Mythbusting: Interest payments are NOT why Ontarians can’t have nice things.
A continuation of my earlier myth-busting piece.
So how much are provincial government interest payments costing Ontarians each year? And how does this differ from the past? I decided to get some data. Three important components:
- Yearly provincial interest payments. These are surprisingly hard to find. Earlier, I manually went through each individual Public Account to grab that year’s figure. However, Philip Smith found data from 1981–2009 from Statistics Canada. I used that data along with data from the Ontario Financing Authority for 2010–2020 (projected), to put together a time series from 1981–2020.
- Population data. Want to put this in per-capita terms. This Statcan series provincial population goes back to 1971. Pretty simple.
- Inflation data. We need to account for inflation (though I’ll show the figures both adjusted and unadjusted for inflation). This Statcan series has GDP deflator data, at the provincial level, going back to 1981. So we’ll use that.
Throwing all of the 1981-present data into the blender, here’s what we get.
Data available for download here.
Thanks to low interest rates, Ontario’s per capita interest in nominal terms is around the level it was 20 years ago. In real (inflation adjused) terms, it’s significantly lower. Over the last 10 years, Ontario’s per capita interest payments have risen at the rate of inflation, leaving them unchanged in real terms.
Here’s the same chart, but showing only the data for real, per capita debt interest payments.
It is not difficult to understand what happened. While Ontario’s debt levels have risen significantly in the 2000s, these have been more than offset by inflation, a rising population, and lower interest rates.
I was 8 years old when Bill Davis retired in 1985. Back then, per capita interest payments were $466.40, which is equivalent to $955.25 in today’s money. My daughter is now 8 years old, and her per capita debt interest payments are $831.06, over $100 lower (in real terms), than mine were at her age.
The average real per-capita Ontario debt interest payments for 1981–2018 is $947.36 (in 2018$). In 2018, the figure was $831.06. Of the 38 years we have data for, the $831.06 was the 5th lowest. That’s right — lowest.
And thanks to low interest rates, the picture continues to improve. In Ontario’s First Quarter 2019–20 Finances Report, in just the last three months, Ontario’s interest payment projections have fallen by $220 million:
Interest rates have dropped substantially since the time of the 2019 Budget. This has allowed the Province to project interest on debt savings of $220 million relative to the Budget forecast while completing $14 billion of its $36 billion total borrowing requirement for 2019–20, as of August 9, 2019.
The Ontario government spent that windfall on a variety of new spending initiatives:
Key changes to program expense projections include:
$100.5 million to help municipal partners provide child care programs;
$35.7 million for Land Ambulance;
$33.4 million for Public Health Units; and
$12.4 million for the Ontario Wine Fund, the Small Cidery and Small Distillery Support Program, and the Vineyard Improvement Program to support Ontario grape growers, wineries, small distilleries and craft cideries.
This trend of lower than anticipated debt interest is likely to continue. Here’s what the Ontario government predicts that their average borrowing costs will be through 2019–2020. Note that they are forecasting a 135 basis point rise from 2016–17 to 2019–2020 (2.09% to 3.44%).
This was an old trick of the previous government as well — forecast interest rates to rise substantially, causing future interest payments to rise. When the higher interest rates don’t materialize (and in many cases fall), pocket the windfall and tout your acumen as sound fiscal managers.
Ontario government bond yields, however, are going nowhere near 3.44%. I went to my TD WebBroker account to find current Ontario government bond yields. I found 18 bonds available for purchase, with the following yields:
When Ontario issues new bonds to replace those that mature, these are the kinds of interest rates they can expect, which are significantly lower than what the province has previously forecasted. Not just a bit lower, but possibly less than half of what was forecasted.
None of this is to suggest that Ontario’s fiscal policies were optimal in the past, nor does it suggest what future fiscal policies should be. That said…
This idea that Ontario is somehow getting crushed by interest payments needs to die. The evidence simply doesn’t support that conclusion.
