The long, sad history of Ontario deficits

Deficits have been Ontario’s normal state of affairs for nearly half a century

The long, sad history of Ontario deficits FREE to Unlimited Access subscribers

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THUNDER BAY, ON, Apr 16, 2015/ Troy Media/ – With Ontario budget day nearly upon us, it is instructive to realize deficits have been Ontario’s normal state of affairs for nearly half a century. Since 1965, Ontario has run a deficit about 80 per cent of the time, putting the odds against Ontario’s finance minister meeting the target of a balanced budget by 2017.

There has been a fundamental imbalance in the growth rates of Ontario provincial government revenues and expenditures. The average annual growth rate of inflation adjusted or real revenues since 1965 is 4.3 per cent while real expenditures grew at 4.5 per cent. This small difference over time has led to accumulated deficits plus interest generating a $287 billion net public debt.

Ontario deficits a chronic problem

In 1965, real per capita provincial government expenditures (in 2014 dollars) in Ontario were $2,413 while real per capita revenues were $2,446. By 2014, real per capita revenues had grown by 255 per cent to reach $8,681 while real per capita expenditures grew 295 per cent to reach $9,521 dollars. During all the years since 1965, Ontario managed a balanced budget or surplus only 11 times

Time for an intervention to tame Ontario deficits

The period 1971 to 1985 was the William Davis era with Frank Miller briefly as premier at the end. The 1973 oil price shock resulted in high unemployment and inflation and marked the end of the post Second World War golden age of growth. The result was slower growth, higher interest rates and government deficits that continued practically unabated until the late 1990s. During this period, the average annual growth rate for real revenues was 3 per cent but real expenditures grew at 3.3 per cent. Between 1971 and 1985, the budget was always in deficit, averaging $4.9 billion in 2014 dollars.

In 1985, the Liberals under David Peterson arrived, ending Ontario’s four-decade conservative dynasty. Ontario’s economy boomed during the 1980s and annual average provincial government real revenue grew faster than expenditure at 6.5 per cent versus 5.8 per cent. However, the gap between revenues and expenditures was not closed until 1989 and the annual value of the deficit in today’s dollars averaged at $3.7 billion. Yet, all this was surpassed by what would come during the 1990s.

Bob Rae formed Ontario’s first NDP government in 1990, coinciding with the worst recession since the end of Second World War. Plunging revenues and growing expenditures, in an effort to maintain services and stimulate the economy, resulted in some of the highest deficits in Ontario history. During the Bob Rae era, real revenues only grew at an annual average of 1.1 per cent while expenditures grew 3.9 per cent. In 2014 dollars, the average annual deficit during the Rae era was $14.5 billion.

The NDP government was followed in 1995 by Mike Harris’s Conservative government, which took steps to reduce expenditure growth. Lower taxes, lower interest rates and a U.S. economic boom together helped Ontario’s economy rebound and government revenues grew, helping close the budgetary gap. During the years of Mike Harris and his successor Ernie Eves real government revenues grew at 3.7 per cent a year while expenditures only grew 2.2 per cent. Ontario balanced its budget by 1999 and the budget was in surplus four times during the Harris-Eves years but the average annual real value of deficits during this period was still $3.8 billion.

The Liberals under Dalton McGuinty arrived in 2003 followed by Kathleen Wynne in 2013. While there were three surpluses during the early McGuinty years, old patterns reasserted themselves, and over the period 2003 to 2014 real revenues grew at 1.7 per cent annually while expenditures grew at 2.4 per cent. The downturn in 2009 exacerbated matters and the average value of the deficit in 2014 dollars was $7.9 billion during this period.

Ontario deficits even during boom times

The sad point of this story is that, more often than not, Ontario’s government has run a deficit no matter which party held office. Even during boom times, there have been deficits while during recessions the deficits have simply grown larger.

The solution? As simple as it sounds, it would help a lot if Ontario could only manage to make sure that, over the long run, its expenditures did not grow faster than its revenues. The resulting imbalance has made Ontario’s deficits a chronic condition.

Livio Di Matteo is Professor of Economics at Lakehead University. He writes on Ontario’s Business for Troy Media every two weeks.

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