Ontario’s wake-up call

Roughly 12 hours after Premier Kathleen Wynne was re-elected in Ontario with a majority government, bond markets and international credit rating agencies sent her a powerful message about the province’s dismal public finances. Ontario’s borrowing costs spiked the morning after the election (the highest daily jump in six months) and financial analysts warned that further credit downgrades are probable. So much for the post-election celebration. This swift reaction from markets is a wake-up call for Premier Wynne’s government.

The post-election market movement is likely driven by the perception that her government doesn’t have a credible plan to tackle Ontario’s deficit and debt problems. Consider that the federal government’s borrowing costs were unchanged on the same day, the markets are signalling that the Wynne government must rein in Ontario’s debt.

Meanwhile, the Premier said her first priority is to pass the government’s budget that triggered the election nearly two months ago. With markets watching the province closely, a rehash of May’s budget will do nothing to temper concerns that the risks associated with Ontario’s debt are increasing.

Recall that the government’s May budget downplayed the need to eliminate the deficit and projected this year’s deficit to grow to $12.5 billion ($1.2 billion higher than last year’s projection). At $12.5 billion, Ontario’s deficit will be larger than the combined deficits of the federal and all provincial governments. And while the government maintains it will balance the budget in 2017/18, without any meaningful reforms or spending reductions, the plan lacks serious credibility.

Seven consecutive years of deficit spending has fuelled growing government debt. Ontario’s debt will hit $289.3 billion this year and is projected to reach $324.5 billion (almost 40 per cent of Ontario’s economy) by 2017/18, more than double the $138.8 billion debt (or 27.5 per cent of the economy) in 2003/04 when the Liberals came to power).

This considerable increase in provincial debt and the government’s apparent unwillingness to tackle the problem has prompted speculation that credit rating agencies such as Standard & Poor’s and Moody’s may once again downgrade Ontario’s creditworthiness.

A downgrade would drive up the government’s borrowing costs as the province would have to pay higher interest to investors buying its bonds. If this happens, the share of government spending dedicated to servicing the province’s debt could also increase as the government issues new debt to cover deficits and re-finances debt that matures.

The government already spends 9.2 per cent of its revenues to service its debt and, according to its own estimates, this will rise to nearly 11 per cent in the next four years. Put plainly, Ontario spends $1 out of every $10 sent to Queen’s Park to pay for past debt. This is money not spent on health care, education, transportation, or other public priorities. The increase in rates and the expectation for further hikes means even more tax revenues will go to paying interest instead of key government services.

But there is hope. Similar market pressures in the mid-1990s caused the Chretien-Martin Liberal government of the day to implement an ambitious plan to eliminate the deficit and reverse decades of rising government debt. A fresh majority mandate provides Premier Wynne with an opportunity to look beyond short-term political machinations. A good first step would be a reconsideration of May’s pre-election budget and the need to reassure markets her government is serious about getting the province’s deficit and debt under control.

While Premier Wynne and the Ontario Liberals can be lauded for their electoral win, there isn’t much time for merriment. Markets have sent a wake-up call. It’s time to get to work and start changing Ontario’s course of deficits and debt.