Hello, #onpoli people:
On Monday the Financial Accountability Office of Ontario released a report projecting that Ontario’s deficit could quadruple to $41 billion.
Podcast hosts Steve Paikin and John Michael McGrath discuss what the largest deficit in the province’s history means moving forward.
The hole in Ontario’s treasury
John Michael McGrath: That giant sucking sound you might be hearing, dear readers, is the pandemic-sized hole that’s been blown in Ontario’s treasury. Peter Weltman, the provincial Financial Accountability Officer reported Monday that the provincial deficit will be $41 billion for this fiscal year — quadruple what the government imagined pre-COVID-19 and double its projection on March 25. The deficit is understandable, given the FAO also projects the most severe and rapid recession on record: a 14 per cent decline in GDP over six months. For context, the 1990 and 2008 recessions — both traumatic for the province — saw 6.4 per cent and 4.7 per cent declines, respectively. Just a staggering economic and financial storm that has struck the province, historic by any measure. Doug Ford might have wanted to do many things when he ran for the leadership of the Progressive Conservative party, but “run Ontario’s biggest deficit in history” wasn’t on that list, I imagine.
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Steve Paikin: You know it, JMM. I’m constantly struck by the ironies one sees throughout history. Politicians get elected with such starry-eyed plans of what they want to accomplish, only to have those plans dashed by (as former UK Prime Minister Harold Macmillan called them) “Events, dear boy. Events.” I think back to 1990, when then-premier Bob Rae wanted to introduce a public auto insurance plan for Ontario, but then the worst recession since the Great Depression hit. Or David Peterson in the late 1980s, who put constitutional renewal at the top of his personal agenda. It was all coming together until elections in Newfoundland and Manitoba ushered in anti-Meech Lake Accord legislatures. So much for constitutional renewal. Three months later, Peterson was out as premier. And now today, Ford gets elected on a pledge to eliminate the deficit and reduce our debt. By the time his first term is over, he’ll have to introduce budgets that will send both to record highs. Politics is a funny business, eh?
A low interest debt
John Michael: About the only bit of good news from the FAO’s report is that even this massive increase in deficits and debt isn’t going to spell a disaster for the province’s fundamental fiscal state. The total cost of paying the interest on this mountain of debt will jump to 9.8 per cent of the government’s revenues, before dropping again in 2021. That’s not trivial, but it’s also well below the costs of deficits in the 1990s. Speaking about politics being a funny business: Premier Ford is always happy to overstate how dire the province’s finances were when his party won the 2018 election. But, by the time 2022 rolls around, his party could very well find itself (fairly!) repeating the same defenses that the Liberals used between 2009 and 2018: the debt and deficits were mostly the result of the recession, not overspending, and the province’s finances are overall sound and stable. Irony is the cruelest taskmaster of all.
Hiking the debt-to-GDP
Steve: Not to drown our readers in numbers, but there really is one that is the most significant, and it’s actually not the size of the deficit. A $2.5 billion deficit is next to nothing when the size of the budget is $150 billion a year. But I remember Bill Davis’ government once bringing in a deficit that big on a budget of $25 billion. That was concerning. So, the number we really have to look at is the size of the deficit relative to the size of our economy — debt to GDP, as the economists call it. The conventional wisdom has always been that Ontario should keep that number below 40 per cent. Well, now it’s going to leap to 49.7 per cent in one fell swoop. Again, when the Liberals went north of 40 per cent one year, the Progressive Conservatives in opposition screamed bloody murder. Obviously, they won’t be now, even as their number approaches 50 per cent. Let the political debates begin.
John Michael: The obvious question is what the Tories do next. Do they try to get the budget back to balance as quickly as possible, even if it means delaying some of their pre-COVID priorities like transit investment or tax cuts? Or do they charge ahead with those priorities, deficit be damned? The 2008 recession didn’t keep the Liberals from rolling out full-day kindergarten, but then-premier Dalton McGuinty wasn’t shy about looking for other ways to find savings in government. Even if the Tories don’t back off on transit, I think we’re going to see this pandemic and its after-effects shake-up government for a long time to come.
Just a reminder...
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