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Public Debt

A Debt Burdened Ontario: Risks and Solutions


Debt Crisis OntarioBlame it on falling revenues, reluctance to limit spending or raise taxes for fear of political ramifications, Ontario is in dire debt straits. If Ontario's borrowing continues to soar, it will reach $282 billion within the next two years or so. At the moment every single Ontarian accounts for $17,825 in province debt.

Debt Statistics: In Debt Ontario Trust!

Ontario is immense compared to the rest of Canada with its 13.4 million people and $614-billion economy. For some its economy is big enough to take care of itself. Despite that its amassed debt is too massive to be pass over. The total projected debts stands at $257.3-billion as at March 31, 2012 while the net debt that subtracts the assets make up $238.4-billion. Such a whopping file of debt can have grave fallout for the Ontario’s future.

Debt Portfolio and Cost of Ontario Debt

Ontario’s $251.9-billion debt at September 30, 2011 is a mix baggage of public and non-public debt. The Public debt of $236.8-billion speaks for 94% of total debt held mainly in Canadian dollars besides 10 further currencies like U.S. dollars, Euros, and Swiss francs. The non-public portion of Ontario debt is $15.1-billion (6%) and mainly comprised of debt instruments issued to Ontario public-sector pension funds and the Canada Pension Plan Investment Board (CPPIB).

The effective interest rate plunged since the last decade even with a gloomy prognosis for the Ontario economy. From the interest heydays (8.4 per cent) in 2000, the effective interest rate in Ontario declined to 4.4 per cent in September 2011. Despite the modest interest rate, since 2002 Ontario handed over $92.3-billion in debt servicing, enough for seven years budget of Toronto.

A Tale of Provincial Debt and Deficit

Debt Debt Ontario over the YearsLooking at the long-term perspective, Ontario net debt ballooned from $132.65-billion in 2002-03 to $238.47 billion in 2011-12, an increase of nearly 80 per cent. Net Debt is fancy way of accounting for the difference between total liabilities and total financial assets of the Ontario. Except for the peak of 8.4 percent in 2005-06, the rise in net debt remained modest between 2002-2007. The net debt story turned to climax from the fiscal year 2009-10 and onward. The figures speak for itself, 14.2% in 2009-10, slightly dipping to 10.8% in 2010-11 and settling at 11.1% in 2011-12. So on average from 2008-2012, it increased at over 10 per cent a year. Similarly, in 2013-14, the net debt is forecasted at $281.8 billion. The story of debt is incomplete without mentioning the interest. Interest on Ontario debt increased from $9.7 billion to $10.1 billion, roughly an increase of 4.2% from 2002-2012.

Ontario is suffering from long-term chronic deficits that contributed to this soaring debt. Take for instance, the province’s annual long-term borrowing fluctuated at $16.8 billion to $43.9 billion between 2002-2012. Just the last three years (2010-12) borrowing average at $36 billion yearly. Looking back for a comparison, Ontario government borrowed $16.8-billion in 2002-03 while a decade later in 2011-12 the figure reached $24.3 billion. Most of this borrowing during 2011-12 went in Canadian dollar (75%) while the rest was in U.S. dollar (24%), Australian dollar and Norwegian Krona.

Why the Debt Piled up?

There are many reasons to be critical of the debt in Ontario. Question arises, why it was build up at the outset and who to blame for it. Starting with the who part, as Gordon Liddy once famously said, a liberal is someone who feels a great debt to his fellow man, which debt he proposes to pay off with your money. Indeed, it was under liberal era that Ontario’s debt almost doubled to $250-billion. As early as 2014-15, the Ontario debt be roughly a quarter of Greece debt accounting for 41 per cent of its GDP. There are multitudes of reasons for this excessive debt ranging from excessive spending, productivity issues, and shrinking economy.Per capita debt Ontario

Recessionary Time and Slow Growth

Ontario is centrally located for both the Canadian and United States markets and this strategic location became a vital reason for its economy being hard hit by the recent recession and moderation in U.S. growth. Ontario manufacturing sector is diversified but not its export destination as nearly 80 per cent of the Ontario’s total $304.4-billion international exports go to United States. Some of these exports are in the shape of motor vehicles & parts (31.9%), precious metals and stones (11.1%), mechanical equipment (9.5%), electrical machinery (4.8%), and plastic products. Ontario dependency on U.S. as export partner is so striking that it exports only $400-million annually to India despite its galloping economy and growing middle class that has demand for products produced here. Such heavy dependency on a single market is felt hard by Ontario in 2009 when its real gross domestic product shrank by three per cent as there was a 48 decline in corporate tax revenues.

