Ontario—from fiscal leader to fiscal laggard
While Ontario’s current struggles with a large and growing government debt burden are widely known, it wasn’t always this way.
Just a decade and a half ago, Ontario had relatively sound public finances compared to most other provinces. In 2002/03, Ontario ran its fourth consecutive balanced budget and had completely stopped the growth of the province’s net debt burden (after adjusting for financial assets) after a disastrous run-up in the early 1990s. As a result, the province’s debt-to-GDP ratio was shrinking steadily.
In fact, in a comprehensive analysis over the period from 1998/99 to 2002/03, Ontario’s overall fiscal performance ranked second best in Canada behind only Alberta.
How things have changed.
Now Ontario (along with Alberta) leads the charge when it comes to debt accumulation in Canada. In fact these two provinces, which comprise about half of the national population, will be responsible for approximately three quarters of all provincial debt accumulation this year. Remarkably, the two provinces that were in many respects the strongest fiscal performers in the country 15 years ago have become the poster children for fiscal mismanagement.
While Ontario has seen its reputation deteriorate since the early years of the century, other provinces have seen reversals in the other direction. Take Quebec, for example, which is set to post its third straight balanced budget this year and has essentially stopped adding any new debt to its books since 2014. As a result of these positive developments, Quebec’s debt-to-GDP ratio is shrinking much more quickly than Ontario’s and the province has been able to introduce modest tax relief and consider further tax reductions (although there’s much work to do to enhance Quebec’s tax competitiveness).
And in a remarkable sign of just how much things have changed, next year Ontario’s debt burden per person ($22,675) is projected to surpass Quebec’s ($22,114).
Credit rating agencies have taken notice. Standard and Poor’s recently boosted Quebec’s credit rating one notch above Ontario’s for the first time in history.
These dramatic reversals of fortunes are troubling for Ontarians. But they should also provide some hope—it shows that it’s possible for a province to improve its fiscal status. Historical or current reputations for fiscal prudence or imprudence don’t dictate the future. Governments can, and historically often have, changed course in ways that can either strengthen or weaken the health of provincial finances.
Of course, doing so is not easy. The problem is that the Wynne government has not yet shown the willingness to make the hard choices necessary to pull it off. Ontario has added significant new debt to its books every single year since 2003 and the government’s current fiscal plan shows no end in sight. Breaking the habit of relying on billions in new debt every year to fund operations and capital spending will be necessary for Premier Wynne’s government to get the province’s finances back on track.