“Even Greece, the poster child for rampant debt, carried an Ontario-style debt load as recently as 1984”
Don Drummond (2012) Commission on the Reform of Ontario’s Public Services
Greece is experiencing a massive fiscal crisis rooted in rampant debt with resulting cuts to its public spending and services and a decline in the quality of life. Greece is an intriguing fiscal example for Ontario, given it has a population approximately the same size. Indeed, in the wake of the Drummond Report on Ontario’s fiscal situation, comparisons invariably surfaced that Ontario was on the road to becoming the next Greece.
Given Ontario’s higher per capita GDP, it is a stretch to argue that Ontario is akin to Greece in terms of its fiscal problems. After all, Toronto is not Athens and Lake Ontario is not the Aegean. Nevertheless, it is useful to examine Greece for lessons on where not to go with debts and deficits. In some respects, Ontario is where Greece was in the 1980s. Ontario in 2011 had a net debt to GDP ratio of about 37 per cent. Greece in 1984 had a net debt to GDP ratio of 37 per cent, which then reached 66 per cent by 1994 and in 2011 sat at 163 per cent.
Both Ontario and Greece expanded government spending prior to the global recession in an effort to drive their economies. Indeed, the growth rates in per capita GDP over time are comparable. From 1982 to 2010, the average annual growth rate of real per capita GDP was slightly higher in Greece at 1.4 per cent compared to 1.2 per cent in Ontario.
For Greece, much of this spending was funded by public sector borrowing, which contributed to Greece’s fiscal woes once the economic crisis began in 2008. From 1981 to 2011, Greece experienced deficits every single year with the deficits growing over time. Over the same 30-year period, Ontario revenues exceeded expenditures only eight times. After 2000, Ontario’s average annual growth rate of total revenue was 4.6 per cent while total expenditures grew at a rate of 5.7 per cent. Greek government revenues during the same period grew at an annual average rate of 4.9 per cent but expenditures grew at 6.1 per cent. Both jurisdictions are marked by a long-term imbalance between their revenues and expenditures with little attempt to narrow the gap.
But Ontario’s fiscal situation is not a tragedy of Greek proportions for three key reasons. First, it is a wealthier jurisdiction with a greater ability to carry its public debt load. Its revenue capacity has also traditionally been much more stable than Greece given the tradition of greater tax non-compliance in Greece. Second, unlike Greece, Ontario still faces very low interest rates on its public debt, which makes its debt service costs still manageable despite its growing debt burden. Third, the cyclical component of Ontario’s deficit is larger and therefore compared to Greece, can expect greater improvements in its fiscal position as the economy recovers.
However, like Greece, Ontario has been in an imbalance between its total government revenues and expenditures for some time and like Greece, has exhibited a long-term reluctance to address its fiscal situation. Ontario had a period of slower GDP growth since 2000 and has ignored this constraint by continuing to spend more than it should. Similarly, during its low growth period in the 1980s, Greece embarked on an expansion of its public spending and debt. Even when its economy experienced improved economic growth between the late 1990s and 2007, Greece continued to increase spending and run debts fueled by the economic steroid of low interest rates.
Ultimately both Ontario and Greece have not been very responsible in managing their fiscal situations. Like Greece, Ontario’s love affair with public debt is being aided and abetted by low interest rates. Ontario still has the good fortune to be in a position where it can still restore its public finances to good health without the type of fiscal trauma currently underway in Greece. However, given the ominous power of compound interest, it should not count on interest rates remaining low forever.