Ontario’s debt plan—weak and risky
Ontario’s finances remain in deep trouble, despite last month’s announcement of a balanced operating budget for 2017/18. The province still has $312 billion in net debt, and expects to pile on more than $11 billion in new debt annually over the next three years.
At Queen’s Park, the Wynne government wants to reduce the debt-to-GDP ratio, which measures the size of the government’s debt relative to the resources available in the economy to service that debt, from its current level (37.5 per cent) to pre-recession levels (27 per cent).
In the past, we repeatedly criticized the government for not presenting a timeline and detailed plan to achieve this objective. The province's latest budget finally presented a timeline for returning the province’s debt-to-GDP ratio to pre-recession levels. The target date is 2029/30.
While we commend the government for finally presenting a timeline, there are major outstanding problems.
First, the target date is set in the distant future. By 2029/30, the great recession will have been over for 20 years, with Ontarians paying interest on an elevated debt burden the whole time.
Debt service charges already consume $11.6 billion annually and are the fastest growing major spending category in the budget. The more Ontarians must pay to service growing debt, the fewer tax dollars are available for health care, education, tax relief and other priorities.
Also important, staying at an elevated debt level for so long increases the risks of even bigger problems if another economic shock hits the province—either a recession resulting from the natural business cycle or perhaps a cooling housing sector.
When the last recession hit, Ontario’s debt-to-GDP ratio allowed for some fiscal cushion. But if another recession hits while our debt levels remain elevated, there won’t be a similar cushion. The longer the government maintains an elevated debt burden, the longer Ontarians are at risk of this type of development.
Secondly, details about how to achieve the reduction in the debt-to-GDP ratio are skimpy at best. The government calls for almost no reduction over the current fiscal plan, the only period when detailed projections on revenues and expenditures are provided. In fact, according to the government, between 2016/17 and 2019/20, the ratio will fall by just 0.6 percentage points. That’s a tortoise-like pace of just 0.2 percentage points annually.
Why will we see such slow progress? Because the government is adding considerable new debt. For instance, Ontario will add $34 billion in debt over the next three years—almost exactly the same amount added over the past three years. Continued debt accumulation, due to debt financed capital projects, is making it impossible for the government to meaningfully progress towards its debt-to-GDP objective.
Miraculously, the government forecasts that the rate of reduction in the debt-to-GDP ratio will accelerate dramatically in the later years of the government’s timeline—to about 1 percentage point each year. But since it’s impossible to develop detailed plans on revenue and spending this far in the future, Ontarians are left to wonder how this much faster rate of debt reduction will be achieved.
Again, we commend the government for at least presenting a timeline to reduce the debt-to-GDP ratio to pre-recession levels. Unfortunately, the details are limited and the real progress on this indicator isn’t even forecasted to occur for several years, leaving provincial finances vulnerable to major risks. In the meantime, debt interest payments will continue to increase and the debt burden that will be placed on future generations of Ontarians will continue to grow.
Simply put, Ontarians deserve a faster, clearer and more detailed timeline for how their government will finally repair the province’s battered finances.