Ontario, like California, Going for Broke: FCPP - Frontier Centre for Public Policy

Food for thought -can we afford to let Ontario at 35% of the Canadian economy go down or hit the debt wall?

Ontario, like California, Going for Broke: FCPP - Frontier Centre for Public Policy

Although California’s economic policies (high spending, high taxes) are destructive, this is mainly a political drama. Democrats will not cut spending. Republicans will not raise taxes. As messy as this left-right struggle gets, California will almost certainly pay its bills, one way or another, in the fullness of time.

Will Ontario? The province has a distinctly different problem: It must now borrow more and more to accomplish less and less. It takes some sophistication to conceal this divergence. Ontario’s effective interest rate – the rate it pays, on average, on all of its debt – is 4.5 per cent. Interest payments will thus cost the province $10-billion (Canadian) this year on its $220-billion debt. Ontario needs half its deficit to make its interest payments.

In 2000, Ontario’s effective interest rate was much higher (8 per cent), its debt much lower ($114-billion). In 2000, interest payments cost $8.8-billion. Ontario, in other words, has used low interest rates to finance higher debt. Any increase in interest rates now will have profoundly disturbing consequences. Ontario Premier Dalton McGuinty conceded the other day (in another context) that his government has made “some mistakes.” Really? D’ya think?