Ontario is getting a Throne Speech this week and a budget next week and these events will set the stage for the June election. In her recent post, Frances drew attention to the province's public finances via the public sector wage bill and the public-private sector wage differential and that cutting the public sector wage bill may certainly be an option pursued in the future. This is because the province has accumulated a large public debt that given the prospects for an economic slowdown and/or rising interest rates will potentially increase fiscal pressure via debt service costs which in 2016-17 totaled $11.7 billion or just over 8 percent of total government spending. That is more than what is being spent to fund the provinces post-secondary education and training system (The Ministry of Advanced Education and Skills Development) which came in at $10.1 billion.
The province's net public debt situation has been decades in the making and my recent foray into the province's public accounts to update my debt numbers yields the following contribution - a dual scale plot of the Ontario governments net public debt and its net debt to GDP ratio going all the way back to 1961. The current level of net debt - estimated at $311.921 billion for 2017-18 and a net debt to GDP ratio of 37 percent - has been over a half century in the making.
In 1961, Ontario's net public debt was $1.093 billion and the net debt to GDP ratio was 6.6 percent. The 1960s saw mainly balanced budgets until the 1967-68 fiscal year when deficits began to occur and they continued to occur in the 1970s. Ontario ran consecutive deficits from 1970-71 to 1988-89 - a total of 19 deficits - and the provinces net debt reached $35.5 billion and the net debt to GDP ratio reached 12.5 percent. Then came the 1990s and the pace of debt accumulation picked up with mounting deficits and the net debt reaching $134.4 billion by 1999-00 and the net debt to GDP ratio 29 percent. There was a bit of a lull in debt accumulation for the first few years of the 21st century but then as the Great Recession hit and the Ontario manufacturing sector was decimated, the deficits grew and so did the debt.
From 1999-00, the provincial net debt more than doubled and grew from $134.4 billion to reach $301.6 billion in 2016-17. The net debt to GDP ratio also grew from 29 percent to hit 37 percent. However, an effort began to be made to balance budgets with some restraint in the growth rate of spending - particularly health - and the expectation was that 2017-18 and beyond would see balanced budgets. Indeed, a balanced budget was expected to be a platform plank for the Wynne government going into the June election.
So where to next? Well, according to Finance Minister Sousa Ontario is no longer going to be looking at balancing its budget but is going to run a deficit again and at least one report said it could be as high as $8 billion. Moreover, the province is planning many billions of dollars in capital spending as part of its infrastructure renewal which will also be added to the net debt in coming years. So over the next few years, we can expect the province's net debt to reach over $400 billion and perhaps even get to $500 billion. If the effective interest rate on government debt stays at about 4 percent, a $500 billion dollar net debt will generate debt service charges of 20 billion a year - nearly double what the charges currently are.
If the province's fiscal situation continues on this path, I think we are looking at more than just an effort to cut the public sector wage bill in order to restore fiscal balance. Depending on where interest rates go and how hard Ontario might be hit by the next recession, we may be looking at a more fundamental restructuring of what the public sector in Ontario can be expected to do. However, I don't expect anything to happen too quickly when it comes to dealing with the debt. After all, this has been a problem nearly a half-century in the making and luckily so far it has been a slow burn. The question is how lucky do you feel?