Tax hikes or service cuts? New Toronto council has to close a 'scary' budget gap of $857M

The annual struggle to balance the City of Toronto's budget looks particularly tough this year. 

Instead of the usual tens of millions of dollars the city needs to raise, or cut, to balance the $15-billion spending package, the candidates elected to the next city council will need to figure out how to make up an $857-million gap.

Most of that deficit is related to the cost of addressing the COVID-19 pandemic. But experts say that's just the start of the serious financial pressures councillors will have to contend with as they work to fulfil the legal requirement to table a balanced city budget.

Those experts also warn that there are limited pathways to balance, compounded by sky-high inflation, a flat-lining of new home sales that has slashed city tax revenue, and an electorate accustomed to low property taxes. 

All of those factors will make dealing with this year's budget a thorny task, said Myer Siemiatycki, professor emeritus with the Department of Politics and Public Administration at Toronto Metropolitan University.

"That is a scary gap to have to make up," he said.

"And I think it signals, to me, that we are looking at deep cuts to a range of municipal services and programs."

That is a scary gap to have to make up.- Myer Siemiatycki, professor emeritus, Toronto Metropolitan University

Siemiatycki said the city has come through years where it intentionally limited tax increases to the rate of inflation. That has meant the impact of funding COVID-19 programs has been more profound on the budget, he said.

The recent cuts to recreation programs and a deferral of $300 million worth of infrastructure work are symptoms of the stress caused by the fiscal gap, he added.

"There have been consequences to the city not having sufficient revenue to meet the expenditures it needs to make to keep the city livable, viable, sustainable even," he said.

The director of the University of Toronto's Institute on Municipal Finance and Governance, Enid Slack, said prior to the pandemic, the city was in decent fiscal health, but some long-term signs of wear had started to emerge.

"We likened Toronto's fiscal health to an aging Toronto Maple Leafs defenceman," she told CBC News. 

"He's playing pretty well, the training staff are looking after him, but he's getting increasingly expensive," she said. "And he's going to need knee surgery very soon."

Limited revenue tools available to council

The proverbial surgical tools will have to come out in the months ahead, as revenues the city has counted on have dropped and the need for pandemic services have jumped. It remains unclear if the federal and provincial governments will come to the rescue as they have in previous years to help sort out the city's deficit.

Making matters worse, revenue from the city's Land Transfer Tax is certain to suffer as real estate sales have slowed dramatically, costing Toronto millions.

"If they don't get the money from the federal government or the provincial government, then they don't have a lot of room to move," Slack said.

"They have to cut services, or they have to raise taxes."

Mayor John Tory said the budget gap could be as high as $1 billion. He is promising to tackle it with a tax increase below the city's rate of inflation and finding budget efficiencies, while still maintaining services. 

But at a time when Toronto's rate of inflation has been as high as 6.8 per cent in August, a tax increase below that figure could still be costly for homeowners. 

"I've said below the rate of inflation, so people at least know that it will be below the rate of inflation," Tory said of any tax increase.

"And the bottom line that I will also say to them is I will make it as low as possible, given the affordability constraints people have in the city right now."

Part of Tory's pitch to voters is also that he's the person to squeeze more cash out of senior governments.

"It isn't a matter of going to sort of rely on them to ride to the rescue," he said. "But saying that they should … be partners with us in making sure we have affordable housing, that we have transit."

Penalosa pushes permanent provincial, federal funding

Mayoral candidate Gil Penalosa said he'd fill the budget gap with a mix of tax increases, cuts where appropriate, and by pressing upper tier governments for permanent funding tools.

He too did not say what a tax increase could look like if he is elected. But Penalosa said Toronto can't continue to be amongst the GTA communities with the lowest property tax rates when it can't provide many basic services.

"When everything is getting worse, then I think that there is nothing to be proud of that we have the lowest (property taxes), of course, we should never have the highest either," he said. "But I think every option should be on the table."

During an event earlier this week, Tory said he is still open to creating new revenue tools for the city. He stressed it's something he's tried to do before with his rejected plan to toll the Gardiner Expressway and Don Valley Parkway to raise $200 million a year. 

Slack said other major cities in North America have access to additional revenue to help provide services. 

"Some of the major cities around the world have access to other types of taxes, like income and sales taxes, that bring in more revenue," she said.

"We have to think about who does what … What should the province be doing? What should municipalities be doing? And then how should we pay for it?"

Siemiatycki said beyond balancing this budget, the new city council must find new revenue streams for Toronto.

"It's been very disappointing that we haven't had political leaders who have made the financial stability and sustainability of municipal government a rallying point," he said.

"I think municipal residents would rally behind that."