With Prime Minister Justin Trudeau talking about the Liberal Party budget plans, I set out to understand what this means. What I discovered has shocked me and it is something I think every Canadian should be made aware of and educated about.
Justin Trudeau’s plans to spend Canada further into historically high debt levels through record-breaking deficit spending comes at a time where Canada is already vulnerable to overdue and/or unplanned economic challenges. As long as interest rates have remained at historically lowest levels, the true financial and future economic impact of excessive Liberal spending has been ignored if not at least unspoken by those that know better.
I came across an article by Professor of Economics, Livio Di Matteo of Lakehead University that does an excellent job at explaining how under Liberal governments Ontario hit record-breaking deficit levels and fallen into record-breaking debt levels by all measures. First appearing in the Financial Post and later referred to by the Frasier Institute, Di Matteo does excellent job of explaining how Ontario’s deficit and debt has come about.
When Professor Di Matteo wrote his article, the Ontario government debt was forecast to reach nearly $320 Billion by 2017. Under the Liberal government it actually reached $348.79 billion as of March 31, 2018. The Ontario government debt is the net amount of money the Government of Ontario has borrowed from the general public, institutional investors and public-sector bodies.
The Facts About Ontario’s Debt
- Ontario has run a deficit nearly 80% of the time since 1965.
- In 1965, under Liberal Premier John Robarts, the net debt was $1.6 billion and only 6.9% of GDP. By 1971, the debt had grown to $2.2 billion and dropped to only 5.2% of GDP because of the robust economic growth of the era.
- From 1971 to 1985, under conservative Premiers William Davis and Frank Miller were faced with the 1973 oil price shock and stagflation marked the end of the economic golden age. With slower growth, higher interest rates and the start of deficits (that continued until the late 1990s), debt grew from $2.2 billion to $28.9 billion and debt to GDP ration grew to 15%.
- In 1985, Liberals Premier David Peterson came into office. Though Ontario’s net debt to GDP ratio fell from 15% to 13.4% 1990, it started a recession which caused many homeowners to lose their homes. Debt still continued to accumulate during this period, though at a slower pace than economic growth. Ontario’s net public debt rose from $28.9 billion in 1985 to $38.4 billion by 1990.
NDP Party and the Worst Recession Since WWII
According to Professor Di Matteo “In 1990, Bob Rae became premier with the NDP forming Ontario’s government for the first time in history. Their tenure coincided with the worst recession since the end of WWII, resulting in plunging revenues and growing expenditures in an effort to maintain services and stimulate the economy. The resulting deficits were as high as $12.4 billion and saw the accumulation of $63.4 billion in net public debt. The net debt to GDP ratio soared to 30.4% from 13.4%. By 1995, Ontario’s net public debt had reached $101.9 billion.”
It took a few years to replace the NDP government with a fiscally responsible leadership under Conservative Premier Mike Harris. Harris was elected to repair the damage to the Ontario economy, finances and job losses. His platform and promises were clear and simple, to fix Ontario’s budget, finances and economy. He immediately began expenditure reduction and restructuring to balance the budget, as well as, tax reductions to stimulate the economy. A combination of lower taxes, lower interest rates and a booming U.S. economy all helped the economy rebound. With growing government revenues and fiscal restraint the budget gap was closed. The budget was balanced by 1999, but under Conservative Premier Ernie Eves the net debt still grew from $101.9 billion in 1995 to $138.8 billion in 1999 with the debt to GDP ratio declining from 30.4% to 27.5%.
Liberal Government Deficit Budgets
According to Professor Di Matteo, “The defeat of Eves ushered in the Liberals under Dalton McGuinty in 2003 and then Kathleen Wynne in 2013. This period witnessed the largest debt accumulation in Ontario’s history. While the onset of the 2009 recession was a factor damaging Ontario’s public finances, rapid increases in health and education spending and rising debt were underway well before 2009. Between 2003 and 2014, net public debt grew to $287.3 billion from $138.8 billion– an increase of $148.5 billion. The net debt to GDP ratio grew to 40% from 27.5%.”
Debt Impact on Ontario’s Future
Profession Di Matteo ends his article with a warning, “Ontario has been a province since 1867 but 87% of its net public debt was accumulated in the years since 1990. The stock of debt currently requires $11 billion a year in debt service – a burden as small as it is only by the grace of low interest rates. All administrations have contributed to Ontario’s debt with some playing a greater role than others. The road to debt may be paved with good intentions in the short run but in the long run, fiscal consequences will resonate with the Ontario taxpayer for years to come.”
Though Ontario’s debt has been growing for decades and under all governments, as a percent of GDP debt has done better under fiscally responsible premiers. However, after extravagant and unsustainable spending by two consecutive Liberal Premiers Ontario finds itself at record level deficit and debt levels. During this period of historically low interest levels and healthy employment rates the immediate financial impact is hidden. However, what will happen if interest rates go up even 1%? What if jobs drop just one 1%?
There is real concern among economists that Ontario will have difficulty raising financing as interest rates increase and the cost of its debt interest payments increases, causing increased budget deficit and borrowing additional money just to pay the interest on debt already owned. Since it’s been so long since Ontario has experienced a recession, most residents never experienced, or don’t recall, the consequences.
A recession usually starts with increasing interest rates, decreasing jobs, out of control debt levels (triggering borrowing crisis), or increasing tax rates. As a gauge, notice how the federal NDP, Liberals and Green Parties speak about greater spending and none of them have any intention of balancing the budget? They even go so far as to create a fear around fiscally sustainable budget cuts. I’m not surprised that that the federal Conservatives have gained so much support in 2019.