Ontario vs. California: Who's Really in Debt?

Kathleen Wynne celebrated this week after winning the Ontario Liberal leadership and the premier’s job. But now comes the hard part, finding a way to return Ontario’s finances to a stable, sustainable path.

Part of the challenge facing Ms. Wynne is Ontarians’ indifference to the province’s deficits and debt. If the citizens of the province aren’t concerned about the over-spending, the deficits, and the accumulated debt that emerges from such spending, then we shouldn’t be surprized to see politicians ducking hard decisions.

There is a consensus that Ontario failed to act in any meaningful way on the recommendations made by its own Commission on the Reform of Ontario's Public Services (Drummond Commission). The Drummond Commission report should have been a wake-up call for the Ontario government regarding the immediate need for reform of the province’s spending to avert serious deficit and debt problems down the road. Instead, inaction and plans based on hope rather than realism have been the order of the day.

To put Ontario’s debt in perspective, we recently compared Ontario’s indebtedness to that of California. After all, the Golden State has gained international notoriety for its deficits and government dysfunction. In fact, California now has the lowest bond rating in the United States and its own Treasurer, Bill Lockyer, called California’s finances “a fiscal train wreck.”

Unfortunately, U.S. states do not measure net debt, which is a standard measure of indebtedness that compares total debt adjusted for financial assets. To compare Ontario and California, we examined what is referred to as “bonded debt.” This is basically the debt of the province (or state) that remains outstanding in the form of marketable bonds.

On every measure of indebtedness, Ontario is markedly worse than California. Ontario’s debt is almost two-thirds larger than California’s bonded debt even though California is a much larger jurisdiction in terms of both the size of its economy and its population. Specifically, California’s bonded debt is $143.9 billion as of 2011 while Ontario’s is $236.6 billion, two-thirds larger than California.

As a share of the economy, Ontario’s debt (38.6 per cent) is more than five times larger than California’s debt (7.7 per cent). Ontario’s per capita debt ($17,922) is over four-and-a-half times that of California ($3,833). Think about that – Ontarians are handing their children a debt load between four-and-a-half and five times that of Californians.

And there is a real cost to this debt today. Ontario spends a little over three times the amount of revenues on interest costs as California: 8.9 per cent versus 2.8 per cent. More specifically, Ontario spends roughly $10 billion a year on interest costs, about $750 per Ontarian per year just paying the interest on already accumulated debt. That’s money not spent on health care, education, roads, or public safety.

The official response from the Ontario Ministry of Finance is one of denial, which echoes the lack of response by the government to the warnings of the Drummond Commission. Indeed, other sections in our report come to the same conclusions as the Drummond Commission: the status quo in Ontario will lead to marked increases in debt that could put the province in harm’s way.

Across every comparable indicator, Ontario’s indebtedness is decidedly greater than California. For those Ontarians who look at California in puzzlement over its inability to solve its deficit and debt challenges, the Ontario-California comparison suggests Ontarians look inward. The time for Wynne and her government to act on spending and deficits is now, so that more dire choices in the future are avoided.