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Why Ontario is poised to become Canada’s Greece

Under McGuinty’s watch, Ontario’s debt has almost doubled to $230 billion

 Why Ontario is poised to become Canada’s Greece

Frank Gunn/CP

October has been an unusually busy month for provincial politics.

Prince Edward Island, the Northwest Territories, Manitoba, Ontario, Newfoundland and Labrador, and the Yukon have all had elections in the past two weeks. Alberta’s ruling Progressive Conservatives recently picked a new premier in Alison Redford. And next month Saskatchewan will head to the polls. While every election is important, one in particular should give all Canadians pause for thought.

Ontario Premier Dalton McGuinty’s re-election last week, albeit with a minority, was an impressive display of campaigning. And yet what makes McGuinty’s return significant is not his politicking skill but his responsibility for Ontario’s ever-expanding debt. Traditionally known as the engine that drives Canada, Ontario is in danger of becoming the Greece of Confederation—if Greece happened to account for more than a third of Europe’s economy.

Under McGuinty’s watch, Ontario’s debt has almost doubled to $230 billion, due to massive stimulus spending as well as unrestrained growth in health care and education. And it will continue to rise despite announced plans for greater austerity. By the time a balanced budget is contemplated in 2017, the province will have added an additional $67 billion in new debt. On a per capita basis, the current provincial deficit is almost twice as large as that of its next nearest wastrel, New Brunswick. While low interest rates have made the debt burden manageable to date (about 10 cents of every dollar goes to interest), the prospect of higher rates in the future presents a dangerous worst-case scenario.

Tackling this debt problem will require far more immediate and drastic steps than the premier has revealed to date; his new minority government will make this job even tougher. But whether McGuinty gets serious about the debt or not, his past profligacy will cause suffering across Canada.

If McGuinty properly accepts the challenge of bringing the province’s finances back into balance, the result will be notable tax increases or spending cuts. Such a situation will inevitably produce a significant drag on Canada’s biggest and most important consumer market. For the rest of the country, this means a greater reliance on natural resource prices and international trade at a time when the global economy is full of risks and uncertainties. This also poses problems for Ottawa’s efforts to reduce its debt.

Alternatively, the Ontario premier may continue to soft-pedal the debt crisis. This seems a strong possibility given his election promise to protect health and education spending and his continued support for massive subsidies in the green energy sector. Paying producers of solar power over 80 cents per kilowatt hour for something that’s sold for less than 7 cents/kWh is clearly improvident. All of which suggests that Ontario’s debt problem may continue to worsen beyond 2017, raising the possibility of credit downgrades and other Greek-style problems that could make things very difficult for all Canadians.

The erosion of Ontario’s finances is already having a profound effect on other provincial budgets. Equalization is a complicated federal program that sees Ottawa make payments to poorer provinces in order to bring them up to a national average of taxing ability. While Ontario was once forbidden to receive such payments because of its dominant role in the national economy, lately it has become the program’s fastest-rising beneficiary.

Of the total $14.7 billion allotted to equalization this year, Ontario received the second-largest share: $2.2 billion. Only Quebec got more. Ontario’s share is up sharply from $347 million two years ago, the first time Ontario ever received equalization. With the pot fixed on an annual basis, and given the size and circumstances of Ontario, Canada’s largest province should soak up an even larger share of equalization in coming years. This will be bad news for traditional have-not provinces such as New Brunswick, Nova Scotia, Prince Edward Island and Quebec.

The fiscal situation has also triggered something of an identity crisis in Ontario. Over the summer, Finance Minister Dwight Duncan bristled at the notion Ontario should be considered a “have-not” province because of its equalization cheque: “It is completely dishonest to use that term ‘have-not,’ ” he griped. And yet, while Duncan was objecting to characterizations that his province is on the dole, the premier was vowing to fight any effort to reduce Ontario’s share of equalization. Perhaps the minister doth protest too much.

The sobering truth is that Canada’s largest province is now facing the country’s most troubling debt problem. And the effects of Ontario’s debt will soon be felt right across the country, regardless of how prudently other provinces have managed their finances. Fair or not, we’re all in this together.