Ontario credit downgrade yet another sign for fiscal policy change
Last week, Standard and Poor’s announced a downgrade to Ontario’s long-term credit rating, pointing to the province’s “very weak budgetary performance.” The downgrade, which has the potential to increase the cost of borrowing for government debt, comes as no surprise, as the writing has been on the wall for years. To avoid further downgrades, Ontario needs to fundamentally change its fiscal policy course and this requires decisive action to reform and reduce spending.
Debt has more than doubled since 2003/04, reaching $284 billion by 2014/15. Ontario’s net debt now represents $20,000 for every man, woman, and child in the province. As a share of the economy, net debt is 39 per cent—much higher than the 1990s when debt levels exploded under the Rae government.
The inability of successive governments to control spending is at the heart of Ontario’s debt problem. Over the past decade, the government increased program spending at an average annual rate of 4.6 per cent. This is significantly beyond what was needed to keep pace with inflation and population growth and the annual rate of economic growth in the province.
Had Ontario held spending increases to the rate of economic growth (3.1 per cent annually), spending in 2014/15 would now be $15 billion lower and Ontario would enjoy a $4 billion surplus instead of a $10.9 billion deficit. In other words, if the province had spent prudently, the persistent deficits and considerable debt growth that led to this week’s downgrade simply would not exist.
Some will suggest that the run-up in spending was necessary to mitigate the effects of the recent recession. But this argument ignores the fact that a large portion of the spending increases occurred in the years before the recession. For example, between 2005/06 and 2007/08, provincial program spending increased by a whopping total of 16.2 per cent. Nor does it acknowledge the government’s failure to bring supposedly “temporary” stimulus spending levels back down in the years after the recession was over. Instead, stimulus-era spending levels have become “the new normal” with harmful consequences for provincial finances.
Others defend Ontario’s ramp up in debt on the grounds that the borrowed money was used to finance long-term infrastructure investments. In reality, a recent analysis showed that approximately 66 per cent of the increase in provincial debt since the recession is due to operating deficits rather than capital investments. That means Ontario has been taking on new debt primarily to finance current spending on things such as the wages and benefits of government workers.
A lack of spending discipline during good times and bad generates skepticism about the provincial government’s commitment to balance the books by 2017/18. The province continues to rely on slowing down the rate of spending growth (rather than actually reducing spending) while hoping revenues increase sufficiently to eliminate the gap.
The fact that the deficit has actually been increasing over the past three years (from $9.2 billion in 2012/13 to $10.5 billion in 2013/2014 to $10.9 billion in 2014/15) casts further doubt on claims that the books will soon be balanced.
Standard and Poor’s downgrade highlights the need for a much more ambitious strategy to reform and reduce spending. If history is a guide, the “wait-and-hope” approach to deficit reduction won’t work, and could lead to a vicious cycle of rising interest payments which will consume a larger share of government revenues, leaving less money available for important public services and tax relief.
Ontario’s debt problem is serious; a new approach to fiscal policy is long overdue.
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