TORONTO — Ontario’s governing Liberals have faced harsh criticism in recent years over the province’s ballooning debt. The government’s spring budget, which projected deficits over the next six years that would in turn inflate the debt level, prompted opponents to decry the Liberals as fiscally irresponsible.
Premier Kathleen Wynne has defended her party’s spending plan as “prudent,” but what’s the real story?
Some economic and credit experts weigh in:
What is Ontario’s debt?
The Liberal government’s spring budget projected the province’s net debt, the cumulative amount of money owed, at $325 billion — or more than $22,500 per Ontarian — for 2018-2019. The debt is forecast to grow to $360.1 billion by 2020-2021. Over that time, the Liberals projected six years of deficits, which is the gap that exists when money flowing out exceeds money coming in.
This year’s deficit is projected at $6.7 billion, although the Financial Accountability Office expects the figure to be closer to $12 billion. The office also expects government spending to push Ontario’s debt to a projected $400 billion by 2021.
To whom does Ontario owe this money?
Michael Yake, vice-president and senior credit analyst at rating agency Moody’s Canada, said Ontario — like many other governments — is indebted to multiple entities, including domestic and foreign investors, pension funds, and other governments.
How do you quantify a province’s debt?
There are different ways of doing so. The government measures the ratio of debt to Gross Domestic Product (GDP). It calculated the 2018-19 ratio at 37.6 per cent, shy of a 39.3 per cent peak reached in 2014-15.
Moody’s, whose ratings of businesses and governments are widely seen as a key marker of fiscal performance, prefers to use the ratio of net debt to revenue, putting the ratio at 233 per cent for 2017-18, meaning debt levels were more than twice as high as income levels.
Yake said that figure is rising to 237 per cent in 2019-20, assuming the Liberal budget is executed is planned.
Ontario’s credit rating
Yake said Ontario’s credit rating of AA2, which it’s held since April 2012, is the third-highest of 21 possible rankings. The likelihood of that score changing was recently lowered to negative when the debt to revenue ratio showed signs of rising again.
Yake said the province’s debt burden could put “downward pressure” on its credit rating, adding Moody’s could make the downgrade if the debt ratio creeps back over the 240 per cent mark and interest rates consume more than nine per cent of revenue.
Why the negative outlook?
As debt levels rise, Yake said the province will have to pay an increasing amount of interest on the debt. In fact, he said interest payments, projected to consume 8.8 per cent of the 2018-19 budget, are the fourth highest expenditure behind health care, education and the children’s and social sector. Interest payments accounted for 8.6 per cent of revenue in 2016-17 and 8.3 per cent in 2017-18.
How is Ontario stacking up against other Canadian provinces?
Yake said Ontario currently has the highest debt burden of the jurisdictions Moody’s evaluates, which includes all provinces and territories except the Yukon. However, Ontario does not have the lowest credit rating. That distinction goes to Newfoundland and Labrador — currently rated at an AA3 with a negative outlook.
While Ontario is the only AA2-rated province with a negative outlook, five others hold the same rating — Nova Scotia, Prince Edward Island, New Brunswick, Quebec and Manitoba. Alberta, the Northwest Territories and Nunavut are all rated at AA1, while Saskatchewan and British Columbia currently enjoy the agency’s top AAA rating.
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Is this picture as dire as it sounds?
Both Yake and former Bank of Canada governor David Dodge say Ontario’s financial picture involves more than just debt level and is a far cry from the disastrous scenario some critics describe. Yake emphasizes that the province’s credit rating is still considered very strong, noting that Ontario’s cash reserves are also plentiful. Dodge said Ontario has thus far taken a “sensible” approach to structuring its borrowing, locking in most of its loans at rock-bottom interest rates.
The province, he said, is therefore relatively protected from the gradual interest rate increases projected for the coming months.
Both Yake and Dodge, moreover, say that Ontario is currently enjoying the benefits of a strong economy that, while unlikely to sustain the rapid growth experienced in recent years, is still expected to make gains.
So does that mean the government critics have it all wrong?
No. Dodge questioned the soundness of Ontario’s fiscal strategy, saying that while there are some circumstances in which it makes sense to take on a higher debt burden, Ontario’s current situation does not qualify.
He said borrowing makes sense if the money is being put toward areas that could generate revenue down the road, citing infrastructure as an example of an investment that would ultimately boost productivity and bolster the GDP.
In this case, however, he said most of the province’s budget is going towards health care and other programs that, while important, won’t yield future income streams.The situation mirrors a similar scenario that played out at the federal level under the regime of Progressive Conservative prime minister Brian Mulroney, he said.
Will a regime change fix everything?
It’s never that simple. Yake said some of the main factors weighing on Ontario’s economy are entirely out of government hands, citing ongoing uncertainty around the North American Free Trade Agreement. Nonetheless, whatever party takes power will find itself having to take action on some fronts.
Tax reform legislation in the U.S. has limited Ontario’s once-considerable competitive edge for business, he said, adding that the incoming government will have to ensure the province can stay in the game. Ongoing “affordability challenges” on issues ranging from housing to hydro may also limit the government’s ability to raise taxes.
At the same time, however, demographics dictate that spending on key government services such as health care will likely have to increase to keep pace, he said. Revenue growth is expected to slow, spending pressure is expected to rise, and that is going to lead to a greater probability that there will be deficits no matter who forms government, he said.
© 2018 The Canadian Press