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Op-eds

30 April 2018April 30, 2018

Ontario is learning the wrong lessons from Quebec

The Globe and Mail, p. B4

Ontario is learning the wrong lessons from Quebec

As the government of Canada’s two largest provinces both tabled their final budgets before their coming elections – Ontario’s in June and Quebec’s in October – it was to be expected that they would loosen their purse strings.

But while Quebec has long been known for its bad public finances – recurrent deficits, lots of spending and high taxes – it has at least begun the process of getting its house in order. And Ontario, long the country’s economic powerhouse, now seems to be competing for the top prize in terms of financial recklessness.

For one thing, in spite of having run a small surplus last year, Ontario’s 2018-19 deficit will be $6.7-billion and the province is not scheduled to return to budgetary balance until 2024-25. Its net debt currently tops $300-billion, or 37 per cent of GDP, a ratio that is set to start rising again in the coming years.

Quebec’s government, on the other hand, has balanced its budget each of the past three years and has just announced it will pay down $10-billion of its debt over the next five years. It has a net debt of more than $180-billion, or almost 44 per cent of GDP, which remains higher than Ontario’s, but this ratio is expected to keep decreasing, despite this year’s increased spending. Indeed, the two provinces’ net debt-to-GDP ratios have been converging steadily over the past decade.

Given this changing debt picture, it is perhaps not surprising that in early April, 2018, for the first time ever, the Quebec government’s cost of borrowing was below that of the Ontario government. For 10-year bonds, the rate for Quebec was 2.82 per cent, five basis points below Ontario’s rate of 2.87 per cent. Indeed, in mid-April, a key ratings agency downgraded the province’s financial outlook from “stable” to “negative,” because of the Ontario government’s plan to run multibillion-dollar deficits for the next six years. Even if Quebec’s debt remains somewhat higher, it matters that the province is headed in the right direction, while Ontario’s debt grows.

In terms of spending, too, Ontario has been echoing Quebec’s questionable performance, with spending as a percentage of GDP rising from 13.1 per cent to 16.8 per cent over the past 15 years, excluding interest payments on the debt, an increase of 28 per cent. In Quebec, these same expenses rose from 19.3 per cent to 23.0 per cent over the same period, an increase of 19 per cent.

Of course, to pay for increased spending, revenue for both provincial governments has also been increasing. In Ontario, revenue relative to GDP grew from 15.1 per cent to 17.7 per cent over this period. Not to be outdone, Quebec’s revenue rose from 18.5 per cent of GDP to 19.8 per cent.

Further evidence that Ontario is becoming more like Quebec may be found in their receipt of equalization payments from the federal government. Designed to address “fiscal disparities among provinces,” equalization payments began to flow to Ontario in 2009-2010. These then grew, to more than $3-billion for a couple of years, though they have fallen since then, down to just under $1-billion this year. Quebec, however, is now receiving close to $12-billion in equalization payments.

The picture that emerges is clear: In terms of debt, in terms of spending and in terms of taxation, Ontario has come to resemble Quebec a lot more in recent years. A small part of this convergence can be explained by Quebec’s somewhat improved performance of late, especially in terms of balancing its budget and reducing its net debt-to-GDP ratio. But a much larger part is due to the deterioration of Ontario’s public finances over the past decade and a half, with the government now taking up much more space in the province’s economy.

Despite Quebec’s recent gains, both provinces are addicted to taxing, spending and borrowing. The large debts in particular will have to be repaid with future taxes, a prospect that ought to alarm anyone concerned about the long-run prosperity and well-being of Quebeckers and Ontarians.

Mark Milke is an independent policy analyst, Jasmin Guénette is vice president of operations at the Montreal Economic Institute. They are the authors of "Ontario vs. Quebec: Whose Public Finances Are Worse?" and the views reflected in this op-ed are their own.

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