Provinces relentless in pursuit of debt

PROVINCIAL finance ministers finally are seeing a light at the end of the fiscal tunnel and it is an oncoming debt train that relentlessly has been stoked in good times and bad.

In Ontario, for example, departing finance minister Dwight Duncan recently told the Toronto Board of Trade that the province's finances are in dire straits.

"Ontario's inconvenient fiscal truth applies equally to the next Liberal government and to the next Liberal leader of Ontario -- these numbers are not going to go away," he said.

It is unfortunate but common that Duncan decided to embrace fiscal rectitude only after the spending spree he helped supervise during much of the McGuinty regime.

According to the most recent edition of the Federal Fiscal Reference Tables, between 2002-03 and 2011-12, Ontario's total provincial government spending grew by 64 per cent while its revenues grew only 46 per cent.

The value of Ontario's net debt grew by 78 per cent and is poised to break $300 billion in the near future. It seems like only yesterday -- about 20 years ago to be exact -- that its net debt first broke $40 billion.

The fiscal truth regarding provincial public finances goes beyond Ontario. At issue is the sustainability of public debt in terms of it growing faster than other variables.

Key comparators involve the growth of net provincial public debt relative to the growth of provincial output, population and provincial government revenues.

The following average annual provincial growth rates for these variables for the 1991 to 2011 period are based on data from the fiscal reference tables and Statistics Canada.

The results are stark and partly illustrate the divide between the booming resource provinces and the rest.

The average annual growth rate of net debt has surpassed the average growth of GDP, provincial revenues and population for a vast swath of the country stretching from Prince Edward Island to Manitoba and British Columbia.

The three exceptions are the usual resource boom suspects: Saskatchewan, Alberta and Newfoundland and Labrador, where recent years have seen net debt actually shrink.

In Alberta, population, GDP and provincial revenues have all grown faster than the net debt. Saskatchewan saw its net debt grow faster than population but more slowly than its GDP or provincial revenues. Like Saskatchewan, Newfoundland and Labrador saw its net debt growth exceed population growth, but then track GDP and revenue growth more closely.

Prince Edward Island, Quebec and Ontario have seen the largest gaps in these average growth rates.

Prince Edward Island's net debt over the 1991 to 2011 period grew at an average annual rate of 12.7 per cent compared to 3.7 per cent for provincial revenues, 4.2 per cent for nominal GDP and 0.5 per cent for population. Ontario saw its net debt grow at 9.4 per cent annually compared to growth of 4.8 per cent for provincial government revenues, 4.0 per cent for GDP and 1.3 per cent for population.

Quebec saw net debt grow at 7.8 per cent annually compared to 3.4 per cent for revenues, 3.8 per cent for GDP and 0.6 per cent for population. As for Manitoba, net debt grew at 6.1 per cent compared to 5.4 per cent for revenues, 4.3 per cent for GDP and 0.6 per cent for population.

Of course when faced with an inconvenient fiscal truth, one reaction is to find extenuating factors to blame. For the 1991 to 2011 period, the usual suspects would be the 1991-92 and 2008-09 recession periods, which hit Ontario particularly hard.

There is some truth to bad economic times being responsible for growth in public debt.

The inconvenient fiscal truth, however, is that even during boom periods, the public finances are not greatly improved.

In the case of Ontario, even the more prosperous years from 1993 to 2007 saw net public debt grow at an average annual rate of 6.7 per cent compared to provincial revenue growth of 6.4 per cent, GDP growth of 4.6 per cent and population at 1.6 per cent. In Quebec, net public debt during the boom years grew at an average annual rate of 7.1 per cent compared to 3.6 per cent for revenues, 4.2 per cent for GDP and 0.5 per cent for population.

Manitoba actually saw its net debt grow more slowly than revenues and GDP during these prosperous years -- but grow it did.

In other words, during recessions, debt piles up while during booms it piles up at a slower rate.

It is truly an inconvenient fiscal truth that these numbers will not go away.

Livio Di Matteo is an economist at Lakehead University in Thunder Bay.

Republished from the Winnipeg Free Press print edition December 13, 2012 A17