The
Ford government will table its next budget on Tuesday. But a
longer-term perspective on the evolution of Ontario’s government
finances provides some important context for today. Since Confederation,
Ontario has seen a massive expansion of its revenues, expenditures and
debt. And its fiscal performance in terms of balancing its finances has
oscillated over the years. Using data from the Finances of the Nation
database, assorted Ontario budgets, and the Fiscal Reference Tables, a
picture of change and variable fiscal responsibility emerges.
With
revenues of $2.3 million and expenditures of $1.2 million in 1868,
Ontario had a substantial surplus and no debt. Indeed, substantial
surpluses marked much of the pre-Second World War era. By 2023, the
Ontario government had spending of $199 billion and revenues of $193
billion for a deficit of nearly $6 billion and a net debt of $400
billion. Ontario government spending on a real per-capita basis was
relatively modest from 1867 to 1913 (despite province-building
activities such as roads and railroads) and was financed primarily by
federal government grants and natural resource revenues from forestry
and mining. The period after 1914 saw an expansion of both government
spending and revenues that was quite dramatic compared to the prior
period, but which paled in comparison with the post-1957 expansion into
health, education and social services.
With respect to revenue
composition, Ontario gradually shifted from a reliance on natural
resource rents and government grants to own-source revenues from income,
consumption and other assorted taxes. When compared to the federal
government—the only other Canadian government larger than Ontario in
terms of total revenues or expenditure—in real per-capita terms Ontario
spent less than the federal government until the early 1990s surpassing
the Ottawa in 1993 for the first time. By 2020, real per-capita Ontario
government spending was actually more than federal real per-capita
spending, though the pandemic years saw a reversal.
What’s truly
remarkable about Ontario’s finances is its growing reliance on deficit
financing since the 1970s. Over the entire 1867 to 2023 period, Ontario
ran an operating deficit in 70 out of 157 years or approximately 45 per
cent of the time. However, in the first 100 years from Confederation
(1867 to 1967) Ontario only ran 22 deficits—that’s 22 per cent of the
time. In the fiscal years from 1968 to 2023, Ontario ran 48 deficits in
55 years—or deficits 87 per cent of the time. Deficits have gone from
being a temporary departure for exceptional times to a near permanent
device.
The accompanying charts plot Ontario’s deficits, its
deficit-to-GDP ratio, its net debt and its net debt-to-GDP ratio from
1960 to the present. The first chart illustrates that Ontario maintained
its largely balanced budget approach to its finances for most of the
1960s but incurred deficits in the 1970s.
Its
three largest deficits were in 2010 ($19.3 billion), 2011 ($17.3
billion) and 2021 ($16.4 billion). As a share of GDP, the second chart
illustrates that Ontario’s three largest deficits were in 1992 (3.7 per
cent), 1993 (4.1 per cent) and 1994 (3.5 per cent). Ontario’s pandemic
deficit peak in 2021 came in at 1.7 per cent placing it lower than some
of the deficits of the 1970s and early 1980s.
Deficits
plus interest eventually result in accumulated debt and Ontario like
other provinces has added to that by borrowing for capital spending on
top of its operating deficit. As the final chart shows, in 1960 Ontario
had a net debt of $994 million and net debt-to-GDP ratio of 6 per cent.
Today, net debt tops $400 billion and the net debt-to-GDP ratio is about
36 per cent. The profiles for net debt and net debt-to-GDP suggest
Ontario’s net debt has grown in three phases.
The
accumulation of net debt takes off in the mid 1970s, then accelerates
in the 1990s and accelerates yet again after 2008. These periods of
acceleration have all coincided with periods of economic slowdown or
recession in the province—the low growth stagflation era of the 1970s,
the recession of the early 1990s and recession/financial crisis era of
2007 to 2009. In each of these periods of distress, deficits mounted,
yet even when the economy and revenues began to recover, spending growth
and deficits continued. In essence, the Ontario government ran deficits
during bad times and better times, giving a fiscal dimension to the
provincial motto “Loyal She Remains.”
As Ontario moves forward
from the pandemic era, it remains to be seen if the government will rein
in perpetual deficit financing and halt debt accumulation, or if the
government will embark on yet another cycle of mounting debt. In many
respects, the government has continued to spend at a rate well above its
economic ability and performance. Key to the issue is Ontario’s
productivity lag, which has resulted in slow growth
relative to the rest of the country. If the Ford government continues
to spend as if Ontario was still experiencing the high growth rates of
an earlier era, that’s not a sound recipe for fiscal responsibility.
