Government’s free-spending approach puts Ontario’s finances at risk
Over the past week, stock markets around the world have taken a beating. It remains to be seen whether these losses are just a bump in the road or the start of a bear market.
Regardless, the dramatic market downturn should serve as a reminder to governments that bad unexpected things do happen. Any government that sets its budgets during periods of growth as though the good times will roll forever is setting itself up for a rude awakening when bad stuff eventually happens.
Ontario’s recent fiscal history provides a perfect example of how an over-optimistic and spendthrift approach to public finances can cause lasting damage. With a net debt burden that now exceeds $20,000 per person, Ontario’s books are a mess. The causes of its fiscal problems, however, are often misunderstood. The government frequently blames forces outside of its control such as the 2008/09 recession. But this is, at best, an oversimplification.
The reality is that tax hikes and a lot of help from Ottawa have ensured that provincial revenue growth over the past decade-and-a-half has been reasonably strong. From fiscal year 2003 to 2015, provincial government revenue increased at an average annual rate of 4.6 per cent annually. So the notion that the big run-up in debt over this time is the result of weak revenue growth simply doesn’t withstand scrutiny.
In reality, plenty of money was coming in the door. The problems are because of developments on the other side of the ledger. Throughout the years leading up to the 2008/09 recession, Ontario’s provincial government routinely increased spending at an unsustainable clip. From 2004 to 2007, for example, program spending in Ontario increased at an average annual rate of 7.7 per cent.
In 2008 when the recession hit and revenue fell, Ontario’s spending habit caught up with it in a big way—the province faced a massive deficit and the massive run-up in debt began. The province’s books still haven’t recovered from this fiscal shock and Ontario taxpayers will pay the price for these mistakes for generations to come.
In the years following the recession, there was a glimmer of hope that our provincial government had learned its lesson, as spending growth finally slowed down. More could have been done to reform and reduce spending to shrink the deficit faster, but at least large annual spending increases seemed to be a thing of the past. From 2011 to 2016, spending growth was much more moderate.
As a result of this moderation in spending, more help from Ottawa, and strong revenue growth, the deficit shrunk. But now, as a new Fraser Institute study shows, Ontario has already apparently forgotten the lessons of recent history and has gone back to the free-spending ways that caused so much trouble in the first place.
This year, the Wynne government is increasing spending by approximately $7 billion—that’s a 5.7 per cent increase. If this is the start of a trend and the government has decided that its era of moderate restraint is over, the province will be at risk of another huge run-up in debt whenever the next recession or downturn occurs.
The upcoming 2018 budget is therefore potentially a pivotal year for Ontario’s finances. If the government continues down the road of rapid spending growth, future generations of Ontarians will be put at risk of serious fiscal pain.