Ontario has no credible plan to shrink its debt burden
It’s no secret Ontario’s debt burden is growing quickly. In fact, Ontario has piled up debt significantly faster than any other province since 2003. Troublingly, the government has not presented a serious plan for addressing this problem.
Premier Wynne’s government has committed to bringing the province’s debt load back down to pre-recession levels, implicitly conceding Ontario’s debt burden is problem.
Unfortunately the government has offered no credible plan for achieving this objective. Instead, the province plans to continue on a spending trajectory that will make it impossible to address our debt problem in a timely manner.
Let’s pause to consider how we got here. In 2007/08, Ontario’s net debt (a measure of indebtedness adjusting for financial assets) was $157 billion. The province’s debt was 26 percent as large as the provincial economy. Economists refer to this metric as a debt-to-GDP (gross domestic product) ratio.
Things have since gotten much worse. Ontario’s net debt has nearly doubled since 2007, reaching $308 billion. Ontario’s debt-to-GDP ratio stands at 39.6 percent, substantially more than during the 1990s, when debt spiked under Bob Rae.
This is bad news for Ontarians. We’re already spending nearly a billion dollars a month just to service existing debt. That’s a sad waste of taxpayer dollars that most Ontarians would rather see spent on other priorities. If the debt persists, we’ll pass that burden onto future generations.
Premier Wynne’s government has promised to bring the debt burden (relative to the size of the economy) back to pre-recession levels.
But if the government recognizes the need to get debt under control, the $300 billion question becomes why has it not presented a plan for doing so?
Consider that a recent report from the government’s own Financial Accountability Office projects that the province’s current fiscal trajectory puts us on track to actually increase the debt by approximately $50 billion over five years. That’s hardly the fiscal turnaround we need.
Some may reply that this debt accumulation is acceptable because the provinces’ debt-to-GDP ratio is finally projected to start shrinking after nearly a decade of rapid growth. But the reality is we’re not on track to make meaningful progress on this metric either.
The province is projected to see its debt-to-GDP ratio go from 39.6 percent in 2015/16 to 38.4 percent in 2020/21. That’s a miniscule reduction of 1.2 percentage points over five years. Considering the provincial debt-to-GDP ratio has increased by 13.6 percentage points since 2007, the government is clearly not on track to undo much of the recent damage that has done to provincial finances.
To better understand this tortoise-like pace, consider that the government is expected to reduce the debt-to-GDP ratio at an average annual rate of 0.24 percentage points over the next five years. At this rate, it will take the government 56 years to get back to the 2007 level.
It’s impossible to make meaningful forecasts over such a comically long time horizon, but this illustrates that the province’s current plan does not represent a strategy to return to pre-recession debt levels anytime soon.
The reality is without a change in direction our debt-to-GDP level will continue hovering near its current historically high level. It will remain the responsibility of businesses and families in Ontario to pay resulting interest costs.
Premier Wynne’s government was right to establish debt reduction as an objective. Talk, however, is cheap. The government now must back up words with action and present a credible plan for getting Ontario’s financial house in order.
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