Dear Minister Sousa, shrink Ontario’s debt burden while we’re still young

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Appeared in the Toronto Sun, December 7, 2016

It’s widely known Ontario’s provincial government has racked up debt at a historic pace in recent years.  What is perhaps not as well-known is that the Liberal government has presented no plan to reduce province’s debt burden back to historically normal levels. It’s long past time for that to change.

Since 2007, Ontario’s net debt (a measure that adjusts for financial assets) has approximately doubled and is expected to reach $315 billion this year. That’s equal to about 40 per cent of the province’s gross domestic product (GDP), the value of all the goods and services produced in the province in a year. Economists rely on this debt-to-GDP ratio as the best measure of the sustainability of any jurisdiction’s debt load.

For historical context, in 2007, Ontario’s net debt-to-GDP ratio was approximately 26 per cent. Finance Minister Charles Sousa has stated he wants to bring the province’s debt-to-GDP ratio back to pre-recession levels.

Minister Sousa deserves credit for acknowledging the problem and setting this important goal. But his government has thus far failed to present a plan explaining how it will be achieved, and on what timeline.

In fact, the government plans to continue adding debt over the next few years, to the tune of roughly $11 billion per year. This will make it impossible to make meaningful progress towards Minister Sousa’s goal.

If you’re looking for a little good news, the province’s economy is expected to grow in coming years, which means that even while the debt is growing, the debt-to-GDP ratio should start coming down—but only by a very little bit.

Specifically, the government now forecasts debt-to-GDP will ease from 40.3 per cent this year to 39.9 per cent in 2018/19. That’s a pace of about one-fifth of a percentage point per year.

That’s not good enough to repair the financial damage that’s been done. Consider that between 2008/09 and 2016/17, the province’s debt-to-GDP ratio increased at an average annual rate of 1.6 percentage points.  

This means that at the government’s forecasted pace, it will take approximately eight years to reduce debt-to-GDP by the amount that ratio increased in a single typical year since 2008/09. At this rate of one percentage point every five years, it would take the provincial government more than 60 years to get this metric back to the 2007 level.

And there’s no reason to expect that under the current fiscal plan the pace of debt-reduction relative to the size of the economy will increase significantly any time soon. In fact, the province’s own Financial Accountability Office projects that debt-to-GDP will hover within a percentage point of its current level over the next half-decade.

Of course, many things can change and fiscal forecasts over years are unreliable, let alone over decades. Still, it’s sobering that at the current rate, a young woman entering university in Ontario this year would be a retiree before the province returns to pre-recession debt levels. In the meantime, she and her family will be responsible for paying the interest on the government’s loans through their tax dollars—if she decides to stay, live and work in this province.

It’s good that the finance minister wants to bring the province back to pre-recession debt levels. Now he must deliver a plan for how and when we are going to get there—preferably while we’re still young.


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