Ontario’s net debt may hit $500 billion by 2026-27

The size of Ontario’s provincial deficit has become a matter of some debate.

The Wynne government’s 2018 budget projected a deficit of $6.7 billion. But according to a recent report from the auditor general, Ontario’s deficit may be even larger—$11.7 billion, due to accounting treatment of pensions and the financial impact of electricity rate reductions. Finally, the Financial Accountability Office of Ontario (FAO) projects Ontario’s deficit will be $12 billion, due to higher spending and weak revenue gains.

Nevertheless, while deficit estimates come and go, Ontario’s fiscal problems remain.

The problems have been decades in the making; the result of a chronic disposition towards running large deficits during major economic downturns and smaller deficits during economic recovery. From revenues and expenditures of $15.0 billion and $16.3 billion in 1980-81, the 2018 budget projects $152.5 billion and $159.2 billion respectively in 2018-19, balancing out at $186.5 billion each by 2024-25.

Over the 37-year period from 1980-81 to 2016-17, Ontario ran a deficit nearly 80 per cent of the time—despite average revenue growth being slightly in excess of expenditure growth over the entire period. Indeed, it would appear that having a deficit is Ontario’s normal fiscal state of affairs.

Consequently, Ontario in 1980-81 had a net debt of $12 billion, which grew to $302 billion by 2016-17. And the 2018 budget forecasts $360 billion in net debt by 2020-21. (Although the FAO suggests the net debt could reach as high as $394 billion by 2020-21.)

Ontario’s debt-to-GDP ratio, a measure of the sustainability of any jurisdiction’s debt load, has grown from 9.1 per cent in 1980-81 to just under 40 per cent presently. These increases in debt have occurred in three waves, each triggered by a major recession when revenues fell and expenditures rose dramatically with key trigger periods being the recessions of 1980-81, 1990-91 and 2008-09.

Yet even with relative expenditure restraint in health and education, and the balancing of Ontario’s budget 2017-18, Ontario’s net debt still rose substantially. From 2004-05 to 2020-21, accumulated deficits are estimated in the 2018 budget at $104.7 billion—but the total addition to the Ontario government net public debt is $221.3 billion. Indeed, there’s an addition to the net debt in excess of the accumulated deficits, to the tune of $116.6 billion.

This difference is due to government accounting practices where borrowing for new capital spending is added to the debt independent of program spending. Provincial governments, including Ontario, use “capital budgeting” techniques where infrastructure expenditures are not charged against the operating budget but capital depreciation—or the user cost of capital—is treated as an expense in the spending of whatever government ministry. The result? An understatement of the fiscal effects of public borrowing on operating budgets.

The Ontario government has committed to spending more than $190 billion on public infrastructure over 13 years starting in 2014-15, and as a result, even if we see balanced operating budgets, Ontario from 2017-18 can expect to add at least another $156 billion to its net debt. This will bring the net debt close to $500 billion by 2026-27, and will obviously add to debt service costs.

So, to get to the point. Ontario has a fiscal sustainability problem independent of the size of this year’s deficit. Even with balanced operating budgets, Ontario’s debt would still increase considerably as the province finances new capital infrastructure spending. With the anticipated rise in interest rates and subsequent rising debt service costs, as well as the potential for an economic slowdown in the wake of uncertain NAFTA negotiations, Ontario’s fiscal problems loom large.

These issues are all the more serious given an aging population and the anticipated pressure on the province’s health-care and social services system in coming years.