Premier Ford’s choice is clear—more government debt or real reform
On Wednesday, Ontario Finance Minister Rod Phillips released the province’s first quarter finances for the 2020/2021 fiscal year. The update is sobering to anybody concerned about Ontario’s well-being. The provincial budget deficit this year will hit $38.5 billion—almost twice as large as the $20 billion deficit projected in the Ford government’s last fiscal update in March.
Of course, big deficits in the wake of a recession are nothing new to Ontarians. Following the 2008/09 recession, the government’s budget deficit hit $19.3 billion. This number may seem small compared to this year’s projection, but in nominal terms it was by far the largest in Ontario’s history at the time.
Today, the Ford government once again faces a large deficit-induced recession. What will Premier Ford do now? Will he eliminate the deficit quickly or follow the path chosen by former premiers McGuinty and Wynne following the last recession in 2008/09 and try to shrink the deficit slowly while allowing debt to pile up.
Some quick history. Again, Ontario’s deficit peaked in fiscal year 2009 at $19.6 billion. Rather than reduce nominal spending to reduce the deficit quickly, the McGuinty government decided to slow the growth of spending compared to pre-recession growth rates. The hope was that with this lower rate of spending growth, revenue increases would reduce the deficit over time.
The problem, however, is that the deficit shrank very slowly in subsequent years. Even as the economy recovered, deficits remained stubbornly large; more than $10 billion every year up to fiscal year 2014. In other words, Ontario ran six consecutive deficits of more than $10 billion.
Both the McGuinty and Wynne governments used this strategy, with a goal to eliminate the deficit by 2017/18—nearly a decade after the recession that produced the large deficits in the first place. However, they failed to achieve this goal and Ontario never actually balanced its budget. As a result, this year will be Ontario’s 13th consecutive budget deficit.
Due to the McGuinty and Wynne strategy, Ontario’s net debt more than doubled in one decade, from $157 billion in 2007 to $324 billion in 2017. And it’s kept climbing.
So what’s the lesson for the Ford government? Clearly, Ontario’s rapid accumulation of government debt since the 2008/09 recession was not because of the deficit in that specific year, but rather because of the string of large deficits produced during the economic recovery. Even with the big deficit of 2008/09, Ontario would have racked up dramatically less debt if it had pursued a more active approach to deficit-reduction in subsequent years.
Of course, today’s huge deficit is not the current government’s fault. But the Ford government is responsible for deciding how to reduce it now and in the years ahead. If the government charts a fast path back to balance, it can curtail the accumulation of new debt. If it instead follows the path of its predecessors by taking a slow gradual approach to deficit-reduction, it can expect similar results, which means more rapid increases to Ontario’s already historically high government debt burden.