Troubled waters—Ontario’s challenges pose challenges for Canada
Canada needs a strong Ontario. With approximately 40 per cent of the country’s population and economic output residing in the Heartland province, it is imperative that Ontario be an economic and fiscal leader within confederation. Unfortunately, Ontario has faced difficult economic circumstances in recent years.
The provincial government has, in important ways, made the economic problems facing Ontario even worse through misguided economic policies. Of perhaps greatest concern, policymakers in Queen’s Park have failed to restrain the growth in provincial spending, with the result being an explosion in the size of Ontario’s public debt—a substantial debt that risks material tax increases in the short-run and/or obligations that will be passed along to the next generation. Although Ontario has faced economic headwinds over the past decade, fiscal policy choices and specifically a lack of spending restraint are responsible for the fiscal mess in which Ontario now finds itself.
Recently, we published a study showing that Ontario has accumulated much more debt since 2003/04 than any other province. In fact, the $160 billion in debt that Ontario has added since 2003 is significantly more than the $126 billion in debt added by all of the other provinces in Canada combined. This is all the more remarkable when you consider that Ontario is responsible for 56 per cent of new provincial net debt over the period, despite accounting for about 40 per cent of Canada’s population and economic output.
An important question to be asked in light of these numbers is: why has Ontario racked up so much debt?
A popular narrative from Queen’s Park and some other circles holds that it is the result of global economic forces over which the government has little direct control. Under this narrative, a highly valued Canadian dollar for most of the past decade and other factors have undermined Ontario’s manufacturing sector resulting in weak economic performance and weak revenue growth with the result being persistent deficits and a rapid run-up in debt.
And it’s true that Ontario has endured some very difficult economic times—particularly during the 2008/09 recession, when the province was hit especially hard. However, a closer look at public financial statistics since 2003 undermines the claim that global economic forces resulting in weak revenue growth are to blame for the province’s fiscal plight.
Consider that since 2003/04, provincial government revenue growth in Ontario has averaged more than 4 per cent annually. This is more than enough to offset cost pressures resulting from a growing population and inflation.
So what then is responsible for Ontario’s huge run-up in debt? The answer is the provincial government’s inability to restrain spending over the years.
In fact, since 2003/04, program spending (which excludes debt service payments) has grown at an average annual rate of 4.7 per cent. This rate of spending greatly exceeds key economic metrics. For example, the provincial economy grew at an average annual rate of 3.2 per cent during the same period. In other words, provincial spending has grown at an average annual rate approximately 47 per cent higher than the province’s rate of economic growth. The result has been rapid erosion in the province’s fiscal position.
To illustrate this point, consider an alternative scenario where the government increased spending over the period but at the same growth rate as the provincial economy. Under this scenario, Ontario would be enjoying a budget surplus of approximately $10 billion this year, instead of a projected deficit of $5.7 billion. Furthermore, instead of 10 budget deficits since 2003/04, Ontario would have run just one. In short, if the province had increased spending more prudently, in line with the rate of economic growth but not beyond it, the rapid run-up in provincial debt since 2003/04 simply would not have occurred.
Although Ontario has faced and continues to face real economic challenges, the run-up in debt since 2003/04 should be recognized as a result of spending choices rather than uncontrollable global economic forces. Navigating the troubled waters ahead will be difficult for the Canadian economy no matter what, but it will be much more difficult still if Ontario remains hobbled by fiscal policy failures. Ontario must address its fiscal challenges for its own sake, and for the economic well-being of the entire country.
Subscribe to the Fraser Institute
Get the latest news from the Fraser Institute on the latest research studies, news and events.