes or no if they have done work on that?

The Chair: Could we have a yes or no on that, please?

Mr Davies: Our quick answer will be no, we have not looked at that as an isolated variable.

Mr Turnbull: One of the things that jumps out from this table is you had estimated in your 30 June revisions a deterioration in land transfer tax to the tune of some $30 million. We see that indeed on 10 September you are estimating that this would have deteriorated by $130 million. I have to say that it seems like a wildly optimistic suggestion that it would only deteriorate by $30 million in June when already the industry was totally on its knees and there were no sales occurring. Further, the industry was suggesting that there was going to be no improvement that year. So, I am really curious as to how we made that kind of estimate.

The Chair: Can I add a supplementary to that question? Did you consult with the industry, that portion of our economy, before you came up with the $30 million?

Mr Salerno: As far as our forecast of that specific revenue, we did not consult with the industry specifically ourselves, but we rely primarily on our economic forecast, and to the extent that its forecasts incorporate its discussion and its consultation with the private sector, it would be included in here.

With relationship to specifically how optimistic or not this forecast might have been: frankly, considering how this revenue source had been increasing over the previous two years, in the budget we had in fact changed the trend and had gone with the flat line. We had projected no increase whatsoever in this revenue source this year, in spite of the fact that the overall economy was still at that time projected to increase and prices were as well, both in terms of real terms and the price effect. We had the economy still increasing. We had, expecting some softness in the market, not increased our forecast for the land transfer tax in the budget. Indeed, as we started to see some softness in this revenue source, we dropped it by $30 million in the first quarter.

Mr Turnbull: But surely flat-lining was in itself a very wildly optimistic move in view of all of the projections that the industry was making for that segment.

Mr Salerno: After the fact, it seems optimistic, but at that time, it did not seem so.

Mr Silk: I am just sort of looking through my papers and I have some information that might help. On 12 July, the range we had in terms of talking to other people of what they thought the housing starts forecast -- which is one component of land transfers; not the only one by any means -- but the range was from 67,800 to 83,100. Our estimate in the budget had been 81,000. By that time, we had revised it down to 73,000. I would recognize that there was that weakness, but we were at the low end. People were saying 68,000 to 83,000. We were much at the lower end of that range, significantly. You are right that in the end the housing starts turned out to be even lower than that.

Mr Turnbull: What were the actuals?

Mr Silk: I do not recollect it off the top of my head, but I can get that for you.


Mr Salerno: If I could just add one more little point there, as you know, the land transfer tax in fact lags what is happening in terms of current sales quite significantly, because the revenues that we see most likely in the summer reflect sales that were taking place during the winter, as much as six or eight months in advance of that, because of course the land transfer tax is paid on closing. There is a significant lag particularly, for instance, in condominiums; there could be a lag of as much as a couple of years.

Mr Turnbull: Well, there were virtually no sales in condominiums at the beginning of the year, so I am perplexed at the lack of attention to this very important revenue item.

Mr Salerno: As I was trying to indicate, the revenues that we were getting reflected sales, in fact, that took place earlier in 1989, 1988, as far back as 1987 because of the lag.

Mr Turnbull: Nevertheless, I am saying that as far back as the end of the previous year, there was already such significant evidence of people failing to close condominium transactions. You are mentioning that condominium transactions are typically ones that have occurred long before you see the revenue item. It was quite clear to anybody watching the industry that people were not closing those and that the numbers would have to be adjusted. In fact, most of the major builders were predicting gloom and doom the year before.

Mr Davies: If I could just perhaps add one point to Mr Salerno's observation that we had already taken down the beginning-of-the-year forecast for land transfer tax significantly from the proceeds of the year before. Was it just flat-lining?

Mr Salerno: It was flat-lining.

Mr Davies: It was flat-lined. The second observation, and this is not to suggest that land transfer tax or for that matter any tax source is insignificant: In the overall scheme of things, out of revenue sources totalling well over $40 billion, we are talking a revenue source of a little over 1% of our total revenues.

Mr Brown: I wanted to talk a little bit about the income tax -- our income tax, collected by the feds -- coming to us. It is just more or less an accounting question on how that happens. Obviously they flow revenue to us monthly or whatever with regard to an estimate, and then there is quarterly -- or how does it work when they make the adjustment to what actually happens?

Mr Salerno: The amount that we actually receive in any one year is composed of a number of components. One is the federal estimate of current-year assessments, when they will be assessed, as the deputy has indicated already. In other words, the federal government forecasts the amount that will ultimately be assessed and pays the provinces on the basis of that estimate.

The forecast is a national forecast. Proportionate to the provinces, they use the last known actual share between the provinces, which again, at the beginning of the year, is two years old.

