Ontario’s fiscal crisis keeps growing

It’s deficit, public debt and rising electricity prices are undermining business confidence

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THUNDER BAY, ON July 14, 2015/ Troy Media/ – Ontario’s private sector job creation finally seems to be picking up, but two important factors threaten to undermine continued recovery: the provincial debt and high electricity prices. While they are seemingly different issues, both will work to undermine investor confidence in Ontario’s economic future.

The provincial gross outstanding debt has grown to $315 billion and, at nearly 40 per cent, the net debt-to-GDP ratio now exceeds the federal government’s. Interest on the debt is $11.4 billion and, with the budget still not balanced, the debt and interest payments will continue to grow.

The lack of confidence in Ontario being able to get a firm grip on its budgetary performance was most recently highlighted by Standard and Poor’s reduction of Ontario’s credit rating from A plus to A double-negative. While Ontario is not on the road to Greece, it nonetheless appears to be merrily meandering along the hiking trail to fiscal perdition. The Finance minister has essentially downplayed the debt downgrade and the provincial government is on a $130-million infrastructure spending plan designed to kick-start Ontario’s economy that will add to its borrowing.

Cost of electricity exacerbates fiscal crisis

Then there is the cost of electricity. Since 2009, the average value of the Electric Power Selling Price Index for Ontario compiled by Statistics Canada has grown by 32 per cent for those using more than 5000Kw of electricity and 42 per cent for those using less than 5000 Kw. Compare that to the increases for Canada as a whole over the same period of 23 and 25 per cent respectively. Moreover, the industrial rate for electricity in Ontario is expected to increase another 13 per cent over the next five years.

Electricity prices began escalating in Ontario starting in 2000. Since then, manufacturing employment in the province has dropped 30 per cent. The 2009 economic downturn and the high dollar only compounded the carnage. Of course, the rise in electricity prices not only affects firms but also consumers by reducing the disposable income they have for spending on other goods and services.

This all affects business confidence. The slow pace of fiscal progress when it comes to the budget raises the prospect of future tax increases. While Ontario has reformed its tax system by bringing in the HST and has lowered its corporate tax rates, there is a lingering fear the government will eventually bring in new revenue tools to balance the budget as well as finance its planned infrastructure spending.

As for the price of electricity, it is only going to get higher. Phasing out coal prematurely, investing in alternative energy with very generous Feed-in-Tariffs and the residue of the previous attempt at privatization have come together to create a high-cost structure. Even the proposed partial privatization of Ontario’s electricity system is unlikely to mitigate the price increases.

Given that the province will retain substantial ownership and control of a large chunk of Hydro One, it is creating an entity that is really neither public nor private. It will only increase uncertainty on the part of businesses on future electricity price increases.

In the end, Ontario’s deficit and public debt and its rising electricity prices are undermining business confidence when it comes to capital investment and likely consumer confidence when it comes to their spending – which in turn also feeds back into business confidence and investment spending.

Government mismanagement created the fiscal crisis

The result? The value of real investment in machinery and equipment since 2010 fell 9 per cent. The value of building permits for industrial and commercial construction only rose an anemic 2 per cent. The total real value of business gross fixed capital formation is only up 5 per cent from 2010. Aside from residential construction, business capital investment – the investment needed for long-term productivity increases – has yet to fully re-engage.

Rising public debt and energy costs have come together to weaken the business investment climate in Ontario. Ontario’s economy still needs to be saved. It also needs to be saved from the provincial government’s fiscal and energy sector management.

Livio Di Matteo is Professor of Economics at Lakehead University.

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