Rising interest payments will make Ford’s life harder
Based on its first budget, the Ford government has settled on a gradualist approach to deficit reduction. Rather than reform and reduce spending, the government plans to try to hold the rate of spending growth below the rate of revenue growth so the deficit shrinks over time.
Unfortunately, the government’s plan falls well short of what Ontario needs to repair its finances. Nevertheless, if this government actually sticks to its targets, it will at introduce some restraint in spending growth. The first Ford budget calls for nominal program spending growth (all spending growth other than debt interest) to grow at an average annual rate of one per cent over the next five years.
And yet, the government also forecasts that the deficit will persist until 2023/24 when Ontario’s debt load will have soared to $392 billion. In short, the government acknowledges its planned slowdown in spending growth won’t stop the bleeding for a long time.
The deficit is set to be $10.3 billion this year so it’s not surprising that a strategy based on simply slowing nominal spending growth (rather than reducing nominal spending) results in continued deficits. This is the fundamental problem with the Ford government approach—it’s a too-timid response to the severe fiscal problems this government inherited.
There are, however, other headwinds that will make life harder for the Ford government. Debt interest service payments are set to climb quickly in the years ahead, at an average annual rate of 4.3 per cent from 2019 to 2023. Remember, this dwarfs the rate of program spending growth (one per cent). By the end of the government’s fiscal plan, it will be spending $15.5 billion annually servicing debt.
The Ford government can reasonably note these rising interest costs, which are largely due to the decisions of past governments, make it harder to balance the budget. But these costs also underscore the importance of doing balancing the budget quickly. Debt interest costs today are due to the failure of past governments to live within their means. If we continue to run deficits for the next five years, as the Ford government plans, that will mean even more headaches for future governments and, in the end, future taxpayers ultimately stuck with the bill.
In a chat with one of my colleagues about the budget, he pointed to the rapid growth in interest payments and said “that’s known as roosting chickens.” He’s right, and it’s fair to recognize that the legacy of its predecessors will make the Ford government’s work harder in this and many other areas—electricity policy also springs to mind. But that doesn’t change reality—that this government is responsible for addressing these challenges now.
Rising debt interest costs are a major problem for the Ford government, and one consequence of a gradualist approach to deficit reduction—instead of a more rapid return to balance—is that interest costs will be an even bigger problem for future governments, and more importantly, Ontarians who will see more of their money go to debt interest instead of health care, education or tax relief.