For this last year, the 1990 tax year, at the beginning of the year, they were using 1988 actual distribution between the provinces; so that is one unknown, let's say. You have the first: It is the federal estimate that we have to guess in terms of the original forecast and how will they change it in-year. There is the other variable, that is, the share that is attributable to Ontario at the beginning of the year and how that will change in-year once they have the previous year's assessment. The other component of what the province will ultimately receive in any year is adjustments in respect to prior years. Now, for this current year, that is, the one just ended, 1990-91, in our forecast for personal income tax, we had included just over $700 million in anticipated changes in-year. Again we were proved to be overly conservative in that forecast in that the actual adjustments in-year amounted to, I believe, about $900 million over that adjustment that we had anticipated.

So there are a lot of variables in there that one has to consider and try to estimate. The biggest is of course the fact that we have to forecast what the federal government will forecast. It is not actually what it will be, because we could be bang on, but that adjustment we will not see for another two years and that is the unfortunate aspect --

Mr Brown: So you are telling me that, to be precise, in 1990-91 we received $900 million more than our Treasury estimated. I understand the difficulty with the estimates; I am just trying to understand how much more revenue the province had than was estimated in the budget documents.

Mr Salerno: You are correct. It is $900 million more than we forecast but $1.6 billion more than they had forecast, because of course we had anticipated $700 million of that adjustment, in-year adjustment.

Mrs Y. O'Neill: Sorry, I do not understand that.

Mr Davies: Perhaps I could just try to clarify that. If, when we were doing the budget this time last year, we had relied on the estimate provided to us by the federal government, that compared with what it finally paid us, the difference would have been $1.6 billion. We looked at their estimate and adjusted it ourselves to the tune of $700 million. We were too conservative, we could have adjusted it even more, but we only learned that in-year.

Mr Brown: Then the question is, when was Treasury actually paid the additional money?

Mr Salerno: We were first advised of some revisions in November, which is what they call their first batch of assessments in respect of 1989. So in November we were advised that our share would be slightly higher because of 1989 assessments. That higher share not only gave us more money in respect of 1989 but also was applied in the 1990 tax year, for which again in effect you get a compounding effect in terms of the impact on Ontario's actual cash flow. Furthermore we were getting prior-year adjustments, and all of these compounded to give us the $1.7 billion. Now, in terms of when we got the actual cash, I believe we received about two thirds of that in January and the final adjustment came -- because again we would never know precisely the final figure until we get it in March -- and we received it in March.

Mr Brown: So then how do we account for that? Do we account for it in our system of books when we actually receive the dollars or do we account for it in the period from which the dollars were generated?

Mr Salerno: No, we are on a cash reporting basis, so we would account for it in the year in which we received the money, in the fiscal year in which we received it, however, in terms of when we report it, as soon as we were aware of that adjustment, and that would have been in the third quarter.

Mr Turnbull: So in point of fact the deficit would have been closer to $4 billion had you not got that extra billion dollars from the feds.

Mr Salerno: Again, I can only report on the projections as we make them in a no-policy-change environment. Assuming the policies as we have them today and the expenditure patterns as we have them now, you are correct.

Mr Silk: Could I answer Mr Turnbull's question earlier, about housing starts? As you recall what I was saying was that in July the range was 68,000 to 83,000, including home builders associations and so on. The actual turned out to be 62,600 for the year. Everybody missed the number, obviously. The number was not in the range, including our own number. We have been revising it down, recognizing that. Later on in the year, obviously, we revised it down even further.


Mr Turnbull: Let me ask you what kind of sensitivity analysis you do on your numbers.

Mr Silk: We do a fair amount. There are a variety of variables in the economy. Housing is one component. Consumer spending is a major component. Exports, imports, business investment -- in all of those we are essentially trying to develop, as I was saying earlier, upside, downside risk, ie, sensitivity analysis. We factor all those in to come in the end at a one-point estimate, just as other forecasters do. Some of them tend to cancel each other out. Some of them obviously do not, and we recognize that in working out our sensitivity analysis.

Second, we are recognizing the latest information we are getting to modify our view of the world just as others are.

Mr Turnbull: Do you have any sort of input as to what international investment perception is with changes in political policy and political parties at the helm?

Mr Silk: We are monitoring financial markets and understanding them as best as we can all the time. That is one of the key screens, if you like, through which international assessments of Canada's and Ontario's economic prospects are filtered. Yes, we are monitoring them. As I said earlier to the Chair, we are talking on a formal basis to the economists and the financial people in our investment houses as well, to get their views of how others are seeing us.

Mr Turnbull: And has the international investment community downgraded its desire to invest in Ontario as a result of the election results?

