With Ontario's balanced budget now pretty much a lock, the provincial government has begun to show us what it plans to do with its hard-earned fiscal dividend. The initial indications suggest its first priority is to buy back the support of alienated voters, while leaving for some other day the elephant practically filling its financial room: the province's massive and onerous debt load.
Ontario's fall economic and fiscal update, released this week, showed that the Liberal government is in even better shape than it was in its spring budget to wipe out what's left of its deficit in the 2017-18 fiscal year, which ends next March. The latest numbers show that the 2016-17 year was a mere $991-million in the red – practically a rounding error in a $140-billion annual budget. With only four months and change left in the current budget year, the first balanced budget in a decade looks in the bag.
That's not only what the government promised in its spring budget, but what it first promised seven years ago. Back in 2010, when the government was saddled with a $19-billion deficit in the wake of the Great Recession, it pledged to return to balance by 2017-18. At the time, it seemed like a far-distant fantasy with only a loose connection to reality, a politically motivated promise almost made to be broken.
The government certainly got lucky along the way, riding improving economic growth and blessed with the absence of any economic shocks that could have derailed its fiscal targets. Nevertheless, the goal was achieved, as set. Now the government is confidently predicting that it will keep the budget in balance – with neither a surplus nor a deficit – for the current fiscal year and each of the two years that follow.
That affords this government the fiscal flexibility to address some things it had put on a back burner during its long pursuit to return to balance. But the fall update continues to indicate that the province's colossal debt – estimated at $312-billion for the current fiscal year, up more than 60 per cent over the past seven years – isn't high on the government's priority list. Indeed, it's hard to tell if it's on the list at all. In Finance Minister Charles Sousa's speech in the provincial legislature presenting the fall update, the word "debt" didn't even come up. Not once.
In the fiscal-update document itself, the government did boast that the net-debt-to-GDP ratio – a key measure of a government's capacity to manage its debt load – has come down from its previous projections. But that's almost entirely because the denominator in that equation, the GDP forecast, has improved. The net debt projections, not only for the current year but out to 2020, are essentially unchanged. And those figures foresee the province adding another $34-billion in net debt – a more than 10-per-cent increase to the pile – over the three-year horizon, despite maintaining balanced budgets. (The borrowing will finance infrastructure investments, which the government is banking on to facilitate long-term economic growth.)
The plan leaves Ontario's net-debt-to-GDP ratio at roughly 37 per cent for the next three years – higher than six of Canada's other provinces, and more than 10 percentage points higher than it was a decade ago. The province is already paying $12-billion a year just in interest on its debt – an expense that's in danger of climbing as the interest-rate cycle turns upward.
And unlike its heavily indebted neighbour, Quebec, which wiped out its deficit and has enjoyed small budget surpluses for the past two years, Ontario is taking no action to appreciably reduce its debt-to-GDP burden. Quebec has been putting its surpluses, as well as revenue from hydroelectric generation, into a sovereign wealth fund dedicated to chipping away at the provincial debt. This commitment has dramatically turned around Quebec's debt-to-GDP ratio, which has fallen from a staggering 50 per cent in 2014-15 to an estimated 46 per cent in the current fiscal year, and is projected to decline to 40 per cent by 2021-22.
What is Ontario doing? It is spending – and spending big, with the next provincial election only about six months away. Expenses are now budgeted to increase nearly 6 per cent in the current fiscal year – the biggest jump in spending since the Great Recession, when the government was trying to stimulate a badly sagging economy.
There is no such economic justification for that level of spending increase today. But while the economy isn't in need of help, the Liberals' position in the polls is.
Pointedly, this week's fiscal update delivered another tax cut to small business, the second in seven years, as well as $500-million in new programs to support small companies. The move curries favour with voters in the small-business community who have been alienated by the Liberals' plan to increase the province's minimum wage to $15 an hour by 2019, a policy that, while helping the province's working poor, puts a serious burden on small employers and puts at risk some of the jobs they provide. Given that nearly one-third of Ontario's workers are at companies with fewer than 20 employees, that's a pretty big voter constituency in need of some soothing.
But windows of opportunity like this – a balanced budget, solid economic prospects, a generally improving global backdrop – rarely last for long. Already, the housing sector that has been a major growth engine in Ontario is losing momentum. The outlook for the province's key export sector is increasingly uncertain, as the renegotiations of the North American free-trade agreement skate on thin ice. The government's projected balances could easily slip back into deficits, should the economic luck of recent years turn bad.
If that happens, without a policy to turn the province's debt burden around, a major opportunity will have been lost – and future generations will pay the price. When this government draws up its full pre-election budget next spring, it will have to ask itself if that price is worth a few votes.