Way back in March 2012, I posted a detailed look at Ontario’s fiscal history back to the mid-1980s. With the provincial election pending, I thought that it was time for an update that will provide Ontario voters and others who may be interested with a look at the fiscal problems facing Ontario’s new government. It will also help us to better understand how a succession of governments in Ontario have spent their way into a debt corner.
As a reminder, particularly for those of you who have either forgotten or never knew, here is an outline showing the terms, Premiers and political persuasions of those who have ruled Ontario as their fiefdom since the mid-1980s:
1985 - 1987 David Peterson - Liberal (minority)
1987 - 1990 David Peterson - Liberal
1990 - 1995 Bob Rae - NDP
1995 - 1999 Mike Harris - Progressive Conservative
1999 - 2002 Mike Harris - Progressive Conservative
2002 - 2003 Ernie Eves – Progressive Conservative
2003 - 2007 Dalton McGuinty - Liberal
2007 - 2011 Dalton McGuinty - Liberal
2011 - 2013 Dalton McGuinty - Liberal (minority)
2013 to present Kathleen Wynne – Liberal (minority)
Now, let's look at some fiscal history for the province, sourced from the TD Bank, starting with a graph showing the surplus and deficit picture for each year since 1986 - 1987:
You'll notice that out of the 27 fiscal years represented (excluding years where the budgets are still projections), that the budget has been in surplus for only eight years or 29.6 percent of the time. If we include the projected years from 2013 – 2014 to 2017 – 2018, budgets have been balanced or in surplus for only nine years out of 32 fiscal years or 28.1 percent of the time.
Now let's look at the growth in net debt:
Since the turn of the century, the debt has grown from $132.5 billion in fiscal 2000 - 2001 to $252.1 billion in 2012 - 2013, a 90.3 percent increase. That’s a compounded annual growth rate of 5.07 percent, well above the rate of inflation over that time frame.
Let’s now look at the change in the debt-to-GDP ratio:
Ignoring the data before 2000, it's really only been since fiscal 2008 - 2009 that the debt-to-GDP level has risen markedly. Since 2008 - 2009, the debt-to-GDP ratio has risen from 28.9 percent to 37.4 percent in 2012 - 2013, a rise of 8.5 percentage points or 29.4 percent. While this debt-to-GDP level seems low when we compare it to what we have seen in the many Eurozone nations, the United States and Japan who have debt-to-GDP ratios in excess of 100 percent, we have to remember one thing; provincial and state governments have much lower tolerances for debt accrual than federal governments, largely because their tax base is limited. Bond ratings agencies and bond markets have already expressed concerns about Ontario's debt level with Moody's already threatening a debt downgrade back in December 2011.
Lastly, let’s look at one interesting metric, the debt charges as a percentage of total provincial revenue since 2009 – 2010:
In 2010, “only” 9 cents of every tax and fee dollar remitted by Ontarians went to debt servicing. This is expected to rise to 10.5 cents by 2017 – 2018, a rather significant increase. This means that rather than funding education, health care and infrastructure, more than ten cents of every dollar that passes through government’s hands will be used to service the province’s burgeoning debt. This situation could become even worse if interest rates on the outstanding debt rise.
Let's hope that Ontario's next Premier takes the role as fiscal caretaker of Ontario's future seriously and ends the government's spend and tax philosophy before painful austerity measures are forced on voters. The overspending by Ontario’s political leaders over the past twenty-five years has created what could be a major problem over the next decade or less. With such a sustained history of deficit spending, the odds of turning the boat around and returning to fiscal balance by fiscal 2017 - 2018 are very low, particularly given that interest rates are at unprecedented low levels and are more likely to rise than fall.