Friday, February 17, 2012

Don’t let them fool you, Ontario’s swimming in debt

The release of the Drummond Report is raising the profile of Ontario’s annual budgetary deficit and mounting public debt. Those who want to defend the province’s record-high annual deficits take pains to point out that Ontario is still in pretty good shape financially.

Ontario is not Greece, far from it, they reassure us. The debt is only about 35 per cent (2010-11) of GDP. That, they say, is pretty good because Ontario’s ratio is much better than most of the EU nations.

But, if fact, Ontario is virtually swimming in debt.

In November 2011, TD Economics set Ontario’s 2011 debt-to-GDP ratio at 37%, a ratio that, it said, “remains very high.” Ontario’s net debt for 2013-14 is projected to be $281.8-billion, and the debt-to-GDP ratio will rise to 40%.

Fortunately for Ontario taxpayers, interest rates have been at super low levels, but for how much longer will that continue? Three factors could see this already enormous figure rise dramatically.

Firstly, Moody’s Investors Service warned in December that it might lower Ontario’s rating if the province doesn’t take serious steps in the next budget to deal with its multibillion-dollar deficit. Does McGuinty adding a 30% post-secondary tuition rebate—nearly half a billion dollars annually—sound like the premier’s taking serious steps to deal with the deficit? If Moody downgrades Ontario like was done to the U.S.A., count on interest charges rising dramatically.

Secondly, the government’s own forecast has the debt increasing to over 40% of GDP by 2014-15. This alone will add over two billion dollars to debt charges—even before an inevitable credit downgrade.

Thirdly, future interest rates are like a ticking time-bomb. We all know they will go up; it’s just a matter of when. When rates inevitably rise, expect interest cost on new debt to skyrocket.

Ontario pays (2011-12) about $10-billion a year in debt charges at current low interests rates. Considering the above factors, this figure could well be $13-14-billion in three years—our debt will rise ever higher and about 10 cents of every tax dollar will go towards debt charges.

By then, we’ll be paying more for debt charges than the combined amount we will pay for our Justice and Postsecondary and training programs—and that’s a damn shame.

If I were up to my chest in quicksand, I’d take no solace in the fact my neighbours were up to their necks.

© 2012 Russell G. Campbell


1 comment:

  1. As a retiree, living on a fixed income and investments - I am looking forward to a rise in interest rates. Woe is Ontario - the hammer is about to strike with a vengence. Cheers.