Mr Davies: Perhaps I could address that just by observing that the province has been going to capital markets to borrow funds over the last number of months and we have been able to place our bonds at competitive rates.

Our business is economic forecasting and we rely on numbers. What is behind the numbers and what generates changes to the numbers are a host of variables, as I pointed out in my answer to Mrs O'Neill earlier.

Mr Stockwell: I read your report here and you went from a $23-million surplus to a $712-million deficit. Whose responsibility is it to report the information either to the public or the Treasurer?

Now you can tell me all you want that this is the first you have felt that this was taking place, that our economy was going to hell in a hand basket, but I do not believe you. You knew at some point between July and September. Somebody must have had some inkling that something was going wrong somewhere. If you did not, that would cause me even greater concern. Whose responsibility is it to report and whom do you report to and how does this information get sent out?

Mr Davies: Let me speak to your observation first of how we could not have known. I really have to state very clearly that our lack of prescience, which by the way was shared by other forecasters as well, Mr Stockwell, was really occasioned by technical limitations and not by any attempt to withhold or manipulate information. If that was the implication of the observation, I want to categorically state that that was not the case.

The actual fact of the matter is that many of the economic indicators that drive our economic forecasting models and hence influence our revenue and expenditure projections were coming to the fore in the later portion of the month of August. I made reference to the second-quarter national accounts data, which were released on 31 August. We had the breakout of the Kuwait situation at the beginning of the month, which caused oil prices to become highly volatile and no one knew where they were heading. We had a Canadian dollar that was at a 10-year high -- or very close to if not a 10-year high -- carrying through there in spite of the fact that most forecasters had been projecting that the dollar would have moderated and interest rates would have dropped. In fact, Mr Wilson had indicated that in his budget back in February.

We had labour force numbers for the month of July, reported on 7 August, I believe it was, that showed a very significant decline in employment levels. These were reinforced with the numbers that came out on 7 September for the month of August. That really showed a sea change in the economy and the province.

Another one would be the August retail sales tax numbers. We get our retail sales tax numbers reported to us as the Ministry of Revenue receives the proceeds. Most businesses remit their retail sales tax obligations as close to the end of the payment period as possible for good and logical reasons. So the lion's share of retail sales tax proceeds come in at the end of the month. The numbers that came in in August were very dismal indeed.

We took all of those factors: the 31 August national accounts data, the retail sales tax numbers for the month of August, which started to really confirm the trends we had been seeing but that were quite anomalous earlier in the summer, and the trends we saw in the labour force data. We worked very diligently, I must say, in that period between the receipt of all those pieces of information to have the best possible state-of-the-art snapshot of the economy ready for whichever administration was assuming the duties and responsibilities of office come 10 September.

In that forecast and the forecasts reflected here before you, we used fiscal projections -- I express again -- not a fiscal plan. In the numbers we even included the 7 September employment data with respect to the month of August. So the numbers we had were the numbers that we used and the numbers that we forwarded, and those numbers were available, sir, in that time period that I mentioned.

Mr Stockwell: The question was the reporting structure and the reporting systems.

Mr Davies: Fine. I will go back to that, then.

The civil servants at the Ministry of Treasury and Economics serve the minister. The minister is the Treasurer of Ontario, who is a member of cabinet, as you know. So through him, we serve the government and through the government, presumably, we serve the people of this province.

The reporting systems that we have, as I mentioned also earlier, are the reporting systems the government has chosen to have, and this has transcended administrations of all three political parties. It is something that is not that common in other jurisdictions, which is a quarterly public reporting of the state of affairs of the fiscal situation of the province. That is the Ontario Finances that I made reference to earlier in my comments, which comes out quarterly. That is the mechanism through which the government and various governments have conveyed in-year revenue and expenditure shifts to the Legislature and to the public.

Mr Stockwell: So your responsibility, then, is to report it to the Treasurer. What he does with it is then really his decision.

Mr Davies: As I understand our system of parliamentary democracy, that is what governments are for.

Mr Stockwell: Okay. That is the way they report. Agreed. I guess there are special circumstances during the election. For instance, if the Premier was walking around or driving around this province talking about a balanced budget, surely you must have had some concern with those statements when you heard them, when the indicators that you had coming in were clearly showing that there was not going to be a balanced budget and probably there was going to be a significant deficit. Would that be a safe assumption?

Mr Davies: No, I do not think it is a safe assumption because that would --

Mr Stockwell: As of even --

Mr Davies: Excuse me, sir, if I can answer the question. That would mean that I, or we collectively, would have to have assumed what an incoming administration would have done with the projections and what alterations, if any, to a fiscal plan -- and this is the distinction I drew earlier -- they might occasion to alter those projections.