Excessive Spending and Stimulus Packages

The massive stimulus spending with the rising costs in health care and education shifted the debt levels in Ontario to $250-billion, almost double since 2003. Back then in 2003-04, when Liberal took office in Ontario, debt was $138.8-billion. It is estimated that further $67-billion will be added to the already ballooning Ontario’s debt in 2017 when the province is expected to have its first balanced budget in years. Right now about 10 cents of every dollar Ontario government goes to interest servicing. This is happening in an era of historically low interest rate, imagine its effects on Ontario economy once the interest rate start rising.

There is mismatch of revenue and expenditure issue in Ontario. For the $108.3-billion Ontario’s revenue this year, there is a spending of $124.1 billion, leaving the gaps to be squeezed by more borrowing. The current government is in red with budget deficit for the last eight years. Even in a time when income taxes are down by 44 per cent and the HST by 4 percent the Ontario’s government spending has jumped 64% since McGuinty took power. The province education and health care account for 62 per cent or $70.8 billion of Ontario’s spending on programs. Some objectionable spending programs in Ontario despite in its worst fiscal straits are:

  1. $1.1 billion for the Ontario Clean Energy Benefit;
  2. $1.4 billion in temporary Harmonized Sales Tax rebates;
  3. $1.3 billion for power supply contract costs;
  4. $500-million a year for full-day kindergarten and using teachers instead of early childhood educators;
  5. Nearly half of every dollar Ontario government spends goes in health-care, an area that is often in news for wasteful spending in programs like eHealth and Ornge ((formerly Ontario Air Ambulance); and
  6. 80 cents a kilowatt-hour paid to solar power producers for something that’s sold for less than 7 cents per kWh.

Not everyone buys the excessive spending argument as the Ontario government responds that it cannot compromise on bailing out of the auto industry to save jobs and improving public services. Even the full-day kindergarten is justified by some quarters not only as an education and a job stimulus plan but a way to save nearly $6,000 for the average Ontario family.

Consequences and Risks of Ontario Public Debt

Ontario total debt is expected to hit $257.3 billion on March 31, 2012 and the provincial government is borrowing at a rate of $58.4 million a day. These facts are hard to swallow but what will be the results of all this for Ontario in specific and Canada in general.

Soaring Debt and Financial Restraint

The present spending course Ontario government is running has serious implications for the already recession struck economy. The Drummond report mentioned the dire consequences of unrestraint spending in programs like eHealth and Ornge as it will not only double the deficit to $30-billion by 2017-18 with the accumulated public debt of $411-billion. This soaring debt is happening in a time when Ontario’s tax base is historically weaker and its labour force suffering with skills and productivity issues. A stronger Canadian dollar coupled with recession on the south of the border is also hurting its exports.

Ontario is huge: A bankrupt Ontario is a bankrupt Canada

Ontario represents 35 per cent of the Canadian economy and roughly 40 per cent of Canadians live here. The notion of a bankrupt Ontario as a bankrupt Canada is considered by some as kind of insurance policy to continue borrowing as owing to its size Ottawa will always there to rescue it. Although this notion of dependency is not in vacuum as revenues are hard to form, Ontario share in national economic pie are falling making it difficult for Ontario as well as Ottawa to pay off its debt.

Worsening Debt Ratio

Debt ratio OntarioOne indicator of healthy economy is debt-to-GDP ratio, and that is also not going in Ontario favour. Ontario is struggle to balance its books within six years and by time it achieve it, the debt serpentine will be $275-billion nearly half of Ottawa’s debt. In per capita debt terms, Ontarians will top the rest of Canada. As warned by Drummond report, without a financial discipline, Ontario public debt will soon be 50 per cent of GDP-in par with the neighbouring Quebec.

