The National Post is Canada’s second largest national paper.
No matter who wins the Ontario election, the newly elected government will be faced with a fiscal hole that gets only wider and deeper. If the province is to gets its fiscal situation under control, either revenues need to increase or spending restrained by billions. There are no quick and easy solutions.
Let me detail Ontario’s house of debt to understand the gravity of the situation. The 2014 Liberal budget projected gross debt is expected to increase from $296-billion in 2013-14 to $311-billion by 2014-15. After subtracting financial assets, net debt will rise from $269-billion in 2013-14 to $289-billion in 2014-15.
Ontario’s net financial liabilities will be $20,500 per person or $82,000 for a family of four. This mortgage is in addition to federal, local and household debt liabilities borne by Ontario residents. It does not include other unfunded liabilities such as health care and elderly benefits that will increase sharply as baby boomers retire.
The $20-billion increase in net debt this coming year is a good measure of the real Ontario deficit. The debt problem is a bigger issue than suggested by a recent “educational” analysis provided in the Globe and Mail, which focused on the $12.5-billion operational deficit of the province, ignoring net liabilities to finance broader government operations, including $10-billion in capital spending.
Obviously, more debt means more interest paid to domestic and international bondholders. Ontario is currently paying $11-billion in interest expense that otherwise could fund an awful lot of schools and hospitals. This financing cost relative to incomes is not too problematical today given our low interest rate environment but eventually better growth in North America will drive up interest rates. Each additional point increase in Ontario’s interest rate will add another $3-billion in interest cost on gross debt.
Ontarians also well understand that good fiscal discipline makes it easier to withstand unexpected bad times. Both Progressive Conservative and Liberal governments in the 13 years prior to the 2008-9 financial crisis, started to fill in the debt hole, thereby making it easier to deal with the economic downturn of recent years. Net debt fell from the mid-1990s peak of 31.5% to 26.6% of GDP in 2007-8.
Public debt at reasonable levels is not a bad thing. Public investment, for example, benefits not only current taxpayers but also future generations. So some of the burden should be shared in the future. Further, in a growing economy future taxpayers have better capacity to pay taxes than current taxpayers.
For the rest of this column, click here: http://business.financialpost.com/2014/06/10/jack-m-mintz-next-ontario-government-will-only-have-bad-news-to-deliver-as-house-of-debt-grows/