Mr Stockwell: What major alterations did they make, that I cannot see, that changed the $23-million surplus into a $712-million deficit? Point them out to me, the major alterations they changed that affected your numbers.

Mr Davies: I was referring to what alterations would be made by an administration when it had these numbers in hand. The changes that you are citing are what economists call exogenous changes in that they are driven by the trends, by the features of our revenue system as it is currently constructed, and of our expenditure system as it was then currently constructed. Those are within the capacity to be altered.

Mr Stockwell: So I can assume, therefore, from what you have suggested, that for the month of August, for the first week of September, you really had no belief, feeling, numbers to think that the $23-million surplus was at all in jeopardy.

Mr Davies: Oh, you are asking the question in a very different way. We were concerned, as were many observers in the public press, as were many observers in the general economy, that conditions seemed to be deteriorating, but our job is to have a forecast based on what we believe are solid data, as solid as we can ever get, and those numbers to generate a revised forecast were really not available until the latter portion of August. And even then, as I pointed out, it was a fiscal projection, not a fiscal plan, but the numbers that we rely on were being exposed and being delivered by Statistics Canada and the other sources of information in that latter portion of August.

Mr Stockwell: Did you report these concerns? I suppose you reported these concerns to the Treasurer and the cabinet.

Mr Davies: I have served in the Ontario public service for over 15 years and have been through a number of writ periods, and during writ periods most members of the Legislature attend to affairs in their ridings, I find, and what we address ourselves to then is usually dealing with a minister's staff, and we were advising and providing our regular advice to the policy adviser to the then Treasurer at that time.

Mr Stockwell: And what were you telling them?

Mr Davies: We were indicating that our forecast was still on direction -- and it was, through the month of August -- that we were still showing a surplus, but we saw signs of weakness, as did everyone else, and we were waiting to gather the information to generate a new economic forecast.

Mr Stockwell: And then, on 10 September, lo and behold, four days after the election, you came out with a revised outlook.

Mr Davies: That is absolutely correct, that we were working on, right through to the morning of 10 September because, for example, the labour force data on which we have to rely was not available until 7 September.

Mr Stockwell: And on 10 September, you were gathering this information with a revised outlook, through the months, through the election --

Mr Scott: Some of which was not available, as he has said, until 7 September.

The Chair: Order, please.

Mr Scott: To be fair, Mr Chairman.

Mr Stockwell: I am trying to be fair, Mr Chairman.

The Chair: Order, please. Mr Stockwell has the floor.

Mr Stockwell: I am trying to be fair. There was some information available. There were certain pieces of information not available. You were reporting to the Treasurer's staff -- and I am not suggesting that you were reporting to the Treasurer. You were reporting to the Treasurer's staff, and then this report came out that went -- would you consider it a huge slippage, a major change, to go from a $23-million surplus to a $712-million deficit?

Mr Davies: Seven hundred million dollars is a significant number, yes.

Mr Stockwell: And that would be a significant change in your department?

Mr Davies: Yes, it would be and, believe me, this has been a year of extremely significant changes because, as I would point out, we were not very accurate even in September in forecasting what was going to happen in this whole entire year, because the economy has certainly degenerated in a much more profound fashion even since September.

The Chair: I just want to remind all members that we have on our list Mr Scott, Mrs O'Neill, Mr Brown. There may be others.

Mr Stockwell: Thank you. I apologize. Go right ahead.

The Chair: I was going to allow you more time, Mr Stockwell.

Mr Stockwell: No, go right ahead.

Mr Scott: Deputy, I apologize for being late, and you may have answered these questions. But just to summarize in my own mind before I come to the questions, what you have been telling us is that you are engaged in a predictive exercise based on a variety of factors, all of which are accumulated after the event that the factors represent, and some time after the event, like a month later.

Mr Davies: Indeed, Mr Scott, and I would say, before you did come in, I did address some of those matters, and in many cases it is not a month, it is two, three or even four months.

Mr Scott: Yes, and what you are predicting when you make your budgetary forecast is what the economic position of the provincial finances will be in effect one year hence.

Mr Davies: That is the essence of budget forecast in the spring.

Mr Scott: And not only is there a risk that the predictive capacity, being human, may fail, but there is a risk that events may occur that were not anticipated, leading to revisions.

Mr Davies: Indeed, and every year we have revisions.

Mr Scott: Yes, and the quarterly assessments that you make are efforts to update the prediction that was contained in the budget.

Mr Davies: Again, I might be covering ground reviewed earlier. The quarterly reports that I was referring to a moment ago report on those revisions. We do ongoing internal monitoring and we produce, as it turns out, as a normal course, quarterly economic forecasts as well.

