It needed lots of economic luck and a bit of budgeting trickery to make it happen, but Ontario's government has eliminated its budget deficit as promised. And just in time for an election, too.
The next step should be to tackle its more than $300-billion in net debt – roughly equal to the debts of the other nine provinces combined. The government is paying nearly $12-billion a year in interest alone on its debt – equal to 8 per cent of the total budget – and there's a real danger that economic and demographic forces will conspire to keep that figure growing in the coming years. The province needs a plan to reverse what has become a chronic debt problem, while its financial conditions are as favourable as they have been in a decade.
It has no such plan.
While neighbouring Quebec has not only defeated its deficits but has been building a sovereign wealth fund specifically aimed at paying down its debt, Ontario seems satisfied to trust that continued economic growth will be enough to stave off deficits and whittle down its debt-to-GDP ratio. Even using projections that Ontario's own in-house fiscal watchdog has questioned, the government's approach targets returning its debt-to-GDP ratio to pre-recession levels only by 2030 – a time frame so remote as to be near-meaningless.
It's a wildly optimistic and inadequate response to a problem that, with any turn of bad luck at all, could cripple future governments for decades.
But first, a little credit where credit is due. Seven years ago, when Ontario was struggling along with everyone else to lift itself out of the Great Recession, the government pledged to bring its $19-billion deficit to zero by 2017-18. The opposition protested, loudly and often, that it was a rose-coloured target without a concrete plan to achieve it. But the deficit for the just-completed 2016-17 fiscal year came in at a tiny $1.5-billion, and the government is budgeting for a balance not only for this fiscal year, but also for the two years after that.
To get to that finish line, the government did play some games with its so-called "reserve," the money it sets aside in each budget as a contingency for surprises that might nudge its budget off course. It booked $600-million for this year and next – precisely the amount necessary to reduce its budget balance to zero. It's also $400-million less than the provision built into last year's budget; if the government hadn't narrowed its own margin of error built into the budget, these would appear as small deficits.
Much more significant, though, is the terrific run of economic luck that has paved the path to this budget balance: Years of low interest rates; a booming housing market; a weak dollar that has helped exporters; and strong growth in the United States, the province's chief export market. Real GDP growth has averaged 2.6 per cent in each of the past three years, well above Canada's national growth and, indeed, better than the U.S. economy has achieved. In his budget speech, Mr. Sousa boasted that Ontario had better growth last year than any G7 country.
But the province's luck could turn. Last fall, the Financial Accountability Office of Ontario, the province's in-house fiscal watchdog, predicted that the government's deficits would start growing again beyond the current year, citing anticipated slower economic growth. A key factor is simply that Ontario's population, like that of the entire country, is aging, meaning declining labour growth that will limit the economy's potential to expand.
The resulting further deficit accumulations, coupled with the province's large commitments to infrastructure investments (now at $156-billion over the next decade) and the good chance that interest rates will begin to rise from years of historic lows, create the prospect for further debt accumulation and rising debt servicing costs. Those, in turn, would make budget balances increasingly remote.
Quebec, another born-again balanced-budgeter with a serious debt overhang, has seen the light. In addition to reining in its deficits, it has been using revenues generated from hydroelectric power for the past several years to build up its Generations Fund, a sovereign wealth fund dedicated to whittling down the province's onerous debt. The fund stood at a little over $10-billion at the end of fiscal 2016-17.
Ontario, whose per-capita debt is roughly in line with Quebec's, has no such plan to use its fiscal stability to lower its debt burden. Indeed, while the country's other three biggest provincial economies – Quebec, British Columbia and Alberta – all have set up sovereign wealth funds in times of budget surpluses to build up funds to steel their finances against rainier days, Ontario has no such savings fund.
Mr. Sousa said in a press conference Thursday that his government has placed its priorities on using its balanced-budget position to boost funding in such areas as health care and infrastructure, rather than dedicating funds to taming its debt. "We've made some choices, definitely," he said.
That might make sense in the current election cycle, but it ignores the bigger picture. As Quebec has rightly pointed out in its rationale for the Generations Fund, excessive debt loads hamper government flexibility, leave its finances vulnerable to rising interest rates, and pose impediments to economic growth. Crucially, Quebec sees reducing its debt burden as critical to preparing for the country's demographic shift, in which provinces will face both a slowing base of taxable earners and rising spending obligations for a growing seniors' population.
Mr. Sousa's bet is that the government's continued use of debt now to invest in infrastructure, while its budget is under control and borrowing costs are near historic lows, will enhance the economy's productivity in future years to offset the looming demographic drag and spur enough growth to keep the debt manageable. If he's wrong, this may be remembered by future generations as the time Ontario had a chance to deal with its debt problem in a concrete way, but instead kicked the can down the road.
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