ontario deficits

Debt-laden budgets now an Ontario rite of spring

Ontario’s debt-to-GDP ratio has climbed from 26 per cent pre-recession to 38 per cent today.

Printer-friendly version
Repeating Past Mistakes? Spending Restraint Critical for Ontario’s Fiscal Health

Summary

  • In 2016/17, Ontario’s net debt reached $302 billion, or approximately $21, 500 per Ontarian. The province’s debt-to-GDP level stands at 38 percent, just below its all-time historic high.
  • Ontario’s net debt has increased dramatically since 2003/04, with the province running budget deficits in 11 of the past 14 years. These annual deficits have ranged from $991 million to $19.3 billion and have averaged $8.6 billion over the whole period.
  • The provincial government’s spending choices are a primary cause of Ontario’s persistent deficits. Between 2003/04 and 2016/17, provincial program spending increased at an average annual rate of 4.9 percent. This rate of growth greatly surpassed the province’s overall rate of economic growth (3.5 percent) and the rate that would have been required to offset the combined effects of inflation and population growth (2.8 percent).
  • If the government had restrained program spending growth to the rate of nominal GDP growth since 2003/04, the province would have run budget surpluses every year since 2004/05; the large run-up in provincial debt since 2003/04 would not have occurred.
  • Between 2003/04 and 2010/11, spending increased quickly, followed by a period of significantly slower spending growth between 2011/12 and 2016/17. This slowdown in spending growth, coupled with strong growth in revenues, contributed to deficit reduction in recent years.
  • However, the government’s 2017/18 budget announced a substantial spending increase for the current fiscal year, suggesting that the short-lived era of comparative restraint may be ending. The Ontario government appears to be repeating the mistakes of the past and may once again be exposing the province to substantial risks including the re-emergence of large budget deficits should another fiscal shock occur.

Ontario’s Fair Hydro Plan—a temporary Band-Aid with high costs

From 2008 to 2016, electricity prices in Ontario increased by 71 per cent.

Printer-friendly version
Wishful Thinking: An Analysis of Ontario’s Timeline for Shrinking Its Debt Burden

Since 2007/08, Ontario’s level of public debt has approximately doubled. As a result, the provincial debt-to-GDP ratio has climbed to historically high levels in recent years.

In its 2017 budget, Premier Wynne’s government presented a timeline for reducing the province’s debt-to-GDP ratio back to pre-recession levels—which is to say 26 to 27 percent—by 2029/30. This report analyzes the government’s strategy and timeline.

We show that the government’s selection of a target date so far into the future exposes the provincial economy to a number of costs and risks, including increased spending on debt service payments over time. What’s more, we conclude that the government’s timeline for achieving even this unambitious target date relies on several questionable assumptions and therefore is not entirely credible.

First, the government indicates there will be significant debt accumulation throughout the life of its current fiscal plan—the only period during which detailed revenue and expenditure estimates are available. The government calls for debt to increase, on average, by $11.4 billion per year over the next three years. This is down only very slightly from the pace of debt accumulation over the past three years—$11.6 billion per year.

Because the province plans to continue adding debt, it does not expect to make any meaningful progress in reducing its debt-to-GDP ratio in the near term. In fact, between the 2015/16 and 2020/21 fiscal years, the government’s plan calls for this ratio to fall at an average annual rate of just 0.4 percentage points. At this rate, it would take approximately 25 more years to return to pre-recession debt-to-GDP levels.

The government projects it will achieve its much closer target date of 2029/30 only by assuming a rapid increase in the pace of debt reduction in the later years of its timeline—for which no revenue or expenditure plans are available. In fact, the government forecasts that the rate of reduction in the province’s debt-to-GDP ratio will approximately triple in the final eight years of its timeline, rising to 1.1 percentage points annually.

Achieving this objective will require the government to essentially stop adding any new debt around 2021 and for the provincial economy to maintain sustained, robust economic growth throughout the following decade. This timeline relies upon two questionable assumptions.

First, it assumes the government will essentially stop adding debt around 2021. Given that it has added billions of dollars of debt every year since 2003 and it plans to continue doing so through the life of its current detailed fiscal plan, it would be naïve to accept this assumption at face value. In short, the government’s refusal to curtail its reliance on substantial new debt to fund its activities raises questions about the credibility of its commitments to do so beginning several years from now.

Second, Ontario’s economy is already eight years into an economic expansion. The government’s plan assumes another twelve years of sustained and relatively robust economic growth.

If either of these assumptions does not come to pass, the government’s target date will have to be pushed even further off into the future.

In addition to its analysis of Ontario’s debt timeline, this report contrasts Ontario’s fiscal strategy with the one being implemented in Quebec. Quebec has already stopped adding to its nominal debt burden and is therefore already in the process of making substantial annual progress in reducing its debt-to-GDP ratio.

Quebec’s significant progress in just a short period shows that it is possible to quickly reduce a large debt-to-GDP burden such as the one both Quebec and Ontario face. Unlike Ontario’s projections, Quebec’s projections that it will continue to reduce its debt-to-GDP ratio are entirely credible since they are consistent with the province’s recent performance.

The contrast with Quebec highlights the weaknesses of Ontario’s timeline. Ontario’s plan involves continued debt accumulation in the years ahead and relies on risky assumptions to offer forecasts of future debt-to-GDP reductions that, unfortunately, amount to little more than wishful thinking.

How public debt begets public debt in Ontario

Ontario’s government debt amounts to approximately $21,000 per person.