Mr Scott: Yes. But the notion is that you begin by predicting what will happen to the financial picture of the province 12 months hence, and the closer you get to that 12-month horizon, the more accurate you are going to be because more actual events, in terms of revenue and expenditure, will have occurred that can be precisely measured and do not require prediction.

Mr Davies: Exactly.

Mr Scott: Now, let me ask you this. This is an ongoing exercise in which all governments of Ontario have been engaged annually. Right?

Mr Davies: Yes.

Mr Scott: And is it not true that as you go through this exercise, there is a capacity in government, an important capacity, to make policy and administrative changes that will correct for the predicted result?

Mr Davies: Certainly there is a capacity to change. I do not know if I would quite use the words "correct for," because the essence of government is to take actions that are needed, or seem to be needed, by the government to meet the needs of the province, but I would hesitate to use the word "correct."

Mr Scott: Let me put it this way. How many days' revenue does $700 million represent?

Mr Davies: I would prefer to do the calculation that is --

Mr Scott: Okay, let us say roughly five.

Mr Davies: In that order, yes.

Mr Scott: All right. How many days' expenditure does $700 million represent?

Mr Davies: Roughly the same, given --

Mr Scott: All right. So what we are talking about -- my friends would call it an error; in light of what you have said, I would not call it an error -- is that the deficit that your 10 September statement predicted was a deficit that represented essentially five days of either revenue or expenditure out of 365.

Mr Davies: That is a way of putting it. I do not mind calling it an error, because with the nature of forecasting you always have errors.

Mr Scott: All right. Now, what I am saying to you is that an incoming Treasurer or an outgoing Treasurer, the Treasurer, confronted by that, may be able and will want to look at making adjustments in programs or policies of the government to offset that. Is that not so?

Mr Davies: Or may choose, depending on the sense that that government has of the needs of the province, not to offset but to pursue other policies.

Mr Scott: Exactly. I am not suggesting for a moment -- a group of public servants -- that this would ever be contemplated, but if there were a freeze, for example, on public service salaries -- you will be delighted to hear I am not in government and have no influence in these matters at all, but if on 1 October --


Mr Mammoliti: It would be scary if you were.

Mr Scott: It was scary when I was. But if on 1 October the government of the day, whether it was ours or a New Democratic Party government, had announced -- and I am not recommending they should -- a freeze on public service increments for that year, it would not be impossible to deliver a balanced budget.

Interjection: Yes, very true.

Mr Scott: Is that not right?

Mr Davies: I would have to do the arithmetic on that particular example but I sense you are using that as an example of one type of policy change to alter an expenditure package.

Mr Scott: And in the same way, a government on 1 October, ours or somebody else's, that was anxious to offset the deficit and restore a balanced budget could ditch some current programs that it judged were not an important priority to the tune of $700 million.

Mr Davies: In government, governments are there to govern.

Mrs Y. O'Neill: Everything is possible.

Mr Scott: Yes. I will not even refer to the other possibility which is so horrendous that it should not even be mentioned: The possibility of raising taxes if you believe in a balanced budget. But that is the way the process works. Governments make adjustments in light of their determination that there should either be a deficit or a balanced budget. Is that right?

Mr Davies: That has been my experience.

Mr Scott: Yes. And so the question for any party in government is: Do you want a balanced budget or do you not? Because you have the levers of power that will permit you to achieve whatever it is you want. Right?

Mr Davies: I cannot deny anything you have said.

Mr Scott: Thank you.

Mrs Y. O'Neill: I think, as was pointed out earlier, Deputy, you have not used exactly the same categories of the budget or lines of the budget in all these statements. But I would like to look at a couple of them if you would tell me a bit more about them. Newly appearing in the 11 October Treasurer's statement is the contingency fund, and that seems to almost balance out some of the things we have been talking about. I wanted you to tell me a bit about what is in that contingency fund.

Mr Davies: I wonder if I could actually take a moment to find or have someone find the statement of 11 October. I can give you a thumbnail sketch, but what the Treasurer said in the statement is what really --

Mrs Y. O'Neill: Okay, I have a couple of other questions that might be easier.

Mr Davies: I would suggest that what the Treasurer said in the statement is the appropriate language to use.

But the contingency fund, as I recall his statement, he indicated there were two very large issues that were then outstanding, but about which negotiations were being pursued. One was the Stadium Corp of Ontario's circumstance and one was the negotiations with the Ontario Medical Association. I believe those two elements, combined with some other issues, were rolled into the one number of the contingency fund.

Mrs Y. O'Neill: So this was a new policy decision, to make this in-year adjustment upwards for expenditure, basically.

