A Brief History of Ontario Public Debt

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Appeared in the Financial Post

Ontario’s net public debt is estimated at $287.3 billion and will hit nearly $320 billion by 2017.  The evolution of this daunting number is an interesting story as the spring budget approaches. Much like Rome, Ontario’s debt was not built in a day but comes from decades of profligacy. Ontario has run a deficit nearly 80% of the time since 1965.

In 1965, John Robarts was premier and the net debt a mere $1.6 billion. As a share of GDP, it was only 6.9%. By the time Robarts passed on the political torch to William Davis in 1971, Ontario’s public debt had grown to $2.2 billion but the robust economic growth of the era reduced the net debt to GDP ratio to 5.2%. In terms of Ontario’s debt to GDP ratio, the Robarts era is as good as it gets.

The period 1971 to 1985 was the William Davis era with an appearance by Frank Miller at the tail end. The 1973 oil price shock and stagflation marked the end of the economic golden age. The result was slower growth, higher interest rates and the start of deficits that continued practically unabated until the late 1990s. Debt mounted and between 1971 and 1985 Ontario’s net public debt grew to $28.9 billion from $2.2 billion. The Davis-Miller era averaged an addition of about $2 billion a year to Ontario’s debt and the net debt to GDP ratio grew to 15% from 5.2%.

In 1985, the Liberals under David Peterson arrived, marking the defeat of Ontario’s four-decade conservative dynasty. Ontario’s economy boomed during the 1980s and the net debt to GDP ratio fell to 13.4% from 15% by 1990. However, all this meant was debt accumulation occurred at a slower pace than economic growth, as deficits were incurred in every year of the Peterson administration except for a small surplus in 1989. Ontario’s net public debt rose from $28.9 billion in 1985 and reached $38.4 billion by 1990. Yet, all this would pale compared to what was coming in the 1990s.

In 1990, Bob Rae became premier with the NDP forming Ontario’s government for the first time in history. Their tenure coincided with the worst recession since the end of WWII, resulting in plunging revenues and growing expenditures in an effort to maintain services and stimulate the economy. The resulting deficits were as high as $12.4 billion and saw the accumulation of $63.4 billion in net public debt. The net debt to GDP ratio soared to 30.4% from 13.4%. By 1995, Ontario’s net public debt had reached $101.9 billion.

The NDP government was replaced in 1995 by Mike Harris’s Conservative government, which began expenditure reduction and restructuring to balance the budget as well as tax reductions to stimulate the economy. Lower taxes, lower interest rates and a booming U.S. economy together helped Ontario’s economy rebound and government revenues grew, helping close the budgetary gap. Ontario balanced its budget by 1999 but its net debt still grew to $138.8 billion under Ernie Eves in 2003 from $101.9 billion in 1995. However, the net debt to GDP ratio declined to 27.5% from 30.4%.

The defeat of Eves ushered in the Liberals under Dalton McGuinty in 2003 and then Kathleen Wynne in 2013. This period witnessed the largest debt accumulation in Ontario’s history. While the onset of the 2009 recession was a factor damaging Ontario’s public finances, rapid increases in health and education spending and rising debt were underway well before 2009. Between 2003 and 2014, net public debt grew to $287.3 billion from $138.8 billion– an increase of $148.5 billion. The net debt to GDP ratio grew to 40% from 27.5%.

Ontario has been a province since 1867 but 87% of its net public debt was accumulated in the years since 1990. The stock of debt currently requires $11 billion a year in debt service – a burden as small as it is only by the grace of low interest rates. All administrations have contributed to Ontario’s debt with some playing a greater role than others. The road to debt may be paved with good intentions in the short run but in the long run, fiscal consequences will resonate with the Ontario taxpayer for years to come.

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