The Effects of the Rising Interest Rates

With an effective interest rate of 4.4 per cent in September 2011, the Ontario government was paying nearly $10 billion to service the debt. This amount (8 per cent of total expenses) exceeds the government spends on postsecondary education and training. Matters turn scary when we analyze it in historical perspective. Back in 2000, Ontario was having a $114-billion debt, nearly half of today’s figure. But then government was paying $8.8-billion in debt servicing as the interest rate was high (8 per cent). It seems the present low interest rate of 4.4 per cent is used by Ontario to finance its high debt. Bring the interest rate to those high levels and imagine the havoc it will bring to the Ontario.

Although the Ontario government has targeted erasing deficit by 2017-18, it is soft on reducing debt as Premier Dalton McGuinty recently proudly considered it as unacceptable levels. If estimates go as planned and Ontario deficit is eliminated in six years, by that time interest payment will rank third in costs items after heath care and education.

Jobs and Spendings Cut

Layoffs and freezing of jobs is a direct outcome of living beyond the means. While there is a huge demand for nurses because of aging population in Ontario, around 2550 such positions were shelved between April 2009 and August 2011. Ontario hospitals cited inadequate findings from government behind such cuts.

There are several spending cuts on the horizon in Ontario as recommended by Drummond report. For instance, elimination of the Ontario Clean Energy Benefit will add 10% on average to an Ontario household hydro bill. If the government insists on wiping the deficit, the result will be more taxes and spending cuts that will directly affect the consumer market. Drummond suggests unprecedented drop of 16.2 per cent expenditure for each Ontarian. He put it bluntly in his report,

Ontario must act soon to put its finances on a sustainable path and must be prepared for tough action not just for a few years, until at least until 2018.

Risks of Downgraded Credit Rating

Every one knows that creditors have better memories than debtors. There are already signs of concerns on the debt terms for Ontario. The province credit worthiness is put on question by the credit rating agencies like Moody's and Standard & Poor’s. Moody's assistant vice president, Jennifer Wong, while listing the reasons behind revising the outlook on Ontario debt from stable to negative, said:

The negative outlook on the province reflects the softening economic outlook, Ontario's growing debt burden, and the extended time frame to achieving a balanced budget.

He further warned,

If a credible plan to address the fiscal imbalance and stabilize the debt burden is not implemented in the next provincial budget, downward pressure on the province's Aa1 rating would emerge.

Instead of taking the seriousness of implications of lower credit rating, the Ontario finance minister, Dwight Duncan, brush it off by saying,

That is not a downgrade. This does signal that they will continue to watch us carefully.

Even other provinces are expressing their concerns on Ontario massive debt and the consequences of possible down rating by credit agencies. For instance, former finance minister of Saskatchewan, Janice MacKinnon, warned that Ontario’s debt crisis will "hurt Canada as a whole." The current stress on austerity by Ontario government is a way to calm the credit agencies.

Effecting Equalization Program

Ontario once a 'Have province' is now a 'Have-not province' in equalization program. It is the second biggest recipient in the $14.7 billion allotted fund with a share of $2.2 billion. Just Quebec with the 50 per cent debt-GDP ratio gets more than Ontario in equalization program. Owing to its economic size and insufficient growth, Ontario share will keep on growing slashing the funding’s for the traditional have-not provinces like Quebec, New Brunswick, Nova Scotia, and Prince Edward Island. This is not good news for the efforts to strengthen the federation.

Solutions to Handle Ontario Mounting Debt

The accumulation of Ontario debt is a long-term phenomenon and so there is hardly a single and painless prescription to vanquish it. A combinations of measures discussed below are needed to deal with the plague of surging debt.

Political Will and Ownership of Debt

There is an utmost need on part of the political elite to take the ownership and recognize the seriousness of the Ontario debts, as a bankrupt Ontario is a bankrupt Canada. After all, all these parties whether Liberal, Conservatives or New Democrat have piled up every Ontarian with nearly $18,000 debt.

