Ontario’s latest budget will keep debt interest costs rising
On Wednesday, the Ford government tabled its 2021 budget, with a projected operating deficit of $33.1 billion for fiscal year 2021/22. For context, that’s only a few billion dollars less than the record-setting deficit for 2020/21 and approximately as large (relative to the size of the economy) as the largest deficits of the Rae era in the 1990s.
It should be noted that this deficit number includes significant contingency allocations for COVID-related emergency funding. If public health and economic circumstances cooperate, this money may not be spent and the deficit will be smaller.
Budget 2021 also forecasts deficits of $27.7 billion next year and $20.2 billion the following year, by which point all onetime COVID-related expenditures are expected to end. After fiscal year 2023/24, Ontario will have run 16 consecutive deficits.
All of these large deficits mean substantially more debt will be added to the government’s books. According to budget forecasts, provincial net debt in 2023/24 will reach $503.1 billion. Ontario’s debt-to-GDP ratio (a good measure of debt sustainability) will reach the highest level in provincial history at 50.2 per cent if the current plan comes to fruition.
Of course, Ontarians must pay interest on the government’s debt. According to the budget, debt interest payments will total $13.1 billion in 2021/22 and reach $14.6 billion in 2023/24 at the end of the current fiscal plan. Money spent servicing the debt consumes significant resources otherwise available for health care, education and/or tax relief.
Growing debt interest payments also make it harder to reduce the deficit and return to budget balance in the near future. In fact, Ontario’s debt interest payments will eat up roughly 9 per cent of provincial revenues and equal nearly three-quarters of the overall deficit by 2023/24. Put differently, debt interest payments are one reason why the provincial deficit will remain stubbornly large in years to come.
What’s more, these sizable interest payments occur at a time when interest rates are at historic lows in Canada. If interest rates increase more than expected, financial pressure on the Ontario government will also increase.
Ontario’s 2021/22 budget confirms that the province’s books will be covered in red ink for the foreseeable future. With a historically large deficit, net debt set to reach its highest level in history, and debt interest costs climbing, Ontario’s finances are in bad shape.
The Ford government has seemingly abandoned its commitment to work towards a balanced budget and has instead adopted a fiscal strategy all too familiar to Ontarians.