OTTAWA – “Canada cannot achieve its potential when our two largest provinces are not achieving theirs. Years after the recession ended, Ontario and Quebec have been driving up public debt, and both need to create more jobs…. All governments in Canada and abroad must remain steadfast in restraining debt. In many cases, that means making tough reforms and painful belt-tightening.”
— Finance Minister Joe Oliver, June 9
This week, federal Finance Minister Joe Oliver scolded Ontario and Quebec for their deficits and debt levels, urging them to balance their books — not only for their own sake, but for the rest of Canada as well.
Is austerity really the best path to prosperity for Ontario and Quebec?
Spoiler alert: The Canadian Press Baloney Meter is a dispassionate examination of political statements, culminating in a ranking of accuracy on a scale of “no baloney” to “full of baloney” (complete methodology below).
This one earns a rating of “a little baloney.” Here’s why.
The latest Ontario budget projected a deficit of $12.5 billion in 2014-15, but included a $1-billion contingency fund to go toward paying down the deficit if it isn’t needed this year.
The province expects to return to a balanced budget in 2017.
By the end of this fiscal year, Ontario’s net debt is expected to be $289.3 billion, compared with $169.6 billion in 2008-09, the start of the global financial crisis.
It’s also worth looking at net debt as a percentage of the province’s gross domestic product. Why? A lower debt-to-GDP ratio is a sign an economy can make and sell enough goods and services to pay back its debts without going deeper into the red.
In 1990, Ontario’s net debt-to-GDP ratio was 13 per cent. Now it’s about 40 per cent. Interest on debt — $11 billion this year — is the province’s biggest expense after health and education.
In Quebec, the newly elected Liberal government’s first budget projected a deficit of $2.35 billion in 2014-15. The province expects to balance the books the following year.
Quebec’s net debt was nearly $182 billion at the end of March, compared with $123 billion in 2008-09. It’s now 49.9 per cent of its gross domestic product. It was 24.5 per cent in 1990.
Debt service is expected to cost Quebec taxpayers $10.8 billion this year.
WHAT THE EXPERTS SAY
In a new paper for the law firm Bennett Jones, where he is a senior adviser, former Bank of Canada governor David Dodge says now is not the best time for governments to be single-mindedly focused on balancing budgets.
Better to take advantage of low interest rates to invest in infrastructure, thereby boosting Canada’s flagging productivity, Dodge argues.
“The very low interest rates that we have today are sending a signal that this is an extraordinarily good time to make the investments in infrastructure that will lead to higher rates of economic growth in the future,” he said in an interview.
What really matters, Dodge said, is a government’s ability to service its debt.
“With very low interest rates, you can sustain considerably higher levels of public debt than you could at very high interest rates.”
Oliver is correct to say Ontario and Quebec should lower their operating expenditures, but they shouldn’t stop borrowing money, Dodge said.
“In trying to be simple, he’s made a big mistake in talking about reining in borrowing requirements,” he said.
“But he’s absolutely correct to say that in the case of both provinces, they’ve got to rein in their current expenditures … so that they can borrow and that markets will understand that their current expenditures are under control and in line with revenues.
“Markets will understand perfectly well that this is a good time to be making some of these long-lived investments.”
Deficit financing is perfectly acceptable in times of economic turmoil, said Finn Poschmann, vice-president of research at the C.D. Howe Institute.
“Normally, that’s going to happen automatically, anyway. We have automatic stabilizers,” he said.
“If unemployment goes up, then UI or EI benefits go up. Social-assistance spending goes up. When the economy is running slowly, government revenue goes down, so you have these impetuses … that are going to push governments toward deficit financing, if they’re not already in that position.”
That’s fine for the short term — easing out of stimulus is better than a short, sharp shock. But 2009 was a long time ago, Poschmann said.
“That said, there’s nothing that indicates that we should be talking about stimulus spending five years after the end of a recession. To be still wondering about when is the right time to start getting serious about reducing deficits is ridiculous.”
If Ontario and Quebec want to avoid a debt downgrade and higher carrying costs in public debt, they will have to shift gears, he warned: when rates go back up, the impact is immediate and dramatic.
“The debt at this time has been financed at extremely low interest rates. Those rates will go up, and as they go up, the carrying cost of Ontario’s existing debt will go up very, very quickly.”
The experts agree that Oliver is correct to urge Ontario and Quebec to rein in their spending. But whether now is the time to focus on battling deficits and slashing debt remains debatable.
Borrowing at low interest rates to pay for badly needed infrastructure projects would yield a better return down the road, Dodge argues. On the other hand, rates will rise eventually, so best be ready, counters Poschmann.
Oliver is, of course, a Conservative finance minister — his disdain for debt and deficits is as much political as it is practical. So his statement earns a rating of “a little baloney.”
The Baloney Meter is a project of The Canadian Press that examines the level of accuracy in statements made by politicians. Each claim is researched and assigned a rating based on the following scale:
No baloney — the statement is completely accurate
A little baloney — the statement is mostly accurate but more information is required
Some baloney — the statement is partly accurate but important details are missing
A lot of baloney — the statement is mostly inaccurate but contains elements of truth
Full of baloney — the statement is completely inaccurate
Ontario Financing Authorityhttp://www.ofina.on.ca/borrowing_debt/debt.htm
Ontario 2014 budgethttp://www.fin.gov.on.ca/en/budget/ontariobudgets/2014/
Details of Ontario’s Financeshttp://www.fin.gov.on.ca/en/budget/ontariobudgets/2014/ch2f.html
Ontario’s Borrowing and Debt Historyhttp://www.ofina.on.ca/borrowing_debt/borrowhistory.htm#debthistory
Quebec 2014 budgethttp://www.budget.finances.gouv.qc.ca/budget/2014-2015a/en/documents/BudgetPlan.pdf
Quebec 2008 budgethttp://www.budget.finances.gouv.qc.ca/budget/2008-2009/en/documents/pdf/BudgetPlan.pdf