Most of Ontario’s new debt due to day-to-day spending

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Appeared in the Ottawa Sun, April 18, 2018

Ontario’s provincial government is piling up debt at a historic pace. Between 2007/08 and 2018/19, Ontario’s debt has grown from $157 billion to $325 billion.

The government defends this record by suggesting the expenditures that have caused the run up in debt are properly viewed as “investments” with long-term benefits. This line of argument is, at best, shaky.

To see why, we must review some technical points. Generally speaking, governments add debt two different ways. One way is through their operating budget, which measures day-to-day expenditures on current programs (public-sector salaries, debt interest costs, and so on). If this type of spending exceeds revenues, the government is said to have an “operating deficit” or just “a deficit.”

This, however, is not the only way governments add debt. Governments also spend on capital projects—long-term investments on roads, bridges, hospitals, etc. This debt-financed spending does not show up fully in the operating budget.

Clearly, debt accumulated through capital spending can more reasonably be described as “investments” than debt incurred via an operating deficit because (in theory at least) capital spending represents one-time expenditures with benefits realized over time.

With these definitions in mind, let’s look at Ontario and, specifically, all the debt the province has accumulated since 2007/08 (we use this base year because it’s the year before big budget deficits emerged in Ontario and debt began to pile up quickly). In 2007/08, Ontario’s net debt stood at $157 billion. Since then, the provincial debt has more than doubled and is expected to reach $325 billion this year. More precisely, provincial indebtedness has increased by $168 billion over this period.

Was all or even most of this new debt incurred to finance capital investments?

In short, no. Rather, $93 billion of this new debt was due to operating deficits over this period. In other words, 55 per cent of the new debt is due to government spending more on day-to-day expenditures (again, public-sector salaries, etc.) than it takes in.

It’s also important to recognize that not all capital expenditures constitute growth-enhancing investments. Many capital projects such as hockey rinks and community centres may be desirable, but are unlikely to improve future economic growth. These should be distinguished from the type of core infrastructure projects that improve the economy’s productive capacity by moving people, goods and resources more efficiently within the province and to international markets (e.g. roads, bridges, railways, ports). Once this reality is factored in, substantially less than half of Ontario’s new debt is due to investments in growth-enhancing infrastructure.

In fact, more than half the new debt added from 2007-2018 is due to current government consumption exceeding revenues. In this light, it’s disingenuous for any government at Queen’s Park—including the Wynne government—to frame the run-up in debt as an “investment” for the benefit of future Ontarians. Because most of the new debt is due to the government’s decision to consume more today while passing the cost along to future taxpayers.

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