Fraser Forum

Ontario government’s rapid spending growth drives deficits and debt

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Ontario government’s rapid spending growth drives deficits and debt

The Ford government’s recent fiscal update confirmed that Ontario is on track for another substantial budget deficit this year ($5.6 billion) on top of a $5.9 billion deficit last year. The government’s insistence on running large deficits despite a growing economy will mean larger government debt interest payments for Ontario taxpayers in years ahead.

Let’s look closely at the province’s debt trajectory. The province’s $5.6 billion operating deficit is just the tip of the iceberg, including only day-to-day government expenditures such as wages and salaries for public employees and the existing interest on debt. Once you add in capital spending on long-term projects (i.e. highways and schools), the scale of the coming debt boom becomes more clear. According to the government’s multi-year forecast, net debt (a measure that adjusts for financial assets) will increase by an estimated $48.7 billion between 2022/23 and 2025/26. For context, that’s approximately $1,424 in new debt for every resident of the province.

The negative effects of this debt increase will be felt immediately as interest costs are on track to increase quickly. In 2022/23, the provincial government spent $12.4 billion on debt interest. By 2025/26, the government forecasts debt interest will grow to $15.2 billion—an increase of 23 per cent over three years.

Growing debt interest payments will siphon off scarce dollars that could otherwise be used for other priorities such as tax relief that could help encourage economic growth.

The government’s fiscal forecast, however, is just that—a forecast. It’s not written in stone, and different policy choices could mitigate the anticipated growth in debt and interest costs and put the province on a different financial trajectory.

Recent research clearly shows that Ontario deficits, which help drive the growth in debt and debt interest costs, are the result of rapid spending growth by the Ford government. In fact, if the Ford government had maintained inflation-adjusted per-person spending at the same level it inherited from the Wynne government, the province’s operating budget would be closer to a surplus today, with room for tax relief while still balancing the books.

Therefore, spending restraint can help put Ontario on a different fiscal track. Research has shown that government employees in Ontario enjoy higher wages (on average) than similar private-sector workers while also enjoying several other advantages with respect to non-wage benefits. Working to shrink this government-sector compensation premium over time is one way the Ford government can help avoid further debt increases and interest costs.

Ontario’s deficit and debt growth are not merely matters of academic concern to economists. They’ll have a real and immediate effect as debt interest consumes resources that could otherwise be used for other priorities such as pro-growth tax relief. These trends, however, are not inevitable but rather the result of policy choices and can be halted if the Ford government finally makes good on its past promise to exercise spending restraint.

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