Ontario must quickly balance budget in wake of pandemic

By on January 14, 2021

Deficits might seem like an abstract problem for our future selves (or future generations) but in Ontario, this simply isn’t the case

New Ontario Finance Minister Peter Bethlenfalvy inherits a difficult job from Rod Phillips. The province’s fiscal challenges long predate the pandemic. The province has mostly run uninterrupted budget deficits since 2008-09.

The governments of both Dalton McGuinty and Kathleen Wynne sketched out long paths to budget balance, none of which came to pass.

The government of Premier Doug Ford also planned a gradual approach to deficit reduction to start its mandate, but then COVID-19 hit. Deficits have now grown much larger and the government has not charted a new path to balance.

It’s dangerous to gradually balance the budget over an extended period. Bethlenfalvy should heed the following lessons and create a credible plan to quickly balance the budget, once the pandemic has abated.

Lesson one: there’s always a reason to run deficits.

The global financial crisis, which began in 2008, kicked off our current deficit run. Back then, there was a rationale for short-term deficits driven largely by a temporary drop in government revenue, but many of the difficult policy decisions required to restore balanced budgets never happened over the course of the following decade. Then COVID hit and Ontario’s deficits ballooned.

Lesson two: Deficits might seem like an abstract problem for our future selves (or future generations) but in Ontario, this simply isn’t the case.

Ontario’s debt-to-gross-domestic-product ratio (a key measure of fiscal sustainability) has climbed from 26.6 per cent to 47.0 per cent over the past 13 years. And it’s projected to grow larger as the province runs at least two more years of deficits in the ballpark of $30 billion.

Which brings us to lesson three: the cost of borrowing.

The government of Ontario spent $12.5 billion on government debt interest in 2020-21, up from the $10 billion 10 years ago. That amounts to $845 per person and 8.2 per cent of provincial revenue. Money spent on debt interest is money unavailable for key priorities such as health care, education and pro-growth tax relief. All else equal, the more the provincial government borrows, the higher these costs will become.

While we can’t blame the Ford government for the pandemic that has sideswiped its governing agenda, even before the pandemic this government planned to run deficits until 2022-23. The government didn’t recognize the urgency and importance of budget balance.

By failing to balance the budget when the economy was still growing, the government failed to set itself up to handle the bad times. Then the bad times came on strong.

Once the pandemic has passed, the new finance minister must urgently restore Ontario’s fiscal health. Otherwise, we’ll be having this very same discussion during the next recession, but with fewer resources left to deal with the problem.

That’s a risk the new finance minister, and the Ford government generally, shouldn’t take.

Steve Lafleur and Jake Fuss are analysts at the Fraser Institute.

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