The ruling as well as opposition parties need to show determination and will to trace a strategy to pay off Ontario $250 billion debt. There will be compromises needed by all stakeholders to avoid a Greece like scenario. The debt problem in Ontario needs pragmatic, drastic, and politically unpopular steps on part of the minority government to handle it.

Privatization and Easing Regulations

Too much government is a dreadful. Ontario government needs to believe in the efficiency and innovation of private sector. There are signs that the government has already grasped this aspect of believing in the private sector by expanding privatization of ServiceOntario operations. As evident from other OCED countries, the private sector has the potential to manage and deliver improved services like birth and marriage certificate, vehicle registration and licenses. The government role be more of keeping a vigilant eye on quality assurance and framing policy guidelines.

Time to Eliminate Ontario’s Structural Deficit

Ontario is plagued with structural deficit and there is a need for making a serious dent on this front. Owing to prevailing recessionary circumstances where growth is stagnant due to declining manufacturing sector and revenues are hard to get, the options available to Ontario government to balance books are limited. Extraordinary circumstances require extraordinary steps. Encouraging businesses and corporations to promote growth and jobs by reducing taxes to 10 per cent is a likable political gesture but it will add up the shortfall. As taxation is the only workable alternative to raise revenues, Ontario government needs to set aside the idea of lowering the existing taxations on corporations and the wealthy.

Need for Austerity Measures

No one like austerity measures, especially the organized unions as evident in recent protests in Greece and elsewhere in Europe. But sometime governments have to look at reducing wasteful spending as growth and tax hikes will be wishful without it. As suggested by Drummond report, Ontario to eliminate the deficit must rein in the annual spending to an increase of 2.5 per cent. There are voices from concern pundits that Ontario has more of a revenue problem than spending problem as it assigns $250 less per citizen on public hospitals than the rest of provinces.

Money is still cheap for Ontario as interest rates are low but matters can get desperate in long-term as there is huge demand for this cheap money from United States and Europe. Ontario requires measures to address a growing gap between revenues and expenditures.

Issue of Debt Bonds

Issue of debt bonds is also a viable option to shoulder the rising debt but it comes with the factor of support on part of the market and Ontarians. Nevertheless we must not forget that recently the biggest economy in Europe, Germany received a lukewarm response from market to such bonds despite its good credit ranking.

Heading to Drummond Recommendations

When it comes to direction, the Drummond report has already mentioned an extensive list of recommendations to tackle the Ontario deficit problem. Following these 350 plus recommendations could eliminate Ontario’s roughly $30.2 billion deficit by 2017. Teachers reduction, increasing class sizes, scrapping the kindergartens, eliminating 12,000 of Ontario's hospital beds along with the staff who support them, and raising utility bills are a few of such recommendations to reduce Ontario’s debt.

The report stresses Ontario to balance its books to avoid long-term financial complications. Keeping the tone optimistic, the report says,

Ontario's finances do not yet constitute a crisis, and with early strong action a crisis can be averted.

However, at the same time it reiterate the government of its financial responsibilities by uttering:

The lessons of history and of what is happening elsewhere today are clear: the government must take daring fiscal action early, before today's challenges are transformed into tomorrow’s crisis.

Not everyone agrees with Drummond recommendations of austerity and program cuts to deal with Ontario deficits. Even Stiglitz considered these recommendations as nothing but economic 'suicide pact' that will have long-term consequences of damping growth. Some think tanks bring the recent example of Europe in their argument to oppose Drummond recommendations. For them, critical recessionary time like present needs increased government spending to avoid GDP shrinking and keeping debt ratio low. Other respected Ontario economists are challenging Drummond's austerity plan for Ontario. They argue that recent experience in Europe has shown that the more governments cut public spending, the more Gross Domestic Product (GDP) shrunk and the worse their debt ratio became.

Innovations and Productivity

Although Ontario is home to RIM and its education system tops among OECD countries, it still lags behind in innovations and productivity. Recently it ranked 14th among OECD countries for innovations. Ontario businesses and government need to improve their productivity by investing in new technology and trainings.

