Ontario has wrapped up its 2018 pre-budget public consultations as it prepares to deliver its next provincial budget. Ontario Finance Minister Charles Sousa confirmed in the fall fiscal statement that Ontario’s 2018 budget will be balanced, as will budgets over the next two years.

However, the average Ontarian may be confused by the fact that despite a future of projected balanced budgets, the provincial net debt will continue to increase.

Indeed, recent years have seen the provincial debt grow by amounts exceeding that year’s deficit. For example, in fiscal year 2014-15, Ontario’s budgetary deficit was $10.315 billion but the net debt rose by $17.386 billion. In 2015-16, the deficit was $3.515 billion but $10.796 billion was added to the net debt. In 2016-17, the deficit was $0.991 billion but $6.276 billion was added to the net debt.

So how can this happen?

Provincial governments—including Ontario’s Wynne government—are using budgeting techniques whereby infrastructure expenditures are not charged against the operating budget. Only capital depreciation or the user cost of capital is treated as an expense in the spending of the applicable government ministry.

The result is an operating budget that does not include the capital spending expense, aside from an annual user cost of capital charge and capital spending, which is not reported in the operating budget but is reflected by increases in the net debt. Thus, a provincial government can present a balanced budget—or even surpluses—while still adding to the debt.

Indeed, the Wynne government’s Fall 2017 Economic Outlook and Fiscal Review specifically noted that:

About 62 per cent of the increase in net debt from 2008-09 to 2016-17 was due to the deficit. The remaining net debt increase was a result of investments in capital assets. Balanced budgets from 2017-18 onwards will ensure that increases in net debt will be limited to net investments in capital assets such as roads, bridges, hospitals and schools. The government’s investments in capital assets will work to increase economic growth and help support GDP growing more quickly than debt, thereby helping the government achieve its net debt‐to‐GDP targets.

The Ontario government has committed to spending more than $190 billion in public infrastructure over 13 years starting in 2014-15, for roads, bridges, public transit, hospitals and schools. This represents an increase of $30 billion from the 12‐year plan announced in the 2016 Budget. This infrastructure spending was $11 billion in 2014-15, $11 billion in 2015-16, $12 billion for 2016-17 and an expected $156 billion from 2017-18 to 2026-27. This $156 billion is expected to be divided as follows: $56 billion in public transit, $26 billion in highways, more than $20 billion in capital grants to hospitals, and almost $16 billion in capital grants to school boards.

As a result, even if balanced budgets are projected until 2026-27, Ontario may add a considerable amount to its net debt by 2026-27. This may add to provincial government debt charges even without any increase in interest rates.

While it’s important to reinvest in needed physical infrastructure, there must be a more explicit recognition that Ontario is ramping-up its net debt and that this can have repercussions for public finances down the road, given that both the debt and interest rates are on the way up.

There’s no guarantee that GDP will increase faster than the debt, thereby reducing the net debt-to-GDP ratio—a measure of a jurisdiction’s ability to pay back its debt. The juxtaposition of massive infrastructure investment with balanced operating budgets is creating a fiscal illusion on Ontario that could rapidly turn into a nightmare.