Mr Davies: Well, to make provision for it.

Mrs Y. O'Neill: Okay. Could I go to the next page on 31 December. These are just acronyms I do not know. PIT?

Mr Davies: Personal income tax.

Mrs Y. O'Neill: Oh, that is the one we were talking about earlier.

Mr Davies: Yes.

Mrs Y. O'Neill: This was the federal adjustment?

Mr Davies: That is correct.

Mrs Y. O'Neill: And the LTT?

Mr Davies: That is the land transfer tax.

Mrs Y. O'Neill: Okay, and PDI?

Mr Davies: Public debt interest, the interest on borrowings.

Mrs Y. O'Neill: Now, could you say a little bit about why that figure appears as it does there?

Mr Davies: When one does not anticipate running a deficit, borrowing is not required. When borrowing commences, interest payments also commence, usually with a lag because the first coupon, as it is called on most bonds, is payable six months hence.

Mrs Y. O'Neill: As you say, though, you are getting that and have been able to obtain that at very comparable rates.

Mr Davies: This year the markets have been quite buoyant for us and for other borrowers.

Mrs Y. O'Neill: Okay, thank you very much. That is fine for me.

Mr Brown: I think Mrs O'Neill has asked most of the questions that I was going to ask. If I could just for one moment, though, when we talk about the contingency fund being in there and the two reasons that you gave, the doctors and the stadium, could you tell us if during the fiscal year 1990-91 those were actually made?

Mr Davies: Those matters are still under discussion, as you know from the press. I really would have to leave that for the Treasurer to address in his upcoming budget, which is very soon.

Mr Brown: You just told me that you account for all your business on the basis of when you receive the cash or, I assume, expend the cash. You should know whether you expended the cash before 31 March or whether you did not.

Mr Davies: Our accounts are just in the process of being finalized now. It is a very large organization with many different ministries and the accounts are still coming in.

Mr Brown: Now, come on.

Mr Davies: If you are asking me with specific reference to the Ontario Medical Association negotiations whether payments were made in the last year, the answer is no.

Mr Brown: What about the stadium corporation? Was there money paid? That is an item you would know.

Mr Davies: The province has assumed the responsibility for advancing the funds to the stadium corporation. That was done in the months of February and March when we basically replaced -- or February really -- the Canadian Imperial Bank of Commerce as the provider of funds to the stadium corporation.

Mr Brown: So in that capacity, does that mean you spent the funds? In your accounting system? That is what I am trying to get at.

Mr Davies: No, that will be a determination as to whether we think those funds are recoverable. And that is a matter that is being finalized.

Mr Brown: My other question is about the UTDC. This was a policy change on 11 October. The UTDC item I do not believe appeared before 11 October as money that was to be expended in this fiscal year. Obviously, there was -- at least I think there was a policy decision to spend that money this fiscal year rather than, as I believe or understood the obligation to be actually, for the next fiscal year. But I guess that is a policy change. Is it a policy change? That is what I am really asking.

Mr Davies: Yes, I am not trained at law and I do not know the exact legal conditions of when the obligations under the guarantee would have to be honoured. But there was some flexibility as to when. There was not a question of whether it was, it was a question of when.

Mr Brown: Yes. So what you are telling me is that it is a question of whether you spent it -- the policy decision was changed to say, "We will spend it in 1990-91 rather than 1991-92," because it did not appear in 1990-91. Is that fair?

Mr Davies: Yes.

Excuse me, Mr Chairman. I do not know and we are at your disposal; there was a third element of Mr Turnbull's original motion which was the historical comparisons. We would be pleased just to table that and leave it with the committee if that is useful.

Mr Turnbull: I will have some questions on that. But I would like just to ask the deputy: In your long years of service with the Ontario government, have you ever seen as rapid and as serious a deterioration in the fiscal position as we saw in these few weeks?

Mr Davies: I am going to turn to my friends the economists here because they might have some data on the 1982-83 downturn. The nature or the steepness of the curve I think was probably as steep. Whether it happened in the same sort of time period of reporting is another question. By that I mean, did the information happen to coincide with the end of the accounting period for our expenditures as well?

Mr Turnbull: I am talking essentially about a six- to eight-week time frame that we have seen such a rapid deterioration in conditions.

Mr Davies: Or we altered our forecasts.

Mr Silk: I am going from memory now, but definitely in late 1981 there was a very marked and rapid deterioration in the economy. If I can just recall a bit of history there, in 1980 there were very high interest rates in the United States and in Canada and we had a mini-recession. Then we came out of that with some surprising buoyancy in late 1980 and early 1981. It looked as if the economy would just continue, not at those high rates, but continue growing. Suddenly, interest rates started rising again in a very short period of time and I recall definitely the federal government's budget at that time in late November or early December 1981 did not expect the 1982 recession that followed. Our budgeting cycle happens to be different, and so when we came out with our assessment of 1982, that was after that evidence.


