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Kicking today's debt down the road

Appeared in the National Post
Authors:
Release Date: April 25, 2012

As Ontario heads towards a fiscal crisis caused by overspending and mounting debt, Premier Dalton McGuinty and Finance Minister Dwight Duncan have issued yet another top-to-bottom review of government spending. This, after Don Drummond's recent and in-depth report, complete with 362 recommendations, was largely ignored by the Ontario government. With credit agencies breathing down its neck, the province needed to deal with the problem, not order more reviews and undertake further study. The same could be said for raising taxes.

While Ontario is in the worst fiscal shape among Canadian governments, it certainly is not alone.

With nearly all Canadian governments having released their 2012 budgets (save for Prince Edward Island and Newfoundland), there has been a void of leadership in tackling ongoing budget deficits and the alarming increases in government debt across the country.

Consider that total provincial net debt (debt minus financial assets) is expected to reach more than $515-billion this year (2012-13), up more than $200-billion since 2007-08. As a percentage of the economy (GDP), the burden of provincial debt has increased to 29% this year from 21% in 2007-08.

Add on the current federal net debt of $663-billion and Canadians are leaving a legacy of over a trillion dollars in direct debt to the younger generation - more than 65% of GDP, up from 54.5% in 2007-08. Put differently, every Canadian family is being put into hock to the tune of $122,000 by federal and provincial government borrowing.

Despite this debt legacy, Canadian governments continue to borrow and spend.

The federal government, for example, plans to run deficits until 2014-15, adding more than $32-billion to the federal debt. In addition, its plan to balance the budget over the next four years is based on optimistic revenue growth (4.9% on average) while promising to hold program spending growth to an average of 2% a year.

In Ontario, Mr. Duncan has decided to continue running deficits for another five years (until 2017-18), increasing Ontario's debt to more than $315-billion from $238-billion today - after the debt has already increased by more than 70% since the Liberals took office in 2003. Like the federal government, Ontario plans to balance its budget by pinning its hopes on optimistic revenue growth forecasts (averaging 3.7% annually) while holding program spending growth to an average rate of 0.7% for the next six years.

Out West, things are better, but still cause for concern. Alberta's government won't balance its budget until 2014-15 as it depletes provincial assets. It also projects revenue growth that is unlikely to materialize, averaging an 8.4% increase over the next three years.

Over in B.C. the government is relying on a host of new tax increases to balance the budget by 2013-14, but will still continue to add significant debt through increased capital expenditures. The BC government's debt will expand by 30% over the next three years and reach 28% of GDP by 2014-15 from a low of 18% in 2007-08.

In fact, save for Saskatchewan, all Canadian governments that have delivered 2012 budgets will run deficits for at least another two years. And, in doing so, will collectively add another $115-billion in debt over the next three years or another $12,000 per Canadian family.

Chances are, however, that it won't end there. As noted above, most Canadian governments are combining optimistic revenue projections and unrealistic low rates of program spending to balance their budgets.

If history is any indication, such plans contain substantial risks.

Through the 1980s and early 1990s, governments continually attempted to grow their way out of deficit by hoping for higher revenues and trying to slow the growth in spending. But the inability to constrain growth in spending, coupled with lower-than-expected revenues, ultimately resulted in ongoing deficits, mounting debt and a loss of Canada's AAA rating in 1994.

If our current governments' plans meet the same fate, the country will be left with even more government debt, which will be an even more significant drag on our economic prospects.

As the budget season comes to a close, Canadians ought to be concerned about their governments' collective fiscal position. What Canadians needed was federal and provincial leadership to realize the seriousness of ongoing deficits and Canada's growing government debt and put forth credible plans to balance government budgets. Instead, our governments' largely kicked the can down the road. Let's hope they get the message soon and find the resolve to actually tackle the problem head on.



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