Ontario faces crisis due to 78% jump in spending

‘I do not want Ontario to become like California,” Ontario Finance Minister Dwight Duncan once proclaimed. And it’s not hard to understand why — California is a fiscal nightmare. It has the lowest bond rating in the United States and its own treasurer, Bill Lockyer, referred to the state budget as “a fiscal train wreck.”

Yet, despite all that is said about California’s finances in the media and financial markets, Ontario is in much worse shape.

Back in 2002-03, the fiscal year before the governing Liberals took office, Ontario’s net debt (assets minus liabilities) stood at $132.6-billion. In the ensuing decade, the province’s debt ballooned by almost 78% to $235.6-billion (2011-12). Most worrying, however, is that if Ontario continues on its current path (status quo in terms of spending and revenues), its debt will balloon to over $550-billion (66% of GDP) by the end of the decade (2019-20).

As the nearby table highlights, Ontario is decidedly worse than California on every measure of debt. For example, despite the fact that California’s population and economy are almost three times that of Ontario, Ontario’s total debt is 64.4% larger than ­California.

On a per-person basis, Ontario’s bonded debt (the concept of net debt is not used in U.S. public accounting) currently stands at nearly $18,000, over four-and-a-half times that of Californiaat $3,800. As a share of the economy, Ontario’s debt (38.6%) is more than five times that of the Golden State (7.7% of GDP). This is a stunning difference in the burden of debt, particularly given the attention and concern focused on California compared with Ontario.

While the two jurisdictions face similar average interest rates for their debt, the large difference in the stock of the debt means equally large differences in interest costs. Specifically, Ontario spends almost double what California does on interest costs in dollar terms and a little over three times what California spends as a share of the revenues collected, 8.9% compared to 2.8% of revenues. This is money that could have been spent on health care, education, public safety.

Thankfully, the Liberal government of Ontario, which just selected a new leader, Kathleen Wynne, has a real opportunity to break with past policies and fundamentally deal with its skyrocketing public debt.

There are two principal barriers holding back genuine efforts at tackling the province’s fiscal problems. The first is a basic misunderstanding of the province’s deficits and debt. More specifically, there is a view that Ontario’s deficits and mounting debt are a result of a lack of revenues. The data here tell a very different story.

In 2002-03, Ontario collected $74.9-billion in revenues and spent $65.1-billion on programs. Some $9.7-billion was spent on interest costs, which resulted in a balanced budget.

Revenues grew to $104.1-billion in 2007-08 (prior to the recession) before decreasing in 2008-09 and 2009-10. This year (2012-13), revenues are expected to be $112.2-billion, some $8-billion higher than the pre-recession high. All told, revenues have grown by 49.8% since 2002-03.

The problem is that provincial program spending has increased by 77.8% from 2002-03 to 2012-13. Simply put, Ontario has had a spending problem over the last decade, not a revenue problem.

The second barrier to dealing with the province’s deficits and debt is apathy. Ontarians are either unaware or uninterested in the province’s indebtedness. We should not be surprised by politicians and bureaucrats ignoring policy issues and the risks associated with them when the citizens of the province don’t seem concerned.

Take, for example, The Globe and Mail editorial the day after Wynne’s victory, which started with the headline “Premier-designate Kathleen Wynne must practise saying no.” If only it were that simple. “Saying no” would have been good advice back in 2002-03; now the new premier must boldly and quickly strike at the root of the problem: unsustainable increases in health care, education and most other government spending.

Or consider how the folks at the Business News Network reacted to our study by claiming: “The reality is once the economy starts growing strongly again in Ontario, revenues will rise and expenditures on things like welfare will fall. It’s not really about cutting spending; it’s about resuming economic growth.”

This indifference is buttressed by the near complete lack of any serious response by the Ontario government to the much-heralded report by the province’s own Commission on the Reform of Ontario’s Public Services, which became known as the Drummond commission. The commission’s report should have been a call to arms for the government to act on reform. Instead, inaction has ensued.

The reality is that Ontario’s indebtedness is significantly worse than the poster-child for bad public finances, California. The inaction to date only delays the inevitable and deepens the breadth and depth of changes needed later. The new premier has an opportunity to set the province on a new, sustainable path. Let us hope she both understands and embraces the need for change.

Financial Post

Jason Clemens and Niels Veldhuis are the editors of “State of Ontario’s Indebtedness: Warning Signs to Act,” recently released by the Fraser Institute.