Ontarians—today and in the future—will pay the price for Ottawa’s debt
At the end of fiscal year 2019, Ontario’s provincial government debt stood at $355 billion. For context, that’s more than $24,000 per Ontarian.
With the COVID recession, this debt will grow further. Scotiabank Economics estimates a $36 billion operating deficit this year. If we add this to the debt load from the end of last year we get a forecast of $391 billion in provincial debt at the end of this year.
This means that at the end of this year, Ontario’s debt will be larger, in absolute terms and relative to the size of its economy, than at any point in provincial history. All else equal, more debt means increased interest costs which will bite into the provincial budget, making it harder for the government to finance health care, education or sorely needed pro-growth tax relief.
The deterioration of Ontario’s fiscal position is only part of Ontario’s bad news story when it comes to the accumulation of government debt. The second part of the story is the mountain of new debt being taken on by the federal government, a large share of which will essentially fall onto Ontario taxpayers.
The Trudeau government’s recent fiscal update tells the story. Ottawa now plans to run a $343 billion deficit this year, by far the largest in nominal terms in Canada’s history. This will bring the federal government’s aggregate debt level to just over $1 trillion.
So what are the implications for Ontarians of a trillion dollar federal debt load? Given that approximately 40 per cent of federal revenue comes from Ontario, taxpayers in the province will ultimately be responsible for paying the interest on $400 billion worth of federal debt.
By adding Ontario’s share of federal debt to the provincial government’s own debt, we get a more complete picture of the scale of government debt in Ontario. In total, between the two levels of government, Ontarians will be responsible for approximately $791 billion at the end of this year. Again, for context, that’s more than $50,000 for every man, woman, and child in the province.
Of course, there are several valid reasons for the large spike in federal and provincial debt this year. Income supports for families hurt financially by the recession and spending on public health measures make good sense. However, this doesn’t change the reality that when the recession does end and the public health crisis passes, Ontarians will face significant fiscal challenges and will be responsible for paying the interest on a dramatically larger pile of federal and provincial debt.
This isn’t the first time Ontario has seen a large and rapid spike in debt. In 2008/09, the global recession hit Ontario hard and led to a rapid increase in debt. Unfortunately, the last time around, the McGuinty and Wynne governments made no progress in terms of reducing the government’s debt burden relative to the size of the economy over the course of the following decade after that crisis passed. As a result, Ontario entered the current recession with an already elevated debt burden, which is why the provincial debt burden is climbing to new historic highs.
Of course, the Ford government is not responsible for the current recession. However, it will be responsible for charting a realistic path to a balanced budget and sustainable finances once the recession is over. If it fails in this task, and if the federal government continues to add debt quickly as well, the cost will be passed on to future generations of Ontarians.