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Greater Niagara Chamber of Commerce

Ontario in the Red – Part Two


Last time, we talked about the size of Ontario’s public debt. Now, we’ll look at how we got into it.

No single government borrowed all this money; every provincial government in the last twenty-odd years has added to the debt. In fact, since 1965, the Ontario budget has only been balanced eleven times. Bob Rae’s NDP government had increased the debt from $35.4 billion to $90.7 billion by the time they were voted out of power. Rae took office right as the worst recession since WWII hit, unfortunately for him, and his efforts to maintain services and stimulate the economy resulted in annual deficits averaging $14.5 billion as revenues plummeted.

In the last years of the Harris/Eves government, debt growth was halted, holding steady at about $132 billion between 2000 and 2003, and the Progressive Conservatives managed to deliver a budget surplus four times. However, this was only done due to massive and unsustainable cuts to services, and even those cuts and the good fortune of presiding over the province in an economic boom could not stop the Harris/Eves government from, overall, increasing provincial debt from $90.7 billion to $132.6 by the time they were defeated at the polls.

Then Dalton McGuinty’s Liberals ballooned that debt to $288.1 billion by the Premier’s resignation, since which time the Wynne government has “only” put another $20 billion on the books. In all fairness, though, the McGuinty administration didn’t increase the debt by as much as the Rae government did, relatively speaking. The former multiplied the provincial debt by 2.18, whereas the latter did so by a factor of 2.59.

Wasteful government programs and initiatives are often cited as a reason for the debt. They are a reason for some of the debt, but it’s a surprisingly small portion of it. The gas plant scandal was calculated to have cost between $950 million and $1.09 billion by the Auditor General of Ontario – or about one-third of one per cent of the current debt. Ornge, the ill-fated provincial air ambulance service, spent about $700 million over five years and borrowed another $300 million to expand the air fleet. EHealth, which the Auditor General also found to be a waste of money, cost the taxpayers about $1 billion. Installing 4.8 million smart meters cost $2 billion and was eventually calculated to yield a net benefit of $88 million over 15 years (smart meters aren’t smart investments, apparently).

These are the biggest spending scandals the Liberal government has committed, yet their combined cost is a bit less than $5 billion. Now, $5 billion isn’t peanuts. You could buy the LA Lakers, the Chicago Cubs, and the Toronto Maple Leafs with enough change for a Pacific island chain. However, if it were all added to the debt, it’s only one-and-a-half per cent of the total.

Clearly, it wasn’t spending scandals that got us into this. There are quite a few more scandals, like funnelling $80.5 million into teachers’ unions, expense account waste at the Ontario Lottery and Gaming Corp. (OLG), $32 million granted in “slush funds” to Liberal-friendly agencies without formal application processes, $18.7 million spent on consultations for Cancer Care in ethically questionable ways, Children’s Aid societies blowing money on luxury SUVs for senior managers and Caribbean vacations, and so on and so forth. If you haven’t been living under a rock in Ontario since 2003, you’ve heard of Liberal government scandals.

I don’t want to make excuses for government waste, but in the grand scheme of things, these incidents are really a drop in the bucket when you’re talking about over three hundred billion dollars in debt. Political scandal is never a good thing, especially when it costs the taxpayers substantially, but to say that we wouldn’t have these debts without the scandals is like saying you could pay down your ten-million-dollar gambling debt if you gave up your daily Starbucks.

Education and healthcare are the biggest expenditures for the province, and those costs have been increasing steadily. Healthcare costs grew 158 per cent in Ontario between 1998 and 2015, now over $50 billion per year. Between 1986-87 and 2013-14, the province’s spending on elementary and secondary education skyrocketed from $4.4 billion to $18.5 billion. The increases in those budgets alone would account for about 15 per cent of the current debt.

Between 1991 and 2008, Ontario spent $27.7 billion on direct subsidies to corporations. That covers governments from every major party, although it doesn’t include heavily-subsidized Crown corporations. It also doesn’t include the one-third share of the $13.7 billion federal and provincial loan to Chrysler and GM that came from Ontario. Put those two together and you have over $32 billion – more than ten per cent of the total debt. Had the automakers gone under, it would have immediately cut $16 billion from the Ontario economy, so that decision does make some sense.

Long before the bailout, the Harris government cut provincial income taxes by 30 per cent. By the 2001-2002 fiscal year, those cuts had added $30 billion to the provincial debt. That’s another ten per cent of the total, and we’ve accounted for almost half now.

Between 2003 and and 2008, McGuinty’s debt increases were in line with those incurred by previous governments. The 2007-2008 financial crisis hit Ontario hard, gutting the manufacturing sector and changing a 2007-2008 budget surplus into a $19 billion deficit by 2009-2010. In recession, it’s hard not to run a deficit and build up debt. The tax base shrinks. Businesses face reduced revenues or even closure, and pay less taxes. People suffer cutbacks in wages or hours or lose their jobs, and pay less taxes. You can’t raise taxes on those who still pay because they’re already getting squeezed by a recession – squeezing them on the other end too might be too much. You also can’t really cut back on services, since there are more people who need them than ever. It’s been tried, of course, but austerity economics has had pretty disastrous results.

What’s the alternative? You borrow.

Declining revenues built up a lot of new debt. During the Rae administration, real revenues only grew 1.1 per cent annually, owing to the recession, but expenditures grew by 3.9 per cent (still in line with the expenditure levels of previous governments). That led to new debts of $55 billion, almost 20 per cent of the current total. McGuinty suffered the same fate as his revenues shrank under the withering blast of the 2007-08 financial meltdown.

Unfortunately, the economic recovery hasn’t been that strong. Even now, almost a decade after the Great Recession, we’re still struggling to grow the economy. We were in recession again only a year ago. You hope that the budget will be balanced over the course of the boom-bust cycle – you build up debt to maintain service levels during the bust, and then pay it back out of the increased revenues during the boom.

But what if the boom never comes?

That’s pretty much the situation we’re in. The debt was mostly built up through increased spending on education and health care, economic stimulus spending, and tax cuts, but the economy never picked up enough speed to allow the government to pay it down again. Now we’re stuck with a sluggish economy and stagnating revenues, leaving us stuck with this debt, at least for the short-term. There’s certainly no way of getting rid of it quickly without a huge economic impact. Huge tax hikes and swingeing service cuts would devastate an already shaky economy, and making like Argentina and just defaulting could be even worse.

Is it a problem? Not at present, but it could become one. Some economic research indicates that as sovereign debt ratios approach 90 per cent of GDP, problems loom. At about 40 per cent, Ontario is a long way off. Moreover, that analysis is weakened by examples such as Japan, which has been over 100 per cent for 20 years and above 200 per cent for seven, and while Japan’s economy is stagnant, that’s a long-running issue that has little to do with national debt. Indeed, many sovereign states are able to manage very high debt loads for long periods of time. What should be crippling debt becomes the new normal, and the economy continues regardless.

Knowing that, the province’s plan to spend more on infrastructure makes more sense. They are borrowing now, at low rates, to invest in things that will help grow the economy, which will lower their overall indebtedness. Obviously we would not want to see skyrocketing debt with no foreseeable way to pay it back, like Greece, but if provincial debt is kept reasonable and increases only in line with economic growth, there’s no real cause for alarm. We should certainly keep an eye on the debt and try to make sure it doesn’t balloon again – at least too much – but the current debt is not going to destroy the Ontario economy or even do it any noticeable harm.

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