Ontario not facing ‘debt wall,’ says study of province’s fiscal health

Amid all of Canada’s bleak economic news, there may be a glimmer of hope about Ontario’s massive provincial debt.

Thestar.com
Jan. 21, 2016
By Robert Benzie

Amid all of Canada’s bleak economic news, there may be a glimmer of hope about Ontario’s massive provincial debt.

A new report on the province’s fiscal situation to be released Thursday concludes the long-term outlook is less grim than critics have feared thanks largely to historically low interest rates and a growing Ontario economy.

“Despite some concerns about the level of Ontario’s debt, the province isn’t anywhere close to hitting a debt wall,” said Sheila Block, senior economist with the left-leaning Canadian Centre for Policy Alternatives.

Block, author of the 20-page study, “No Crisis on the Horizon: Ontario Debt, 1990-2015,” noted as Premier Kathleen Wynne’s Liberals prepare a spring budget their focus should not be eliminating the deficit by 2017-18.

“The Wynne government was elected with an activist mandate, yet it has always allowed concerns about debt and deficits to hamstring that agenda,” the economist wrote, pointing to the “questionable” sale of a majority stake in Hydro One to bankroll transportation infrastructure and the Liberals’ reticence toward raising taxes to generate revenue.

The opposition Progressive Conservatives have long warned that Ontario’s debt load is too high, with interest payments accounting for a larger chunk of the budget than all but health care, education, and social spending.

At the same time, credit-rating agencies have warned that Ontario’s planned infrastructure expenditures could hinder plans to balance the books. That’s significant because a major downgrade to Ontario’s credit rating could mean the province might be forced to pay higher interest rates in the future.

To bolster her contention that Ontario’s debt - currently about $295 billion - is manageable, Block looked at its ratio to the province’s gross domestic product over the past 25 years.

She also factored in that during that time the stranded residual debt of the old Ontario Hydro, and the broader public sector debt from schools boards, colleges and hospitals was also added to the province’s tally.

“Part of the debt increase is due to the changes in accounting rules, not a result of profligate public spending (which is, per capita, the lowest in Canada),” Block wrote.

While Ontario’s debt-to-GDP ratio in 2014-15 was 39.4 per cent, without those accounting changes it would have been 35.9 per cent.

That level compares relatively favourably to the 1990s when, after the recession, it skyrocketed from 13.4 per cent in 1990-91 to 31.3 per cent in 1996-97.

At the same time, Ontario was paying an average of 10.9 per cent interest on its debt in 1990-91 compared to 3.7 per cent in 2014-15 with rates continuing to drop.

“Debt crises are rare, though events in both Greece and California are frequently cited in the media and can lend an unwarranted sense of panic to any exploration of this subject,” Block wrote.

“Three factors suggest that the province is not approaching a debt crisis. There is a continued appetite in financial markets for Ontario debt. That means that financial markets expect it will be repaid and that the provincial government is not approaching a debt wall,” she added.

“The continued fall in effective interest rates also support this, suggesting that the risk premium on Ontario’s debt is not rising. The stability of interest costs as a share of revenue indicates that this increased debt can continue to be serviced.”

Block said Prime Minister Justin Trudeau’s new Liberal government - with its large Ontario political base and close ties to Wynne’s administration - could also help the province’s bottom line with increased transfer payments.

“This holds the potential of helping Ontario deal with some of its current fiscal pressures, which could have a positive impact on its debt.”

The government also received some good news from Ontario’s independent fiscal watchdog on Wednesday.

The Financial Accountability Office of Ontario pored over last week’s Statistic Canada data showing the province’s economy grew at an annualized rate of 3.5. per cent in the third quarter of 2015.

“Importantly, third quarter growth was broad-based, with household spending, business investment, and net exports all contributing to the overall increase - a positive sign for potentially stronger and more balanced economic growth in 2016,” the office said.