Mr Turnbull: I am talking about in such a tight time frame in Ontario. Have we ever seen as rapid a deterioration in the fiscal position?

Mr Silk: I would have to defer to somebody else. But on the economy, I would say that if you had asked economic forecasters in late 1981 to anticipate the decline, to predict what might have happened in 1982, I think that all of us would have been very off base. We would have said that the economy was going to grow moderately in 1982. We got the biggest recession in the post-war period.

Mr Turnbull: Okay. Let's get back to the deputy. If we are going to look back and we are going to say potentially in the 1981-82 recession we had something of a similar nature but you are not even sure as to whether it was such a rapid deterioration, it seems to me that it would be reasonable to bring this urgently to the attention of the Treasurer. Quite frankly, I find it beyond the realms of credibility that this was not brought home to the Treasurer, and I think there is a general sense in the public and this question has to be asked and I have to ask it very bluntly. Is it conceivable that when we are seeing such a rapid erosion in our position that this is not brought to the attention of the Treasury?

I want to refer back to the comment that you made about reporting it to the Treasurer's staff. Surely there would be an anticipation that the Treasurer's staff would report that immediately to him and remedial action would at least be started or some contingency plans. Also, the suggestion that during an election this should not be brought --

Mr Drainville: Mr Chairman, I just want to make a couple of comments. The one comment is that the deputy minister and his support staff have been very clear in their responses up to this point in time. We are getting, I would say, very close to the point where we are asking the deputy minister and support staff to make comments on what happened to any of the information that they gave to the Treasurer. They cannot make any deposition as to that reality.

The second point is that these gentlemen originally, when they came today, asked for half an hour of time to present their report. Right from the beginning, there were many questions and that is fair enough. We decided we would go with that format. I have no problems with that, Mr Chair, except that we are coming again very close to the clock and we are going to be in the situation in which these gentlemen have a section that they want to share with this committee -- and I am quite interested in what they have to say on that basis -- and this repetition of the argument, I think, is not particularly helping the committee at this stage.

So I would ask that we quickly move on to the section that they are prepared to give to us and then we can continue on, if Mr Turnbull feels, if we have any time left, with the questioning on the basis that he has begun.

The Chair: Thank you for the advice. Mr Turnbull?

Mr Turnbull: It seems inconceivable that this would not be brought to the Treasurer's notice, and your suggestion that during an election there seems to be a tradition that you do not bring it to the attention of the senior politicians, the cabinet, is an alarming statement. I am certainly not blaming you for it, but I would just like to draw your comments on how we can possibly govern our country and our province and just have the province float for the period of an election, if that is the suggestion and if that is in fact what happens.

Mr Davies: First of all, let me correct any misimpression I might have left with you that reflects that last clause of your question. That is not what I was implying. What I was implying and what I was intending to state was -- and I think it is critical to identify -- in your question you kept saying, "Bring this to the attention of the Treasurer." I am not sure exactly what the "this" was that you were referring to. Were you referring to the fact that a war had broken out or the potential for a very serious war was arising in the Middle East? That the Canadian dollar was staying much higher and interest rates were staying much higher than the federal government had projected? That the July labour force numbers -- all of which were public, by the way, and all of which were out -- were as bad as they were? Because the "this" that counted to me are the "these" numbers that came at the end of August, that we then moved very rapidly and worked weekends, believe me, to gather together, to assemble a snapshot, state-of-the-art forecast for an incoming administration. Those numbers came through in the course of the latter portion of August and by that I mean, I guess, the retail sales numbers would have been the week of the 24th, the 25th, and the national accounts were right on 31 August. The August labour force numbers were 7 September. I have gone over some of those already and there were others. We gathered all those together right for 10 September. So the "this" that I would have been bringing to the attention of the Treasurer, as you are suggesting, were not things that were around in the time frame that I think you were alluding to.

Mr Turnbull: I would assume this --

The Vice-Chair: Mr Turnbull, the Chair would just like to help out and remind you, as Mr Drainville did, that this is your party's 123 and these gentlemen will only be with us for a while longer. So I would just remind you that, while the Chair is quite lenient, it is your time.

Mr Turnbull: Thank you, Mr Chair. I think it would be useful to move on.

Mrs Y. O'Neill: Before you move on, I thought there was an intimation that maybe you had further details on this contingency fund. Did you find anything as you looked in your briefing books or whatever you call your books?

Mr Davies: I am sorry. I do not know if we have a copy of the October announcement.

