Ontario’s finances—back to the ’90s?
During the early 1990s, the federal government and many provinces faced severe fiscal challenges so daunting that many described the situation as a crisis.
As governments across the country run historically large deficits in response to COVID-19 and the recession, many Canadians worry that the country may be on the road to a similar crisis. And many of these concerns are reasonable, particularly if we focus on the provincial level of government.
Consider the situation in Ontario. This year’s forecasted budget deficit of $38.5 billion is larger (relative to the size of the economy) than any year in the 1990s. This year’s deficit is forecasted at 4.5 per cent of GDP comparted to a high of 4.2 per cent in fiscal year 1992/93. Of course, this is an extraordinary year, but Ontario is expecting another $33.1 billion deficit next year and a $28.1 billion deficit the year after that. As a size of the economy, these figures are nearly identical to deficits run in the two years following the 1990s’ peak deficit in 1992/93. It’s fair to say the size of current deficits are approximately as large as those in the 1990s.
Of course, deficits add up over time and contribute to a province’s debt burden. On this metric, Ontario is in much worse shape today than in the ’90s. The mid-1990s peak debt-to-GDP ratio was 31.2 per cent in fiscal year 1996/97. This year it will be much bigger, at a forecasted 47.0 per cent. With large deficits forecasted for the next two years, the debt-to-GDP ratio is expected to climb slightly higher to reach 49.6 per cent in 2022/23.
Of course, the size of a government’s debt burden is just one measure of the scale of its challenges. The interest the government pays on its debt is another important factor and it will drive the extent to which debt interest payments bite into the provincial budget, which leaves fewer resources available for other priorities.
On this metric, the news is better relative to the 1990s. The recent and current period of rapid borrowing has taken place during a period of historically low interest rates. This has kept the cost of borrowing down.
During the 1990s, at its peak, debt interest payments in Ontario consumed approximately 15.5 per cent all provincial government revenue. Followed by the fiscal consolidation of the ’90s, debt interest payments (as a share of provincial revenue) fell to 8.9 per cent, which is approximately where it’s remained.
Although debt interest payments relative to overall revenue have not yet started to climb in Ontario, there’s a risk of this happening in the years ahead. If interest rates rise while Ontario continues to run large deficits, the cost of new borrowing will be higher. Ontario’s government has received several bond rating downgrades in recent years, which makes this prospect more plausible.
For all these reasons, multiple independent analyses show Ontario’s finances are unsustainable (in fact, they were considered unsustainable prior to COVID-19).
Ontario’s fiscal situation today looks similar to that of the 1990s. The current deficits are approximately as large and the debt-to-GDP ratio is higher. Interest payments (as a share of GDP) remain below 1990s levels but independent analyses suggest the province’s fiscal trajectory is unsustainable. This analysis suggests that the historical example of the 1990s can help inform how the Ford government and potential successors work to address the serious fiscal problems facing the province.