Despite brisk economic growth, Ontario continues to rack-up debt

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Appeared in the Ottawa Sun, November 1, 2017

After a lengthy period of sluggish growth, Ontario’s economy has finally started to pick up steam. Which is good news for Ontario. And good news for Canada.

Ontario represents about 40 per cent of the national economy, so the uptick in Ontario has helped drive relatively brisk national economic growth over the past few quarters. In fact, Canada is expected to lead the G7 in economic growth this year, thanks largely to growth in Ontario.

The fact that Ontario and Canada are now growing relatively quickly—again, good news—raises important questions about the pace provincial and federal governments are racking up debt. Specifically, if governments can’t finance their activities without extensive borrowing during relatively good times when revenue is growing quickly, what will happen when economic growth slows or the economy falls into recession.

Let’s start with what’s happening at the provincial level. It’s well-known that Ontario is a heavily indebted jurisdiction. What’s perhaps less well-known is that the province is still adding debt quickly. This year, for example, Ontario’s net debt is forecast to increase by $10 billion. That’s about $750 per Ontarian in new debt this year alone, bringing the total to about $22,000 per person.

In addition to this long ongoing run-up of provincial debt, Ontario taxpayers should also be concerned about growing debt at the federal level. Last week the Trudeau government published its fall economic update, showing that despite brisk economic growth Ottawa expects to post a $19.9 billion deficit this year.

Crucially, the federal deficit has important implications for Ontarians. About 40 per cent of federal revenue comes from Ontario, which means that taxpayers in this province will ultimately be responsible for paying interest on $8 billion in new federal debt this year alone. And remember, this comes on top of $10 billion in new provincial debt. Add them together and you get nearly $1,400 in new government debt per Ontario taxpayer this year alone—again, a year of relatively brisk economic growth—with Ontarians paying a large chunk of the debt interest.

Moreover, the Trudeau government in Ottawa and Wynne government at Queen’s Park are adding all this debt this year when economic growth is, by all accounts, expected to cool in the years ahead. Consider that the federal government’s own forecast shows much slower growth in the next few years than currently expected for 2017. And there are dark clouds on the economic horizon in Ontario. Specifically, business investment in the province (a major driver of long-term economic growth) remains weak.

If Ontario’s economy does indeed slow in the years ahead it will become harder for both the provincial and federal governments to avoid rapid debt accumulation.

So there’s good news and bad news. Ontario and the broader Canadian economy are enjoying a good run, which has bolstered revenues for the provincial and federal governments. But the fact that the two levels of government plan to add $1,400 in new debt for every Ontarian—even during this period of stronger growth—is troubling, to say the least. If our governments can’t avoid piling up debt when times are comparatively good, when the economy inevitably slows, the prospect of much more rapid debt accumulation—with Ontarians footing the bill—looms large.

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