Fraser Forum

Wynne government embarks on spending spree despite looming economic storm clouds

Printer-friendly version

Ontario’s economy is on a bit of a roll lately, with unemployment rates at the lowest they have been in some time and real GDP growing.

While Canada’s real GDP was up 1.4 per cent in 2016, Ontario’s was up 2.6 per cent—the second-fastest growing economy in Canada after British Columbia at 3.5 per cent. Indeed, real GDP growth in Ontario is forecast to be better than two per cent for the next few years. The optimism has spilled over into the provincial government’s fiscal hopes with the anticipation of a balanced budget and perhaps even a small surplus in 2017-18.

As a result, Ontario is embarking on new expenditure, regulatory and program initiatives in an extraordinary manner.

As part of the lead-up to the provincial election in June, the Wynne government is boosting spending with announcements such as $155 million more for seniors and home care, new ferries in eastern Ontario, re-opening the IMAX at Ontario Place, new transit projects, and new hospital and education projects and redevelopments. Ontario is boosting support for children and youth in care and is even planning a high-speed rail line.   

Indeed, not a day seems to pass without a spate of announcements designed to help communities “invest” in themselves in one capacity or another with public dollars. Moreover, Ontario is expanding personal emergency leaves, raising the minimum wage, intervening in rental housing markets and implementing a basic annual income pilot—all of which can be expected to eventually have some impact on businesses in the province.

Yet storm clouds are on the horizon, suggesting that Ontario is operating under some dangerous illusions when it comes to its fiscal planning.

First, while the economy has been a bit more robust as of late, the indications are that things may be slowing down, even in the GTA, which has been the main engine of Ontario economic growth. Ontario’s unemployment rate actually crept up slightly to 5.9 per cent in October from 5.6 per cent the previous month (though Toronto managed to avoid the increase). However, when it comes to construction intentions and new investment spending, even the Toronto area is being hit by a slowdown.  

The September 2017 month-to-month change in the total value of building permits in Ontario was only up 1.8 per cent compared to 3.8 per cent nationally. However, on a September-to-September basis, Ontario was actually down 1.2 per cent while Canada as a whole was up 12.3 per cent. The drop was fuelled by a decline in residential permits. Indeed, of the 14 Canadian census metropolitan areas (CMAs) that registered a drop in the total value of building permits between September 2016 and September 2017, half were in Ontario. Toronto in particular saw a 13 per cent drop in its total value of permits.

Second, Ontario’s finances are still burdened by massive debt that continues to grow and must be serviced. Despite the historically low interest rates, Ontario in 2017-18 is expected to spend $11.6 billion servicing its debt. The opportunity cost of this money adds up over the years. Since 1990, the total sum of debt interest paid by Ontario on its provincial debt sums up to approximately $254 billion. The growth rate of the province’s net debt has averaged 8 per cent a year since 1990 and the net debt for 2017-18 is estimated at $311.9 billion with the gross debt at about $341 billion.

Clearly, even if Ontario is on the verge of balancing its budget, it’s not time to reignite spending with new initiatives. The economy may be slowing down, which may entail a slowdown in revenues. Moreover, there’s still a huge pile of provincial public debt to deal with. Indeed, Ontario can best meet the future needs of its citizens by reducing the burden of its public debt.


Subscribe to the Fraser Institute

Get the latest news from the Fraser Institute on the latest research studies, news and events.