Mrs Y. O'Neill: I just wondered if you had more of a breakdown of that.

Mr Turnbull: Perhaps you could submit that.

Mrs Y. O'Neill: That would be fine.

Mr Davies: If I could beg the indulgence of the Chair, I would just like to conclude in my answer to Mr Turnbull. It is our job, or at least I view it as our job to ensure that the best possible information is available. We cannot re-forecast without having the data on which to base a re-forecast, and those are the data that are generated through these series that come forward at specific times of specific months and at various times throughout the year. Those hard numbers on which to base a forecast were not there until the end of the month.

Mrs Y. O'Neill: If I may just say, Mr Brown, I really appreciate what has just been said and I think it was general knowledge, but there is general knowledge out in the news. You people have to have actual figures from actual communities in this province. Certainly as I went door-to-door, as we all did in August, everything was holding true, but people were beginning to say, "I have got a two-week severance notice," and, "My bank is foreclosing." I was actually running into those situations. But until those data were compiled -- and I do not know whether it was coincidental, and certainly in some ways it was with the actual dates on which government was changing in this province -- but I do think that things were changing drastically for many reasons and I think they have been well-explained to us. I am sure, even to the end of August, the figures you began with in July were holding. It was as these things came -- and you worked on them, as you said, even on the weekends -- at the beginning of September the data were there to support the change that had taken place in that long, hot month of August.


Mr Davies: The third handout, which I will ask the clerk to distribute, attempts to deal -- and this was a difficult item, Mr Turnbull, and I apologize in advance for perhaps not having as complete a database as you would have liked, but it is not the sort of information that we historically assemble. But we have done as best we could, and I think it will be of some assistance to you. This is the section of the motion or of the request that deals with historical patterns of how our variances to our forecast this year compared to prior years, and as well, our performance compared to other provinces.

The first three tables -- this handout has a total of five tables -- relate to our economic forecast. I had them typed in the upper right-hand corner 1, 2, 3, 4, 5. Table 1 says, "Budget Forecast Comparisons, 1990." So, this is the comparison to other provinces, sort of your last question first.

This is for provinces for which information was available. As one can see from this table, most jurisdictions overstated growth in 1990. The overestimation in Ontario was the largest. I guess we share that dubious distinction with Newfoundland. But as I stated earlier, I think that reflects the really severe recession that has hit Ontario more than some of the other jurisdictions.

Table 2 -- and please stop me if there are any questions -- is a time series table going back to 1980, so covering the entire decade, that shows the difference in percentage points between Treasury's budget forecast and the year-end actual results and the economic variables, the four key variables: growth, inflation, employment and unemployment. On the far right-hand side we have averaged out the change over the years.

Mr Turnbull: I am sorry. Perhaps you could explain this particular table.

Mr Silk: In every case what we are doing is looking at what we had forecast in our spring budget -- let's take the 1980 number -- what we presented in the 1980 spring budget as being the real growth number, and then the difference between that growth number, let's say it was 2.1, and the actual that turned out at the year-end. We knew what the actual was, say it was 1.6. That difference suggests that we overstated, we missed the mark, by half a percentage point.

Mr Turnbull: This is plus and minus numbers?

Mr Silk: Yes.

Mr Scott: But they are treated equally, are they? It is the -- if you can use this phrase -- the error, not whether it led to a benefit or disbenefit to the Treasury?

Mr Silk: Yes.

Mr Scott: It is the error?

Mr Silk: Yes, and in fact I think the point we make at the bottom of that table is saying that in a sense we have tended to underestimate the strengths and we have also tended to underestimate the decline. So, we have made errors, as you can see, and in all cases, with the expansion that takes place, we tend to be conservative in terms of underestimating the strength that is taking place. When the decline takes place, we recognize that, but we do not tend to estimate the depth of the decline or the magnitude.

Mr Turnbull: Is there any significance between the years when there is an election and the years when there is not an election in terms of whether it is plus or minus?

Mr Silk: I do not think so. I do not recall an election in 1982.

Mr Christie: Mr Turnbull, if I could just add, aside from apologizing for not actually knowing offhand when the elections were here -- I am sure we could find that out quickly -- the pattern that Qaid has cited in terms of underestimating the declines and underestimating the strengths of recoveries is quite typical not only of our forecasts but of the forecasts of most other people. The economy simply tends to be more volatile in its actual behaviour than anyone expects in a forecasting model or some other device. So, it is a typical forecasting result.

The Chair: Hearing the bells calling the members for a vote and being so close to 12 of the clock, I am going to adjourn the standing committee on general government and we will proceed where we left off this morning on another day. The committee stands adjourned.

The committee adjourned at 1155.