Fraser Forum

Interest payments are Ontario’s fastest growing expense—faster than health and education spending growth

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This year, Ontario is projected to run its eighth consecutive budget deficit, which will be approximately $7.5 billion. And since 2007/08, it will have racked up an additional $141.7 billion in government debt.

The provincial government has repeatedly promised that it will finally eliminate the deficit and achieve a balanced budget by 2017/18. However, the government’s own Financial Accountability Office has pointed out significant risks to the government’s plan, including the fact that it has not yet provided a clear, specific plan to achieve the kind of spending restraint required to meet this target.

Notably, a non-discretionary expense item in the budget that is set to grow quickly is the cost of servicing the province’s $298 billion debt. Over time, the government’s fiscal decisions can cause the debt to rise or fall but in the short term, the government has little control over the growth rate of debt servicing costs. And it’s not a trivial component of the budget: Ontario’s debt servicing costs this year are projected to be more than $11 billion or nine per cent of overall government revenue.

So how quickly will this budget line item grow in the years ahead? Between 2015/16 and 2017/18, the government projects debt servicing costs to grow at an average annual rate of 6.7 per cent. Critically, annual debt servicing costs are expected to grow significantly faster than health spending (1.8 per cent) and education spending (0.3 per cent), which are two key public services that the provincial government delivers (see chart below). In fact, debt service is the single fastest growing line item in the Ontario budget for the projected period in question. And keep in mind this is in an environment of historically low interest rates. If interest rates rise, the cost of government borrowing—and therefore debt servicing costs—will go up as well.

Ontario’s large and growing public debt burden represents a threat to the province’s long-term economic health. But it also has immediate costs for taxpayers. All of the money spent servicing government debt is money unavailable for public services such as health care or education, or for reducing the tax burden borne by consumers and businesses, which has grown in recent years.

The rapidly increasing cost of servicing Ontario’s debt will take away money that could more productively be spent on other priorities, and will make it that much harder for the provincial government to keep its promise of balancing the budget by 2017/18.