How public debt begets public debt in Ontario
One of the most important policy problems facing Ontario is the province’s big government debt burden, which amounts to approximately $21,000 per person.
It’s also proving to be a stubbornly difficult one to solve. Premier Wynne’s government has long recognized that the provincial debt burden is a problem. And has repeatedly pledged to bring the province’s debt-to-GDP ratio (a metric economists use to measure the sustainability of government debt by comparing it to the size of the economy) back down to pre-recession levels. It’s an important objective, but the government hasn’t made much progress yet.
Since the province’s debt-to-GDP ratio peaked at a historically high level of 39.1 per cent in 2014/15, the province has made only agonizingly slow progress in it bringing down. This year, it’s expected to be 37.5 per cent. That’s a fall of just 1.6 percentage points in three years—or about a half a percentage point per year.
At this snail’s pace, the province won’t get back to pre-recession debt-to-GDP levels until about 2040—three decades after the recession, which, along with the previous government’s spending increases, contributed to the rapid recent run-up in debt.
But why is it so difficult for the government to bring down the province’s debt burden?
One important reason is that interest needs to be paid on all debt. And the cost of these interest payments, which are not discretionary, makes it harder for the province to stop adding debt.
In fact, the province now spends $11.6 billion on annual debt interest payments. That’s sad news for taxpayers, most of whom would rather see that money spent on other priorities such as health care, education, infrastructure or tax relief.
But it’s also a contributing factor to the government’s failure to start shrinking the province’s debt burden. Consider the fact that this year, Ontario’s net debt is forecasted to increase by $10 billion—only a little less than the province expects to spend on debt interest payments this year.
In other words, if the government didn’t have to spend money servicing debt accumulated in past years, and decided to use the resulting surplus to retire existing debt, it would not add to its net debt burden at all this year.
And if Ontario could stop adding to its net debt burden, the Wynne government really would be on track to make substantial progress in reducing its debt-to-GDP ratio. With nominal GDP growth of 4.3 per cent expected this year, the province would be able to shrink the ratio by 1.6 percentage points this year alone if the nominal debt load remained unchanged.
This dwarfs the paltry 0.2 per cent reduction that the government is actually forecasting between this year and next year.
In short, the cost of servicing debt acquired in the past is contributing to the government’s inability to stop adding even more debt today.
The moral of the story is that government debt comes at a cost. The money spent on interest payments displaces other priorities while also making it harder for governments to avoid adding even more debt in future years. It’s a painful cycle, and one that Ontario will only break if it commits to dramatically slowing the pace of new debt accumulation in the years ahead.
This, in turn, will likely require a commitment to spending discipline that was sadly absent from this year’s budget.
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