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Greater Niagara Chamber of Commerce

Ontario in the Red – Part One

The Ontario government owes a lot of money, currently over three hundred billion dollars. Why did they borrow all this money? Who did they borrow it all from? Is it too much to handle, and do we need to panic? This week, we’ll look at the size of the debt and what it means.

The Government of Ontario’s debt (and from hereon out, whatever I call it I mean this public debt, not private borrowing at all) has ballooned over the last twenty-five years. In current dollars, it’s gone from $31.5 billion in the 1986-1987 fiscal year to $308.3 in the most recent. Interest alone was $10.3 billion in 2012-2013. If that debt were evenly divided amongst every resident of Ontario, we’d each owe over $22,500. It could pay for the entire province’s gasoline purchases – for eight years. If it was in loonies, they would weigh two million tonnes, about a third of the mass of the Great Pyramid of Giza, and if stacked in a column, it would be over 600,000 km tall, or almost twice the distance from the Earth to the Moon.

Staggering.

Who does the government owe all this money to? Almost three-quarters is in Canadian dollar public bonds, of which the overwhelming majority is Canadian-owned. About 17 per cent is in foreign currency bonds, 4 per cent in Canadian dollar treasury bills, 4 per cent in Canadian dollar non-public debt (mostly consisting of debt instruments issued to the Canada Pension Plan Investment Board), and 2 per cent in U.S. dollar commercial paper.

$252 billion was issued in Canadian dollars, and $45 billion in U.S. dollars. Of the remainder, our major outstanding debts are $12.1 billion in Euros, and the rest in a mix of Swiss francs, Australian dollars, Japanese yen, and South African rand. Most of the debt, in short, is owed by the Ontario government to investors and creditors in Ontario and Canada, including individuals, firms, mutual funds and investment vehicles, and most of the rest is owed to the same sorts south of the border.

If you’re now haunted by the thought of a pile of coins that rivals the pyramids, remember that debt is only a problem related to your ability to pay, and the absolute size of the debt is not the most relevant figure. If you owe $20,000 on an annual income of $150,000, that’s not a problem. If you owe $10,000 on an annual income of $15,000, you’re in trouble. In economics, we generally look at the debt-to-GDP ratio. GDP, or Gross Domestic Product, is a measure of the overall size of the economy, so in this case, we’re comparing a public debt to the economy on which its repayment depends.

Ontario’s debt-to-GDP ratio in 2013 was 37.4 per cent, the highest in the province’s history. The Financial Post reported, based on that number, that Ontario is now the world’s most indebted sub-sovereign borrower, now with twice the debt of California. Since then, Ontario’s ratio has gone up even more, to 39.9 per cent.

There are two problems with that headline. Firstly, it’s not a fair comparison. Secondly, it’s a half-truth.

Point the First: provinces have more budgetary responsibilities than states, and Ontario’s budget is bigger than California’s despite having about one-third of the population, so it stands to reason that a province would have a greater debt load than a state. California also has constitutional limits on borrowing (which they’ve managed to largely ignore through some creative accounting and legal sleights-of-hand). It’s not really fair to compare Ontario to California, just as it’s not fair to point to a family of four and accuse them of being fiscally irresponsible just because they’re more indebted than the DINKs next door.

But I also said it was a half-truth. That’s because Ontario’s debt-to-GDP ratio isn’t the highest sub-sovereign debt in the world. It’s not even the highest in Canada. Quebec’s debt totals $279 billion, which is lower, but it’s now 49.2 per cent of GDP – far ahead of Ontario. And New Brunswick (38.3 per cent), Newfoundland & Labrador (38.1 per cent), and Nova Scotia (37.8 per cent) aren’t far behind at all. When you look at other provinces and territories, Ontario actually looks fairly normal.

Even if the Financial Post was right, to say it’s the most indebted sub-sovereign borrower in the world paints an unfair picture given that there aren’t actually that many sub-sovereign jurisdictions in the world that can borrow in the first place. Canada is a federal state, with provinces and the national government each taxing separately, being responsible for distinct government services and roles, and spending accordingly. Most other countries don’t do things the same way, and in them, there’s no intermediary level of government between the municipal/regional and the national.

Canada, Mexico, the United States and Germany are examples of federal states, but France, the United Kingdom, Spain, Italy, China, Japan, and many others are unified. All of those countries have higher debt-to-GDP ratios than Ontario, by the way. That means any hypothetical sub-sovereign states in Japan, with its national debt-to-GDP ratio of 229 per cent, or Italy, with 133 per cent, or Spain, with 99 per cent, are excluded from this race. Would sub-sovereign states in those countries have debts exceeding that of Ontario? We can’t know, but it seems very possible given how enormously indebted their sovereign governments are.

None of these governments are doing well on debt, of course. Japan, Italy, and Spain are all pretty worried about their national debts. But even Mexico is concerned with state debt, though their most indebted state, Coahuila, has a debt-to-GDP ratio of only 7.9 per cent. The points I’m trying to make are that Ontario is not alone in being a highly indebted government, that many national governments have taken on far greater debt loads, and even among sub-sovereign borrowers, Ontario is not the most indebted province and is actually not much deeper in debt than its less-leveraged peers.

Ontario’s credit rating was downgraded last year by Standard & Poor, from AA- to A+, and it’s been 27 years since the province held a triple-A rating. However, Moody’s recently upgraded their outlook from “negative” to “stable” and left the debt rating of Aa2 untouched, so opinions differ even amongst agencies. More to the point, the credibility of the ratings agencies themselves took a major hit after the sub-prime mortgage crash, which they are alleged to have contributed to causing and exacerbating by defrauding investors. Perhaps it’s partially because of this that credit ratings agencies don’t have the influence they used to. After the U.S. downgrade in 2011, the dollar and stocks rallied; Alberta’s downgrade from AAA to AA+ barely had any impact on the province’s cost of borrowing. The correct response to a single-level downgrade is probably a shrug.

Next week, we’ll talk about where the debt came from, and who’s responsible for it.