With a forecasted budget deficit this year of more than $14 billion and a debt-to-GDP ratio hovering near an all-time high, Ontario’s debt burden is one of the most important problems facing the province.
Indeed, Premier Doug Ford identified the deficit as one of his government’s three most important goals for the new year.
And action is long overdue.
Ontario’s government already spends more than $1 billion every month on debt interest — money unavailable for other important purposes. Due to continued debt accumulation and rising interest rates, that amount is forecasted to increase more than one-third over the next four years unless policy changes are made.
How did things get so bad? To begin answering this question we must go back in time nearly 30 years to the recession Ontario of the early-1990s.
The government of the day, under then-NDP premier Bob Rae, chose to tackle the recession through fiscal stimulus, cranking up spending as government revenue was contracting, leading to big budget deficits and a rapid run-up in debt.
Then, in the middle of the 1990s, Ontario went through meaningful fiscal consolidations under then-Tory premier Mike Harris, which slowed the pace of nominal debt accumulation and caused the provincial debt-to-GDP ratio, a key indicator of the sustainability of government debt levels, to start falling.