TORONTO, ON—Ontario’s debt load is higher than that of California, America’s most-indebted state, and could reach 66 per cent of GDP by 2019 unless the provincial government musters the courage to rein in spending, says a new report released today by the Fraser Institute, an independent, non-partisan Canadian public policy think-tank.
“California has been roundly criticized by news media and the financial markets for its inability to control spending and reduce deficits. Yet Ontario, with a fraction of California’s population and a significantly smaller economy, is carrying a debt load almost two-thirds larger than California,” said Jason Clemens, Fraser Institute executive vice-president and co-editor of The State of Ontario’s Indebtedness.
“The first priority for incoming Ontario Premier Kathleen Wynne has to be taking action on the province’s precarious financial situation. Ontario simply cannot continue spending money it doesn’t have; otherwise it will soon be compared to Greece, not California.”
The State of Ontario’s Indebtedness examines Ontario’s deficit and debt from three perspectives: a comparison to California, the future of Ontario’s debt if current spending trends continue, and a comparison of Ontario’s debt load and spending outlook to that of Greece. Combined, the three chapters detail the extent of the problem facing Ontario and paint a cautionary tale of what could happen if the Ontario government delays taking action.
“Comparisons to Greece may seem farfetched but Ontario’s net debt to GDP currently sits at 37 per cent, the same as Greece in 1984,” said Niels Veldhuis, Fraser Institute president and co-editor of the report.
“The 2012 Drummond report should have been a wake-up call for the Ontario government, yet the response was a collective yawn and a figurative shrug of the shoulders. Ontario’s debt problem is real and unsustainable.”
University of Calgary economist Ron Kneebone contributes a chapter to The State of Ontario’s Indebtedness calculating that Ontario’s net debt will balloon to 66 per cent of GDP by 2019-20 if it maintains the status quo in terms of spending and revenues.
“The failure of past Ontario governments to control spending has added significantly to the province’s debt load and today saddles Ontario taxpayers with more than $10 billion in annual interest payments. That’s money that isn’t available for health care, education or other social services,” Veldhuis said.
Kneebone concludes that the Ontario government could hold the debt-to-GDP ratio at roughly 40 per cent by 2019-20 if the province can dramatically slow the growth in spending in both health care and education to match the growth in the economy.
“Health and education spending grew at an average annual rate of seven per cent in the decade prior to the recession, compared to GDP growth of 4.3 per cent. Limiting the rate of growth in health and education spending will not be easy and requires significant reform of both programs,” Veldhuis said.
To help put Ontario’s debt in context, a second chapter in the report compares Ontario to California, which in 2009 made international headlines as a “fiscal train wreck” and appeared headed for bankruptcy. Ontario and California are measured against one another using a slightly different indicator than is normal: bonded debt. The reason for the alternative measure is that California doesn’t publish data on net debt, which is the normally used measure in Canada and elsewhere.
On any comparative measure of bonded debt, Ontario fares much worse than California. Ontario’s debt is almost two-thirds larger than California’s even though California is much larger in both the size of its economy and its population. As a share of the economy, Ontario’s debt (38.6 per cent) is more than five times larger than California’s (7.7 per cent). Ontario’s per-capita debt ($17,921) is more than four-and-a-half times that of California ($3,833) and Ontario spends more than three times the amount of revenues on interest costs as California.
“The frightening aspect of Ontario’s debt is the lack of attention it receives, not just from politicians, but from the media, organized labour, businesses, and just about every single Ontarian,” Clemens said.
“Ontario is in a worse situation than California and it will only get worse unless the provincial government finds a way to reduce spending.”
The report concludes with a chapter by Lakehead University economist Livio Di Matteo comparing Ontario’s fiscal situation to Greece. Di Matteo points out that Greece’s net debt to GDP stood at 37 per cent in 1984, the same level as Ontario’s today and increased to 66 per cent over the next decade. Since then, Greece’s net public debt has spun out of control, reaching 163 per cent of GDP in 2011.
Di Matteo explains that Ontario and Greece share a common trait over the past 30 years: trends in spending and revenues diverged, meaning the long-term trend is towards larger deficits and debt accumulation rather than smaller deficits or even surpluses.
“If Ontario continues spending at its current rate, its net debt will increase to 66 per cent from 37 per cent in just seven years. It took Greece 10 years to experience a similar increase. This highlights the unsustainability of Ontario’s current spending trends,” Veldhuis said.
Inaction or insufficient spending reforms could mean that somewhere down the road, Ontario could experience a fiscal crisis of Greek proportions. While not there yet, the pain and severity of reform needed in Greece serves as an example to Ontarians about the benefits of proactive reform now before a crisis evolves.
“Neither Ontario nor Greece has been responsible in managing their fiscal situations. Fortunately, Ontario is in a position where it can still restore its public finances to good health without the type of fiscal trauma currently underway in Greece,” Clemens said.