Ontario usurps California's role as poster child for bad fiscal management

It has been more than two years since an independent commission submitted its report to the Ontario government on the province's poor public finances and high government debt. The report's findings were sobering. The government needed to implement more than 360 reforms to restrain the growth in government spending or it would risk running deficits and growing debt into the foreseeable future. As the report's introduction stated: Decisive, firm and early action is required to get off this slippery, and ultimately destructive, slope.

The government claims it has implemented many of the recommendations but the fact is its response can hardly be characterized as decisive and firm. In fact, its fall economic statement signaled that the government is focused on new spending rather than short-term [deficit reduction] targets. The consequence is the province continues to run deficits and accumulate debt.

A sign of the seriousness of Ontario's debt problem is evidenced by comparisons with California, which for more than a decade has been the butt of jokes of comedians, political commentators, the media, and politicians themselves for its inability to solve its perennial financial problems. This dubious distinction ought to be a wake-up call for Ontario's policymakers and citizens alike.

Indeed, the numbers tell a worrying tale. Using an apples-to-apples comparison, Ontario's debt by any measure is higher than the Golden State.

Despite the province's smaller size, Ontario's $267.6 billion (Cdn) outstanding government debt is higher than California's $144.8 billion (US).  And as a share of the economy, Ontario's bonded debt (the part of a government's debt represented by bonds) is 40.9 per cent compared to California's 7.6 per cent meaning that Ontario's debt when expressed this way is more than five times larger.

On a per-person basis the story doesn't get any better. Every Ontarian owes $20,166 (Cdn) in government debt compared to $3,844 (US) for every California resident.

This high level of government indebtedness is having immediate consequences. The Ontario government currently spends 9.2 per cent of its revenues on interest payments on the debt. This is money sent to Queen's Park by Ontarians through taxes, fees and other payments that is not available for services like health care and education. Former Ontario finance minister Dwight Duncan understood the severity of interest costs and their future risk when he called them a ticking time bomb.  California, on the other hand, loses 2.8 per cent of its revenue to interest payments. In other words, Ontarians are making interest payments more than three times as high as those of Californians.

The main reason that Ontario compares unfavourably to California is that while the provincial government has put off serious reforms, California's government has taken some steps to improve the state's public finances. Not all of California's choices have necessarily been the right ones (recent tax increases, for instance, have markedly hurt the state's tax competitiveness) but there has been movement to get its spending under control.

Herein lies a lesson for Ontario. Harsh spending cuts are not required to stabilize the province's public finances if the government acts now. Specifically, according to several analyses, stabilizing the province's deficit and debt only requires greater restraint in the growth of provincial spending.

If the province's economy grows at historical trends, calculations show that Ontario can be put back on a solid financial footing if policymakers limit program spending growth to four per cent per year. This type of spending restraint sounds modest enough, yet it would represent a much different course than the government has been on over the past decade.

The fact is, the Ontario's government current financial trajectory is unsustainable and the absence of decisive and firm action in the short term ensures much more painful reforms in the long term.

We can expect a provincial budget in the coming weeks. This represents a major opportunity to reverse this course of deficits and debt and start to bring stability to Ontario's public finances.

A failure to act decisively and firmly risks more government debt, higher interest payments, and ultimately a worse budget crunch down the road. Policymakers and Ontarians must consider the numbers including the province's comparison with California to understand the severity of the situation.