Ontario Opportunities Fund

Relying on its residents’ generosity, Ontario setup Ontario Opportunities Fund in 1996 to collect donations from them to pay down the province debt. Under this fund, taxpayers donate their tax refunds to Ontario government and in return receive tax deduction for coming year. However, the Ontario government has only collected just over $2-million from 30,000 Ontarians since the start of this fund. People response to shoulder government debt is not that positive elsewhere too. For instance, the U.S. government online donations program for its $15-trillion debt fetched only $2.4-million in 2012 to the treasury.

Conclusion

If Ontario continues to receive additional capital buffers to support its troubled economy and finance its wasteful programs, the public debt could soon reach $300-billion. Clearly it is not sustainable and can put the Ontario as well as the Canadian future in serious peril. In the end, as Thomas Jefferson once suggested, we must not let our rulers load us with perpetual debt. After all, debt is nothing but the slavery of the free.

Useful Resources and References

  1. Debt Portfolio, Ontario Financing Authority. http://www.ofina.on.ca/borrowing_debt/debt.htm
  2. 2011 Ontario Economic Outlook and Fiscal Review, Ontario Financing Authority. http://www.fin.gov.on.ca/en/budget/fallstatement/2011/chapter4.html
  3. Ontario’s exports to India a meagre $400M. http://business.financialpost.com/2011/06/24/ontarios-exports-to-india-a-meagre-400m/
  4. Facing record debt, Ontario appoints Drummond to revamp public services. http://www.thestar.com/news/canada/politics/article/965183--facing-record-debt-ontario-appoints-drummond-to-revamp-public-services
  5. The faulty premise for the Drummond Commission. http://rabble.ca/news/2012/02/faulty-premise-drummond-commission
  6. Deal with government debt now. http://blogs.canoe.ca/lilleyspad/government-debt/deal-with-government-debt-now/
  7. Drummond report recommends wage freezes and increased class sizes amid ‘harsh reality’ for Ontario. http://news.nationalpost.com/2012/02/15/ontario-must-act-swiftly-and-boldly-to-eliminate-projected-30-2-billion-deficit-drummond-warns/
  8. Donating to pay down Ontario's debt. http://www.globalnews.ca/donating+to+pay+down+ontarios+debt/6442578343/story.html
  9. Ontario warned of Greek fate. http://thechronicleherald.ca/canada/63479-ontario-warned-greek-fate
  10. Why Ontario is poised to become Canada’s Greece. http://www2.macleans.ca/2011/10/17/why-ontario-is-poised-to-become-canada%E2%80%99s-greece/
  11. Ontario's debt hit record $212.1 billion in 2009-10. http://toronto.ctv.ca/servlet/an/local/CTVNews/20100823/ontario-government-deficit-debt-100823/20100823?hub=TorontoNewHome
  12. Ontario’s debt, Canada’s woes. http://www.theglobeandmail.com/news/opinions/opinion/ontarios-debt-canadas-woes/article2279912/
  13. Ontario's debt to hit $257.3 billion next year. http://www.sunnewsnetwork.ca/sunnews/politics/archives/2011/11/20111123-201124.html
  14. Ontario Deficit Nightmare: Nine years of deficits add $116.6 billion to debt. http://www.canadafreepress.com/index.php/article/21374
  15. Ontario creating birthing centres. http://www.cbc.ca/news/canada/ottawa/story/2012/03/20/toronto-birthing-centres.html
  16. Blizzard – Ontario’s debt headache hits home. http://blogs.canoe.ca/lilleyspad/contributor-columns/column-blizzard-ontarios-debt-headache-hits-home/
  17. Lorne Gunter: Ontario’s debt threatens programs, tax cuts. http://fullcomment.nationalpost.com/2011/03/09/lorne-gunter-ontarios-debt-threatens-programs-tax-cuts/
  18. Ontario, like California, going for broke. http://www.theglobeandmail.com/report-on-business/commentary/neil-reynolds/ontario-like-california-going-for-broke/article1684035/
  19. Ontario’s debt, Canada’s woes. http://www.theglobeandmail.com/news/opinions/opinion/ontarios-debt-canadas-woes/article2279912/
  20. Moody's revises Ontario debt to negative. http://www.ctv.ca/CTVNews/TopStories/20111215/moodys-ontario-debt-downgrade-111215/

( 6 Votes ) 


 


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