Ontario's Public Finances: A Fiscal Primer

With Ontario set to deliver its own budget on Tuesday March 29^th, it is useful to provide a perspective on the province's finances given that it is Canada’s most populous province and largest provincial economy. Ontario faces some tough fiscal decision making over the next few years given a set of deteriorating public finances and economic challenges that were exacerbated by the recession. 

Indeed, like many Canadian provinces, there is a long-term sustainability challenge affecting Ontario’s finances that will need to be dealt with.  This long-term sustainability challenge is illustrated in the accompanying graphics for Ontario showing: revenues and expenditures, the deficit, the net debt and the net debt-to-GDP ratio.

  

Fiscal sustainability is government having the resources to do what the public wants or needs.   If over the long-term expenditures consistently rise faster than revenues, then the public finances are not sustainable.  Over the period 2000 to 2010, the average annual growth rate for provincial government expenditure in Ontario was 9.6 percent while revenue grew at 6.2 percent.    Since 2007, due to the recession and world financial crisis, expenditures have even more rapidly outpaced revenues resulting in very large deficits. Part of the recent deficit gap is the result of increased spending during the recessionary period, while part of it is also due to the slowdown in revenues because of the recession.  While the economy has begun to improve and revenues started to rise, Tuesday’s budget will still show a substantial deficit.

 

Accumulated deficits plus interest give you the debt and Ontario’s net public debt has risen to reach an estimated 245 billion in 2010.   The debt figures provide a longer term perspective in that they stretch back to days of yore – all the way back to 1965 when the net debt was only 1.6 billion dollars.  There is a gentle climb (it did not seem gentle at the time but hindsight moderates all) until the early 1990s and then the pace of debt accumulation picks up substantially.  Given that Ontario’s net debt was 132 billion in the year 2000, it means that nearly half of Ontario’s net debt was acquired over the last 10 years.  Indeed, while Ontario has been a province in the Canadian federation for 143 years, over 80 percent of its net public debt has been acquired in the 20 years since 1990.  Debt and debt service costs in Ontario have only been as manageable as they have been because of historically low interest rates.  Of course, the ability to carry debt is also a function of your GDP and in Ontario, the debt to GDP ratio has also grown dramatically and now stands at nearly 40 percent – a bit more than the Federal Debt to GDP ratio.   It will be interesting to see what the long-term plan for managing Ontario’s public finances will be in Tuesday’s provincial budget.

Comments

[Frances Woolley]

Ontario spending goes, overwhelmingly, to health care (about $25B in 2009), social services ($25B) and education ($18B). http://www40.statcan.gc.ca/l01/cst01/govt56b-eng.htm. Everything else is pocket change.

My sense is that the McGuinty government is proud of what it has achieved with respect to better funding for health care and education, and will run up the debt further rather than erode those accomplishments. But, as you say, something has to give soon.

[Simplicitus]

I don't see it. Your chart shows that between 1998 and 2008, revenue grew as fast as expenditures. Only by using a different 10 year span, including the recent recession years, do you get overall deficit spending. I see no way to conclude long term deficits without choosing your data to support your pre-determined conclusions. And even then, over the last two years, revenues have grown faster, so your conclusion is really based on only two really bad years. Your conclusion may be correct, but your argument is terrible.

[Kevin]

The story that jumps out at me is that when times are tough we run up deficits, and when they are good we just balance the budget (and don't pay off the deficit). Due to interest the debt keeps growing. So those years between 1998-2008 still saw our debt grow. I think the narrative still holds. No tricky sample selection here.

[Tim]

I have heard rumors McGuinty is going featured soon on the show 60 Minutes on CBS TV in the US as part of a story comparing Ontario's education system favorably to that of the US essentially calling on Barack Obama to copy McGuinty's education reforms in the US. Given any press for a Canadian politician in the US is hugely favorable I suspect McGuinty will milk it for all it worth and thus it is unlikely he will cut education spending.

Not to get too far off track as a WCI reader I would be interested in the future if any WCI contributors have any thoughts on Ontario's and Canada as a whole's performance on the OECD PISA exam which I understood is becoming quite good. I think Ontario students now rank ahead of everyone else in the developed world on math and science other than Japan, Korea, Finland, and Singapore. The US not surprisingly is close to the bottom. There is a paper and video from the OECD linked to below that goes more specifically into Ontario's performance. I guess the question I have is whether the OECD PISA is actually an effective test of student achievement and whether Ontario's improved performance is actually related to the reasons the OECD has given.

http://www.pearsonfoundation.org/oecd/canada.html

http://www.oecd.org/dataoecd/34/47/46580959.pdf

[Jim Rootham]

Does no one remember Mike Harris tax cuts?

