Ontario’s red ink—the Ford government should heed lessons from recent past

The Ford government recently government tabled its budget for the 2020/21 year. Unsurprisingly, given the pandemic and recession, Ontario is on track to run a large operating budget deficit this year—an estimated $38.5 billion. The budget forecasts further deficits of $33.1 billion and $28.2 billion over the next two years.

It’s difficult to put such large numbers into context. So it’s helpful, in understanding the scale of the deficits Ontario faces, to compare the size of today’s deficits with deficits from Ontario’s past. Doing so, we see that Ontario is now facing some of the largest deficits in provincial history.

Let’s start by considering the best way to compare the size of deficits that are spread out over time. Inflation and population growth make a simple comparison of nominal deficits between now and, say, the 1990s, essentially meaningless. But one of the best ways to measure the size of a given year’s budget deficit is to compare it to the overall size of the economy from the same year.

This metric allows for interesting comparisons across time, but also provides important information about a government’s fiscal position. The extent to which deficit or growing debt will strain public finances depends largely on the size of the underlying economy.

So let’s contextualize Ontario’s situation today by comparing recent deficits (as a share of provincial GDP) to past deficits.

Let’s start with the 1990s. Bob Rae’s NDP government famously ran large budget deficits in the face of a steep recession. During that time, government revenue fell and the government quickly increased spending. During that era, Ontario’s three worst fiscal years were from 1991 to 1993 when the province averaged an annual deficit-to-GDP ratio of 3.9 per cent.

Ontario’s finances would hit the rocks again following the 2008/09 recession. From the perspective of deficits, things didn’t get as bad as they were in the 1990s, but they were still pretty bad. From fiscal year 2009 to 2011, Ontario’s annual budget deficit was 2.6 per cent of GDP.

Fast-forward to today and the Ford government’s recent budget, which forecasts Ontario’s deficits will average 3.7 per cent of GDP over the next three years—more than during the early 2010s and slightly less than during the ’90s.

These historical comparisons are valuable because they remind us how much new debt Ontario’s government accumulated during previous eras when deficits were approximately as large as they are today. In both of the historical examples described above, governments took a long time to reduce the deficits and consequently the province quickly racked up debt. In fact, these two historical episodes are the primary reason Ontario’s net debt-to-GDP ratio climbed from just 13.4 per cent in 1990 to 39.6 per cent last year.

Now, with Ontario facing deficits approximately as large as those in the ’90s, it’s important to recognize the potential long-term consequences. In terms of its debt-to-GDP ratio, Ontario never really recovered from either of the two periods of rapid debt accumulation described above. Another similar string of large deficits will push the province’s debt burden higher still.

Of course, the Ford government should take prudent measures to protect public health and help individuals and businesses weather the COVID and the recession. However, it’s important to learn from history and acknowledge that periods of rapid debt accumulation are not easily reversed. The last two times Ontario ran deficits of this size, the province saw increases to its debt burden that remain with us today.

As such, the Ford government, should work quickly to shrink and eliminate these large deficits to help prevent another bout of rapid sustained debt accumulation. Of course, the Ford government must incur certain expenses to preserve public health and help economically suffering Ontarians and their businesses. But it also must consider the province’s long-term fiscal wellbeing.