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Ontario's Debt Situation Is About To Get a Whole Lot Worse

12/22/2014 12:45 EST | Updated 02/21/2015 05:59 EST

When the federal government faced a growing debt problem in the late 1980s, then Opposition finance critic Paul Martin was initially skeptical about cutting spending. In 1989, he labelled mild government efforts to cut spending as "ideological." Six years later, as finance minister, Martin recognized that cascading debt and compounding interest on such debt have an unrelenting logic all their own: "The debt and deficit are not inventions of ideology," said Martin in 1995. "They are facts of arithmetic. The quicksand of compound interest is real."

The mid-1990s revelation for Martin has relevance to today's fiscal situation in Ontario. The latest alarm bell has been sounded by the province's Auditor General. In a newly released report which chronicles the Ontario government's growing indebtedness, Bonnie Lysyk listed a raft of statistics that demonstrates the problem. Here's one: Ontario's net debt as a percentage of GDP (at 38.6 per cent) is the second highest among the provinces. Only Quebec (49.9 percent of GDP) is worse while Ontario's net debt ratio is over twice that of British Columbia (17.2 per cent).

The auditor general notes that interest rates have come down and have temporarily rescued Ontario from the full effect of its high debt levels. Effective average interest rates on Ontario debt were eight per cent in 1999/00, and have since dropped to about four per cent.

What happens when rates begin to rise again and/or when the debt bills come due?

"Total debt will eventually need to be paid off or refinanced" wrote Lysyk, who added that "it becomes a particularly relevant measure when global capital markets tighten and credit is not readily available."

The auditor general warns of three consequences of Ontario's existing massive indebtedness: debt interest siphons away tax dollars from social programs (currently nine cents of every dollar collected by the government goes to paying interest on debt). More debt means a higher risk from interest rates when they rise. And the potential for a credit rating downgrade would further drive up borrowing costs.

The danger of Ontario's indebtedness is real. Consider that in 2013/14 interest on the provincial debt was $10.6 billion. According to the province's fall fiscal update, that was just over half of all provincial sales tax revenue paid by Ontarians last year ($20.5 billion). So Ontarians should know that when you pay your provincial sales tax at the till, half of it flutters away just to pay your provincial government's debt interest.

Or to compare to expenditures, that $10.6 billion in debt interest last year exceeded the ministry of social services' entire budget ($10 billion) and equalled 45 per cent of the education ministry's spending ($23.6 billion).

So to hearken back to the auditor general's warning on interest rates, imagine what happens to Ontario revenues and Ontario's welfare and education budgets when interest rates rise. More revenues diverted to debt interest; less money for services and schools, among other fiscal diversions.

Consider this as well. For all the headlines over the years about the fiscal plight of an American state such as California, Ontario's public bonded debt in 2011/12 was nearly twice that of California. Measured on a per person basis, the comparison is even more dramatic: Ontario's debt was over five times greater.

And Ontario's situation is about to get much worse.

Ontario's net debt has virtually doubled over a decade to $267.2 billion last year from $138.8 billion in 2003/04. The forecast is for more of the same. Ontario's net debt will hit $322.5 billion by 2017/18. No wonder the Ontario auditor general points out that with Ontario now accounting for half of all net provincial debt in Canada, "Ontario's debt load could be viewed as a national concern."

All Canadians should re-read that last quotation again. Auditors by nature use restrained language. But when they give multiple examples to describe government debt and the potential pitfalls ahead as a "national concern," they send a stern warning decked out with Christmas lights to get our attention. Or, with apologies to Paul Martin, this is the message from Ontario's auditor general: The arithmetic of Ontario's deficits and debt are real -- so too is the fiscal quicksand that can quickly follow.

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