Ontario government debt will reach 47 per cent of the economy (GDP) this year, requiring immediate action

Lessons for the Ford Government from the 1995 Federal Budget

Summary

• Chronic deficits since the 2008/09 recession have weakened Ontario’s public finances. The province’s debt-to-GDP ratio—a key measure of fiscal sustainability—increased from 27.8 percent to an estimated 47.0 percent of GDP by the end of 2020/21.
• Projected deficits as a percentage of GDP for 2020/21 to 2022/23 are comparable to the three-year run of deficits from 1991/92 to 1993/94, which were the worst fiscal years of the 1990s.
• The global pandemic and accompanying recession have exacerbated debt accumulation in Ontario, but even before COVID the province’s debt-to-GDP ratio was already hovering around 40 percent.
• The Ford government could look to the 1995 federal budget for lessons. It eliminated large deficits over the course of two fiscal years and made room for important tax reforms.
• Ontario faces a fiscal gap of 3 percent of GDP. In other words, in order to return to budgetary balance without increasing tax revenue above and beyond current projections, total annual spending would have to be reduced by 3 percent of GDP. This is less than the 4.6 percent budget gap during the Chrétien years, but will still require sizeable spending reductions post-pandemic to balance the budget without increasing tax rates.
• The 1995 reforms were underpinned by a rigorous review of federal programs that helped to determine the appropriate role of government in delivering services and resulted in program spending reductions almost across the board—including in politically sensitive departments such as defense. The Ford government has an opportunity to change course in its second budget, just as the Chrétien government did 25 years ago.