Ontario’s deficit is growing — and the Fair Hydro Plan is largely to blame

A new report from the Financial Accountability Office says that the province will add $75 billion to its debt over the next four years
By Sarah Reid - Published on December 11, 2017
Two men sit at desk with flags in background.
David Wake (left) and David West presented the Financial Accountability Office’s 2017 fall economic and fiscal outlook at Queen’s Park on Monday. (Sarah Reid)



Ontario will have a $4 billion deficit in 2017-18 and its fiscal position will continue to deteriorate over the next four years, largely due to the government’s Fair Hydro Plan, according to a new report published Monday by the Financial Accountability Office of Ontario.

“It’s pretty clear that we think that they are overly optimistic in their revenue projections,” said David West, the FAO’s chief economist, at a press conference at Queen’s Park.

The Ontario government projected balanced budgets 2017-18 through to 2019-20 in its fall economic statement.

By 2021-22, the FAO expects the deficit to reach $9.8 billion, because the province will no longer be able to rely on one-time revenues (such as the sale of Hydro One assets and federal transfers for infrastructure), and it will see more moderate tax revenue growth. But the biggest piece of the puzzle is the Fair Hydro Plan, which is intended to reduce electricity bills by an average of 25 per cent.

The FAO adopted accounting recommendations from the auditor general for net pension assets and the Fair Hydro Plan, which explains the vast difference between its numbers and the government’s. (The auditor general said last year that the government could not include $10.7 billion in pension assets as government assets, because the government did not have ready access to those funds, even though they have been counted as government assets since 2001.)

Because the government has not adopted the auditor general’s accounting recommendations, it “has reduced the transparency and reliability of Ontario’s fiscal plan,” the FAO report says.

“I think as this debate goes forward, I think the credit rating agencies may revisit their ratings [for Ontario],” West said.

The Progressive Conservatives were eager to jump on the FAO’s report. “It’s distressing to hear another story like this that shows that the Liberals aren’t being honest with the people of Ontario about the province’s fiscal realities,” said Todd Smith, the PC energy critic, in a scrum after Question Period.

(Even though the Tories are criticizing the Liberals for their accounting, Smith says his party will continue to present its plans based on government projections, so that they are providing an “apples-to-apples comparison.”)

Here are a few highlights from the report.

The Fair Hydro Plan will increase deficits in the short term

In the spring, the government announced its Fair Hydro Plan, a subsidy that was not included in government accounting, because funding for the rate cut is being borrowed through Ontario Power Generation.

Ontario’s auditor general says the debt should be captured as an expense – advice the government so far has not heeded. The AG said at the time of her report’s release that the move will cost taxpayers an extra $4 billion in interest on the debt over the course of the program.

Over the next four years, the FAO expects that the Fair Hydro Plan will increase program spending by an average of $2.8 billion per year.

Debt will exceed government projections

Ontario is already the most indebted subnational government in the world. Even so, the FAO expects that the province will add $75 billion to its debt over the next four years, taking its total debt to about $400 billion.

Increased borrowing and rising interest rates mean it will cost the province more to pay off what we owe; interest on the debt is expected to rise to 8.3 cents of every dollar of government revenue by 2021, compared to 7.9 cents today.

The current net debt-to-GDP ratio — or debt relative to the size of the economy — is almost 40 per cent in Ontario. The government has committed to lowering this to 35 per cent by 2023-24 and to 27 per cent by 2029-30.

But the FAO is doubtful that will happen. This report only looks four years out, but already the FAO expects debt-to-GDP will rise slowly in that timeframe and hit 41.4 per cent by 2021-22.

(The FAO’s long-term outlook, released earlier this fall, expected Ontario’s debt-to-GDP levels to reach 63 per cent by 2050.)

Economic growth is expected to be strong this year, but moderate next

In the FAO’s spring outlook, it projected that Ontario’s economy would grow by 2.4 per cent in 2017. Now their projection is 2.9 per cent. One FAO official attributed this robust growth to what he called “surprising strength” in household consumption, as well as growth in residential construction and investment.

Despite the strong growth expected this year, for the next four years the FAO expects growth to be lower, between 2 and 2.3 per cent per year.

In its response to the FAO’s report today, the government ignored the accounting disparities and the larger deficit and debt projections, choosing instead to focus on growth in the Ontario economy.

“I want to thank the FAO for his report, Mr. Speaker,” Premier Kathleen Wynne said during Question Period. “The report actually shows that our plan is working: the economy is growing, our unemployment rate is the lowest it has been in 17 years, and more than 843,000 net new jobs have been created since the recession.”