Interest payments on government debt: Ontario’s fastest growing expense

It’s no secret that Ontario’s provincial government finances are a mess.

The province will run its eighth consecutive budget deficit in 2015/16. This time, the shortfall is projected at $7.5 billion.

Largely thanks to this string of multi-billion dollar deficits, the province is racking up debt at an alarming pace. In fact, Ontario has racked up $141.7 billion in government debt since 2007/08.

As a result, the province’s net debt as a share of provincial gross domestic product (a key measure of the debt burden) has grown quickly and now stands at approximately 40 per cent. This is significantly worse even than the 1990s when provincial debt exploded under Bob Rae’s government.

If we were to spread Ontario’s $298 billion debt equally, each Ontarian would be responsible for over $21,600.

The provincial government has repeatedly promised that it will finally return to a balanced budget by 2017/18.

But given the size of the deficit today, getting to a balanced budget in two years won’t be an easy task. In fact, the government’s own Financial Accountability Office has pointed out that for the province to meet its fiscal targets, it will have to hold program spending growth to approximately one-third of the average growth rate that has prevailed in recent years.

One reason balancing the budget on schedule will be difficult: the requirement to pay interest on the government’s existing debt. Interest payments (or “debt servicing costs” as the government calls them) are a non-discretionary expense. Interest payments are not a trivial component of the budget. Ontario’s debt servicing costs this year are projected to be more than $11 billion or nine per cent of overall government revenue.

So how quickly will this budget line item grow in the years ahead? 

Between 2015/16 and 2017/18, the government’s own projections have interest payments growing at an average annual rate of 6.7 per cent. This makes debt service the single fastest growing line item in the Ontario budget over this period.

Critically, annual interest payments on Ontario’s debt are expected to grow significantly faster than health spending (1.8 per cent) and education spending (0.3 per cent)—two key public services that the provincial government delivers.

All of the money that is spent servicing government debt is money unavailable for public services such as health care and education, or for reducing the tax burden on Ontario’s consumers and businesses.

And remember, interest rates are now at historically low levels. These numbers show that even if interest rates are low, the interest on government debt can still become a substantial burden for taxpayers if the amount of debt that must be serviced becomes very large.

Of course, if interest rates do go up, on the cost of servicing Ontario’s debt will increase higher still.

Balancing Ontario’s budget for fiscal year 2017/18 will likely require greater spending restraint than the province has shown in recent years, not to mention optimistic revenue projections to materialize. The rapidly increasing cost of servicing Ontario’s debt is just one more factor that will make the task of eliminating the province’s $7.5 billion budget on schedule that much more difficult.