Ontario’s debt is cause for worry

Ontario’s net debt – estimated at $272 billion in 2013 – is the largest in Canada. While the province accounts for just under 40% of the country’s population, it shoulders almost 50% of provincial net debt.

Yet given a debt to GDP ratio of about 39%, it could be argued Ontario is just fine. After all, looking t the relationship between debt and growth, it’s nowhere near the 90% ratio considered to be a key tipping point. Besides, Ontario is a wealthy province in a wealthy country that has excellent credit ratings, and it’s able to borrow at low interest rates, making debt very manageable.

But the ratio may continue to rise over the next few years given the projected slow growth of its economy, and increased spending in this spring’s budget will likely delay balancing the books by 2017.

Also consider there are three levels of government and only one taxpayer. Combine the three debt levels and the ration rises to more than 70%.
This may not be a problem of Greek proportions, but it does suggest the big picture is more complicated than its separate parts.

An appropriate indicator is the debt to revenue ratio. In 2012-13, it stood at about 222%, compared to the debt to income ratio of the average Canadian household, which has reached 160%.

And low interest rates that help to finance this appetite for debt won’t remain low, resulting in growing debt service costs that will crowd out other government spending. At present, debt service already costs Ontario taxpayers about $10.6 billion making it the fourth largest expenditure item after health, education and social services. And a 1% increase in interest rates could add billions of dollars to service costs by 2017.

The international bond market already sees Ontario as a more risky prospect compared to the federal government. In 2007 the spread between Ontario and Canada 10-year bonds was about 0.025%. Today the spread is closer to a full percentage point, which suggests some concern about Ontario’s fiscal future. A return to either recession or higher interest rates may well push the province’s finances over the edge, which should be of greater concern than it appears to be.

Livio Di Matteo is professor of economics at Lakehead University in Thunder Bay, Ont. This article is distributed by Troy Media in Calgary. Visit www.troymedia.com.