After ten years of deficits brought on largely by the 2008 global recession, Ontario balanced its budget last year, scraping out a $600 million surplus.
But last March, Ontario’s Liberal government signaled a return to red ink, arguing that it needed a deficit to fund pharmacare for seniors, new mental health initiatives, preschool for toddlers and several other programs at a time when the province was leading the G7 in real economic growth and jobs numbers were soaring.
As a result, three major credit rating agencies soured on the province, moving their outlooks to negative.
"The return to deficits is in sharp contrast to past messages the province had provided on maintaining balanced budgets once they were achieved in 2017/18 after a lengthy period of consecutive deficits," Moody’s senior analyst Michael Yake said in March.
“The inability to accommodate new spending within a framework of maintaining or quickly returning to balanced budgets, at a time when the province's economy is performing well, suggests the province is facing a structural deficit," Yake wrote.
Ontario now has a rating from Moody’s of ‘Aa2’, third from its top rating of ‘Aaa’. Securing the top rating helps ensure the lowest possible interest rate on debt.
Quebec, Manitoba, Prince Edward Island, New Brunswick share Ontario’s rating, but none of them have Ontario’s negative future outlook.
Saskatchewan, British Columbia and the federal government each hold Moody’s top ‘Aaa’ rating.
Alberta’s rating is one level higher than Ontario’s but one level lower than the top, at Aa1.
Ontario’s interest costs dwarf spending on university and college
The province will fork over $12.5 billion in interest to service its $325 billion debt this year.
Ontario spent more to service its debt this year than it spent on its entire system of courts, jails and provincial police ($5 billion), its system of public colleges, universities and financial aid ($11.8 billion), and its welfare and disability support programs ($ 8.7 billion).
If interest on debt was reconstituted as a government ministry, it would be the fourth largest in the province, behind only healthcare, primary and secondary education and children’s and social services.
The Liberals counter that annual interest costs are now 8 cents on every dollar of revenue, a lower ratio than any year in the past 25 years.
But their plan calls for spending to continue to rise through 2021, with interest on debt reaching $13.8 billion in that year.
The NDP platform does not specify exactly where debt costs would go between now and 2021, but their party’s projected deficits are approximately $1.1 billion less over the next three years, suggesting debt servicing costs would be somewhat lower.
The Ontario Progressive Conservatives have made no mention of where the deficit would be in each year of their mandate should they win.
PC leader Doug Ford has said at various times he would balance the province’s books “in year two or three” of his mandate should he win a majority on Thursday.
His platform does not list a budget or deficit figure for any year of his mandate, but his party has promised new spending or revenue reductions amounting to more than $8 billion per year.
Looking elsewhere
Deficit hawks in Ontario often say the province is the most indebted sub-national jurisdiction in North America, or even the planet, but that’s not the whole story.
While it’s true the largest U.S. states have lower debt than Ontario: California ($199.4B CDN), New York ($181.2B CDN) and Texas ($67.5B CDN), none of these figures include their heavily-indebted municipalities.
When their municipal debt is added in, California’s debt rises to $553 billion CDN. New York’s rises to $460 billion CDN. Texas rises to $394 billion CDN, according to publicly available figures for 2018.
In comparison, Ontario’s largest municipalities hold $16.35 billion in debt, and all of the municipalities in Canada combined hold $37 billion in debt, according to data from RBC Capital Markets.
Put together, Ontario’s municipal and provincial debt amounts to approximately $341.3 billion.
Cities in Ontario are barred from borrowing to cover operating costs, and can borrow only to fund capital projects such as infrastructure.
When interest rates rise
As it stands, Ontario is a lucky borrower. The average overall interest rate on its debt is 3.5 per cent, just above prime at 3.45 per cent.
But most private sector economists predict interest rates will continue to rise.
In the 2018 budget, the province said every 25 basis point hike in interest rates would immediately raise that year’s interest costs by $75 million. The overnight lending rate stands today at 1.25 per cent.
Private sector forecasts put Canada’s key overnight lending rate, set by the Bank of Canada, to rise to between 1.75 per cent and 2 per cent by the summer of 2019, generating an additional $150 to $225 million in annual costs that no major party has accounted for in its platform.
