Ontario debt gouges tomorrow’s taxpayers for today’s spending

Many Ontarians have likely heard a horror story or two about their government’s growing debt and the resulting strain on public finances. You can’t blame them. Sources of evidence abound.

Consider the sobering comparisons with California, once the poster government of fiscal imprudence, showing Ontarians carrying over five times more debt per person. Or take the damning analysis contained in the government’s own Drummond Report, calling for no less than 360 reforms to simply balance the budget within five years. And most recently, alarm bells were sounded by the provincial auditor general, warning of a credit rating downgrade and ever more tax dollars syphoned away to simply pay interest on existing debt.

Here’s some context: since the recession, Ontario’s debt has expanded from 28 per cent of the provincial economy to an expected 40 per cent this year. This represents an increase of over $117 billion—or $7,800 more debt per Ontarian. All told, the debt now sits at $287 billion or approximately $21,000 for each man, woman, and child in the province.

But what forms of government spending caused Ontario’s debt to take off? Was it investments in infrastructure or spending on government operations such as the salaries and pensions of government employees, materials, supplies, and cash transfers? The answer matters because, as a general rule, current (or “operating”) expenses should be paid for with current taxes.

Spending on infrastructure, on the other hand, creates physical assets, such as highways and hospitals, which can generate benefits for many years, often decades. While it can make sense to use debt to finance such long-lived assets and to repay the capital debt gradually as the assets wear out and get used, borrowing to pay for current expenses is harder to justify because it puts future taxpayers on the hook for today’s benefits. In this case, Ontario’s children and grandchildren would be paying for the goods and services delivered by the provincial government today.

A new study published by the Fraser Institute finds that Ontario’s increased debt since the recession is primarily driven by operating deficits (current expenses exceeding revenues on an annual basis), not capital investments. More specifically, about 66 per cent of the increase in provincial government debt from 2009/10 to 2014/15 is due to current spending exceeding revenues. Even over the longer term from 2002/03 to 2017/18, current expenses are the main cause of the rise in debt. In other words, Ontario has gone deeper into debt to pay for spending that the current generation of taxpayers will enjoy while passing on the bill to future generations.

Although the Ontario government is hoping to eliminate its $12.5 billion operating deficit by 2017/18, achieving a balanced operating budget does not necessarily mean that debt will stop growing. This is because the operating budget only includes current expenses, not the cost of capital investments. So, the government’s plan to spend $130 billion on infrastructure over the next decade will almost certainly conflict with the need to restrain provincial debt.

The study also finds that Ontario’s overall debt has been growing at an unsustainable rate, implying that status quo tax-and-spend policies must change or the government runs the risk of provoking further credit rating downgrades and rising interest payments.

Already, in 2014/15, more than nine cents of every revenue dollar goes to debt interest payments and not towards government programs or tax reductions.

The writing is on the wall. As the provincial government prepares to deliver its 2015 budget in the coming months, the only question is whether the Ontario government will have the political will to correct the course of fiscal policy.