The Trudeau and Ford governments—two fiscal statements, one debt problem

Both the Ford government in Ontario and the Trudeau government in Ottawa will release their fall fiscal and economic statements this month. Despite a tendency to compartmentalize these separate events, in reality, there’s only one taxpayer. And when the fiscal situations of the provincial and federal government are combined, Ontario taxpayers are right to worry.

According to the most recent data, the federal net debt is $759 billion in 2017-18, with the 2018 federal budget pegging net debt at $779 billion for 2018-19. The federal deficit is now about $19 billion with no sign of any plan to reduce the deficit and arrest the growth of the debt. Indeed, the plan still seems to be deficits for years to come, even in the absence of an economic downturn. We can only imagine what might happen if the economy sinks into recession.

The so what’s the result of all this red ink?

Debt charges—specifically, interest on debt—eats up substantial resources, which are therefore unavailable for other purposes. The 2018 federal budget forecasts a steady increase in public debt charges, growing from $24.4 billion in 2017-18 to $30.3 billion by 2020-21. Compare that to current direct program spending for national defence (about $20 billion) or the Canada Health Transfer, which funds health care in the provinces (about $40 billion). Clearly, the opportunity cost, in foregone public services or tax relief, of debt charges can be substantial.

As for Ontario, recent revisions have increased provincial deficit estimates for 2018-19 from $6.7 billion to $15 billion, and estimates of net debt have grown to $338 billion. Unlike the feds, the Ford government seems committed to reining in spending and addressing its deficit and debt situation—though it has yet to deliver a specific plan with a target date to eliminate the deficit. In the interim, Ontario is spending nearly $12 billion a year on debt-service costs, making it the fourth largest budgetary expenditure after health care, education and social services.

So to recap, Ontario taxpayers bear a provincial net debt of $338 billion and a federal net debt of $779 billion. Based on Ontario’s share of Canada’s population, Ontario’s share of the federal debt is likely close to $300 billion. For Ontarians then, their effective combined federal-provincial net debt is an estimated $638 billion, making their net debt-to-GDP ratio (a measure of a jurisdiction’s ability to pay back its debt) close to 70 per cent. Needless to say, this is not a particularly sunny view of the fiscal situation in Ontario. And indeed, one can construct similar parallels in the other provinces.

Given that interest rates are slowly creeping upwards and will ultimately impact debt-service costs, the Trudeau and Ford governments should act now and present a deficit-reduction plan with a credible target date for budget balance. Reducing deficits is vitally important given the size of public debt charges and their opportunity cost, the prospect that the economy might slow, and the tightening of monetary policy and subsequent increase in interest rates. Failure to act will increase the already heavy burden on Ontario taxpayers.