Ontario’s government debt actually increased last year by $6.8 billion

This is the second installment of a blog series examining the fiscal challenges Ontario continues to face following the recent surprise announcement of an operating surplus in 2021/22.

After initially forecasting a $13.5 billion operating deficit for 2021/22 in the spring budget, the Ford government recently revealed that Ontario actually recorded a small operating surplus last year.

The end of Ontario’s nearly decade and a half of uninterrupted deficits, however, does not mean the province has stopped accumulating debt. The final fiscal reports for 2021/22 show Ontario’s net debt (a measure that adjusts for financial assets) rising from $373.6 billion in 2020/21 to $380.4 billion in 2021/22. The government forecasts additional debt growth in the years ahead.

Why does the province’s debt continue to grow despite the absence of an operating deficit?

Because not all government spending is accounted for in surplus and deficit figures. In reality, the operating deficit includes day-to-day expenditures on items such as salaries for government employees but excludes spending on long-term capital projects. As a result, a government can, perhaps counterintuitively, continue to add debt even when it’s in a surplus position. This was the case in Ontario last year when provincial debt actually increased by $6.8 billion.

Adding debt to pay for legitimate growth-enhancing infrastructure is not always a bad thing. As Jean-Francois Wen explained in a 2015 study on Ontario finances, using debt to finance infrastructure (such as roads that will produce benefits for many years) can make sense, with the debt repaid gradually as the value of the asset erodes.

But governments sometimes take advantage of this principle of government finance by “hiding” debt that should be counted as current spending in the capital budget to make the operating deficit smaller than it is or give the appearance that the books are truly balanced. Distinctions between capital and operating debt are therefore fuzzier than we might like.

Ultimately, Ontario taxpayers must service new government debt regardless of whether it comes from operating or capital spending. One problem for Ontario is that the new capital debt added this year comes on top of the substantial debt incurred to fund day-to-day expenditures over the past decade and a half. This is why Ontario’s debt as a share of its GDP (economists’ preferred way of measuring the size of a government’s debt burden) has remained near its all-time historical high in recent years.

It will take many years of little or no debt growth in either the operating or capital budgets to bring this metric back to where it was in 2008 when the province started adding debt quickly. Moreover, rising interest rates mean any future borrowing will be more expensive and add to the province’s debt.

Again, although many economists consider using debt to finance capital expenditures more defensible than using debt to pay for day-to-day spending, governments have increasingly blurred the lines between the two categories. It’s the combination of borrowing through both the operating and capital budgets together that ultimately determines the sustainability of government finances. That’s why it is important to look beyond the headline operating surplus or deficit number. Only then do we see that Ontario’s debt actually continued to grow last year.