Ontario needs to get cracking to clean up it's financesAs Ontario’s new government takes charge, attention has focused on the moves made on education and the management of Hydro One. However, the most important task remains: dealing with the province’s public finances.

The government of Premier Doug Ford took a first step by tapping former B.C. premier Gordon Campbell to lead an inquiry into Ontario’s finances. It should be handled in systematic fashion due to the importance to business-sector confidence and the sustainability of important long-term government programs in health, education and the renewal of provincial infrastructure. Yet the parameters of the task remain uncertain.

The 2018 provincial budget projected revenues of $152.5 billion and expenditures of $159.2 billion, for a deficit of $6.7 billion, accompanied by an estimated provincial net debt of $325 billion for 2018-19 – approximately 40 percent of the province’s gross domestic product – with debt-interest costs of nearly $12 billion annually (or $1 billion per month).

Yet, according to the recent report from the auditor general, the deficit is actually larger, at $11.7 billion, due to the government’s accounting treatment of pensions and the financial impact of its electricity rate reduction. And the Financial Accountability Office of Ontario (FAO) projects a deficit of $12 billion due to higher spending and weak revenue growth. As a result, net debt figures may also be higher than expected with net debt possibly reaching $394 billion by 2020-21, according to the FAO.

On the other side of the ledger, total expenditures grew from $128.9 billion to $149.5 billion between 2014-15 and 2017-18 – an increase of 16 percent – followed by a proposed spending increase of more than six percent for 2018-19. Given that spending has been increasing at well above the combined rates of population growth and inflation, there should be room for restraint on the expenditure side.

The economic picture is also uncertain. Ontario’s economy has improved since 2014 with economic growth the best it’s been in nearly a decade (though much of growth is due to the hot housing sector). This has resulted in revenue growth forecasts that may be too rosy. The 2018 budget sees total provincial government revenues from 2017-18 to 2024-25 growing at an annual average rate of approximately 3.5 percent.

Yet Ontario’s economy is very dependent on trade with the United States and the impact of the current tariff war may be substantial, especially if it affects the auto industry. Moreover, there’s the prospect of the provincial economy approaching the tail end of the business cycle, which would affect revenues even without a trade war.

Tariffs may also raise consumer prices, generating inflation. The Bank of Canada is already slowly raising interest rates to “normal levels.” But any burst of inflation that takes the economy out of the bank’s inflation targets will likely trigger a more concerted increase in interest rates.

While the Ontario government has shifted debt to long-term bonds to protect against interest rate increases, the impact of rising interest rates on the economy could further complicate the efforts of the provincial government to balance the books.

So the tasks at hand for the new government are clear:

  • Ascertain the actual fiscal parameters of the situation. What is the actual provincial government deficit and net debt?
  • Take steps to address the deficit. Reducing the projected six percent increase in spending for 2018-19 to two percent would essentially balance the budget. After that, keeping expenditure increases to the combined rate of population growth and inflation – given that increases since 2014-15 have been nearly double that – should keep expenditures in line with revenues.

Ontario should get cracking. In the world of compound interest, time is money.

Livio Di Matteo is a senior fellow at the Fraser Institute and professor of economics at Lakehead University in Ontario.

Ontario needs to get cracking to clean up it's finances

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