Is Ontario headed for a debt crisis? (original) (raw)

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Is Ontario headed for a debt crisis?

Published May 02, 2015 • Last updated May 02, 2015 • 4 minute read

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Finance Minister Charles Sousa delivers the provincial budget at Queens Park on April 23, 2015. (Mark Blinch/Reuters)

TORONTO

Ontario would be a loan shark’s dream.

Imagine a client that lets the principle build and build and build, but always pays the interest on the debt in full and on time — no kneecapper required.

Given the amount of money that’s been borrowed, Ontarians might wonder why the government is squeezing the highway winter maintenance budget or why teachers are on strike.

Kelsey Ingram, a spokesperson for Finance Minister Charles Sousa, said the government made a deliberate choice in response to the 2008-09 global recession to invest in the economy.

“We did this to both stimulate the economy and to lessen the impact on families and businesses,” Ingram said in a statement. “We did this in lockstep with the federal government, which also borrowed and added to its debt in order to invest in the economy.

For example, both Ontario and the federal government, along with the United States government, invested directly in two automakers in order to prevent them from going bankrupt, saving thousands of jobs not only with the automakers, but with auto parts makers and the wider economy. “

Ontario Progressive Conservative finance critic Vic Fedeli said it’s commonly believed that economic stimulus spending spurred the rapid increase in debt since the 2008-09 recession.

But rather than be a one-time thing, that extra spending was “baked into the budget” so that it became part of the provincial annual structural deficit.

“It never disappeared,” he said.

Fedeli quoted statistics from the Fraser Institute that indicate 66% of the province’s debt is attributable to ongoing operating expenses.

Costly scandals such as the cancelled gas plants and eHealth Ontario only added to the tally, he said.

Ontario NDP Finance Critic Catherine Fife said the Liberal government has chosen poorly — cutting road maintenance budgets while spending lavishly on their “friends on Bay St.”

On the revenue side of the ledger, Ontario is losing about $2.5 billion a year thanks to slashed corporate tax rates, she said.

“Ontario currently has a lower corporate tax rate than Alabama and that certainly isn’t anything to brag about,” Fife said.

As the most populous province, Ontario has always enjoyed the benefits of economy of scale when spending on programs its citizens expect like health care and education.

According to figures put out by RBC Economics Research, Ontario was offering programs at a cost of $2,027 per citizen in 1981-82, cheaper than any other provincial government at the time.

There was a surge in program spending under the Bob Rae NDP government in the early 1990s, a slight decline followed by an increase under the Mike Harris/Ernie Eves governments, and then a steady increase under Liberal premiers of Dalton McGuinty and Kathleen Wynne.

As Sousa likes to repeat, the province still spends less per capita on programs than other provinces.

Yet over the same time period, Ontario’s net debt grew from 13.8billion(1981−82)to13.8 billion (1981-82) to 13.8billion(1981−82)to38.4 billion (1990-91) to 101.9billion(1995−96)to101.9 billion (1995-96) to 101.9billion(1995−96)to138.8 billion (2003-04) to 284.1billion(2014−15)andisprojectedtohit284.1 billion (2014-15) and is projected to hit 284.1billion(2014−15)andisprojectedtohit319.5 billion in 2017-18.

Ingram said the government remains on track to balance its books by 2017-18.

“Moreover, once we reach a balanced budget, we will maintain a rigorous approach to control program spending to reduce Ontario’s net debt-to-GDP ratio to its pre-recession level of 27%,” Ingram said.

Lakehead University Economics Professor Livio Di Matteo said Ontario has been basically spending more than it takes in since 1965.

Over time, a small gap in revenue and spending led to accumulated deficits and then interest to service that debt, he said.

The debt began to pile on more quickly in the last 25 years, and at higher rates of interest during the early 1990s.

“Indeed, Ontario has run a deficit about 80% of the time since 1965,” Di Matteo said. “A reason for weaker revenues is the slower economic growth that Ontario has experienced since 2000. Ontario has ranked at the bottom in per capita income growth across the Canadian provinces.”

Carleton University Assistant Professor Ian Lee, of the Sprott School of Business, said most of the debt was acquired in the last eight or nine years as the provincial government made a political choice to keep spending.

“We do not have to say yes to every request that comes in the front door for more money,” Lee said. “They have doubled, approximately doubled, the indebtedness of Ontario so that we are now the second most indebted province as a percentage of GDP.”

The province of Quebec is number one but it could be argued that Ontario’s debt is less defensible given its long history as an economic powerhouse, he said.

Ontario remains a strong province but at some point, if the debt trend continues, the “bond boys” in New York will be demanding higher rates of interest to loan money, he predicted.

“It’s never a crisis until it’s too late,” Lee said.

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ONTARI-OWE

The amount of provincial net debt per resident in 2014-15:

(Source: RBC Economics Research - Federal and Provincial Fiscal Tables)

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