[Donald Hughes]

I think a starting point for closing the gap would be to raise the HST by 2%. Quebec and Nova Scotia have both done this recently. It would raise about $4 billion annually in Ontario. It would be very unpopular, though, and would have to wait for the federal deal to expire (which froze the rates).

Other than that - ecotaxes? Not sure. A BC-style modest carbon tax would probably raise $1 - $3 billion.

CCPA says that Ontario's revenues are down $15 billion a year due to the tax cuts since 1995. Given that the current projected deficit is $17 billion for 2011-12, that seems relevant.

[Frances Woolley]

Jim: "Does no one remember Mike Harris tax cuts?"

When there's a liberal government in Ontario, there tends to be a conservative government in Ottawa, and vice versa.

However you view things, there's always an upside and a downside!

[Determinant]

Um, Frances, that rule has almost no basis in fact. Ontario had Tory governments from 1944-1985 without interruption, regardless of what was happening in Ottawa. Then we had David Peterson and his Liberals for a minority, a majority, then Bob Rae and NDP. Then Harris *grumble*.

Dalton McGuinty is only the third Liberal premier in Ontario in 80 years and the first since Mitch Hepburn in the 1930's to be reelected to a majority.

[Chris J]

A question: Is it fair to say that Ontarians have (roughly) a debt of 80% of GDP? ie 40 federal and 40 provincial. It seems to me that since Ontario's economy is about at average for Canada that I can just add up these numbers. This seems high to me. Do we need an HST bump of +4% (2 federal + 2 provincial) phased in over 4 year starting in 2012?

[Tim]

From 1944 to 1985 Canada essentially had Liberal governments other than the Diefenbaker years and Joe Clark's short interegnum. I will also note the provincial Conservatives in Ontario were not known to get along with Clark or Diefenbaker all that well to put it mildly. There is story that is perhaps apocryphal of a young Bill Davis meeting premier Leslie Frost in his office for the first time after Davis was elected as an MPP. As Davis is walking in Frost slams down the telephone after ending a converstion with PM Diefenbaker over the Avro Arrow cancellation and comments to Davis that he can't believe why he helped "get that son of (blank) elected."

Another less well known fact is that provincial liberals pre 1980 were essentially a rural Randy Hillier/Landowners Association type party that the Federal Liberals under Trudeau and Pearson wanted nothing to do with. There is another perhaps apocryhal story too that when David Peterson and Sheila Copps were competing for the provincial leadership in the early 1980s a powerful rural Liberal power broker when asked who he was supporting commented that he definately wasn't voting for the "broad".

[DR]

Yeah, it seems the problem is that the surplus isn't big enough during good times. Ontario needs to start running a $10 billion or so surplus while the economy is growing.

[Determinant]

My point is that the data points are so sparse for Ontario's voting record it's a very tenuous conclusion, since we didn't have a change of power in this province for decades.

[Nick H]

I found this post very interesting but I was wondering if someone, ideally Mr. Di Matteo himself, could clarify what role tax cuts played in the creation of the deficit? Also, I apologize if this is naive, but I don't see anything indicating whether or not the numbers here are adjusted for inflation. If they aren't, then how would the picture change by looking at these numbers in real terms? I also wonder if there have been changes in the tax base that may have had an effect on revenues. For instance, is it possible that economic changes induced by NAFTA and/or globalization have reduced government revenue by moving many of our manufacturing jobs to other regions of the globe?

[Nick H]

Prof. Di Matteo? Anyone? This is the sort of information that could help me decide who to vote for and its weird and perhaps even a little inappropriate to publish this kind of information and then not clarify what it really means.

[Livio Di Matteo]

Nick H:
The revenue, expenditure, deficit and net debt numbers are nominal, that is not adjusted for inflation. However, taking a ratio of debt to GDP gives you an idea of what the burden of the debt is in terms of total provincial output. A rising debt to GDP ratio means the debt is rising faster than output. While income tax and corporate tax rates did go down in the 1990s, revenue went up because of an expanding tax base. However, over the last decade, expenditures have tended to rise as fast as revenues and sometimes faster (especially since 2007 because of the recession) resulting in large deficits. One of the problems has been the tendency of Ontario governments to run deficits during downturns but then only balance the budget during recoveries and never paying down the accumulated debt. While this is tolerable during times of low interest rates and growing GDP, it means that there is now a large mass of debt that can grow rapidly should interest rates rise or a recession hit that slows revenues.