A necessary New Year's resolution for Ontario
Another year has come and gone and Ontario's weak public finances remain largely unchanged. The provincial government did little to improve its fiscal position in 2013 and recently signalled it intends to continue with debt-financed spending into the New Year. But the status quo isnt serving Ontarians well. For 2014, the government should chart a new course that places provincial finances on a more sound footing. That would be a much-needed New Year's resolution for Canadas largest province.
After many years of increasing spending beyond reasonable benchmarks, the Ontario government started to run budgetary deficits in 2008-09. Since then it has borrowed nearly $74 billion to finance its expenditures. And theres plenty more to come with the target year for deficit elimination being 2017-18 (although the current government seems poised to push this timeline even further into the future).
Persistent deficits have nearly doubled the provincial governments debt over the past decade to $272 billion. The debt now consumes 39.3 per cent of the provincial economy, up from 28.2 per cent 10 years ago. Ontarios level of indebtedness currently exceeds Californias, whose own fiscal woes earned it a reputation as the poster child of bankrupt states. Without any change in sight, Ontarians will see public debt expand as the government continues to accumulate deficits.
This expansion of public debt has an immediate and tangible impact on the resources available for important programs that Ontarians care about. Interest payments on the provincial debt will total $10.6 billion this year or 9.1 per cent of government revenues. That means over nine cents of every dollar in revenue the government collects goes to pay interest on the provincial debt not on important programs like health care, education, and social services.
Last year's provincial budget anticipated interest payments growing, on average, by 5.5 per cent per year between 2012-13 and 2015-16, making them the government's fastest-growing expenditure (health care and education will grow annually by 2.2 and 3.4 per cent over the same period, respectively).
Like other governments, Ontario is borrowing at historically low interest rates. However, if rates were to rise above the governments projections, interest payments would grow even faster and further displace other types of spending while limiting the room to reduce the tax burden on Ontario families and businesses.
Interest rates could rise for reasons outside the provincial governments control but they also could increase because of the governments weakening finances. Multiple rating agencies have already warned about or downgraded Ontarios credit worthiness. Future downgrades could increase provincial borrowing costs and drive up annual interest payments.
It is fair to say that 2013 was a lost year in terms of improving Ontario's fiscal policy and putting its public finances on a stronger footing. What can Ontarians expect for 2014? Unfortunately, if we go by the governments recent rhetoric, much of the same.
The government's November financial update did little to rein in growing public debt and rising interest payments. In fact, the update signalled new spending increases and potentially a delay in eliminating the deficit.
Rather than tackle the root cause of Ontarios fiscal problems excessive government spending the government is instead talking about further tax increases to pay for more transit spending and a made-in-Ontario public pension plan; this in addition to increases in personal and corporate income taxes.
Tax hikes and new spending programs are not the way to restore the health of public finances. Ontario is overdue for a bold plan that aggressively restrains the growth in government spending. In the absence of swift and decisive action, the province risks piling on more debt and kicking the problem into the future, leaving the next generation of Ontario families to deal with the debt. The longer the province delays tough choices, the more painful the reforms will ultimately be.
Last year was a missed opportunity for the Ontario government to address core fiscal problems. The province requires bold and swift action that restrains government spending. Fortunately, 2014 is a new year and a chance to pursue a fresh course. That's a worthwhile New Year's resolution that we hope Ontario adopts.
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