Ontario’s Debt: Down the Rabbit Hole

I have written in the past about the duplicity of the Ontario Liberal budgets in speaking only of net debt. The 2018-19 provincial budget was released on March 29 and I will comment briefly on how it handles the topics of debt and deficit. But first a discussion of net and total debt.

Let’s say you have an RRSP of $10,000 nominal value, no credit cards, no loans outstanding, and no other savings since tomorrow is payday and your account is registering empty. Further, your car was in an accident and is a total write-off. You need one for work so you go to your bank and get a loan for $10,000 with a 6-years term and monthly payments of $200. How much debt do you have at this point?

The way the Liberals look at it is that you have no debt. You have total financial assets of $10,000 – your RRSP. At the same time, you have total financial liabilities of $10,000 – your new auto loan. The Liberal accounting trick subtracts your financial assets from your liabilities to get your net debt which in this example is zero. Note that although your (net) debt is zero, you still have a total debt of $10,000 on which you are paying $200 a month principal and interest. This is part of the magic of the Liberal budget. More will be revealed later.

The figure that is important in the real world is total debt. In the Ontario Budget, whimsically called A Plan for Care and Opportunity, the total debt for the province as of March 31, 2018, stands at $348.8 billion (subject to any minor year-end adjustments). They project adding another $10 billion to that figure this fiscal year bringing the total to $358.8 billion by March 31, 2019. You can find these figures buried in TABLE 3.30 Net Debt and Accumulated Deficit of section III D.

To make you really cheerful, TABLE 3.31 Medium-Term Outlook: Net Debt and Accumulated Deficit projects a total debt of $369 billion for March 31, 2020 and $384.4 billion for March 31, 2021.

A more detailed analysis of Ontario’s debt can be found at the Ontario Financing Authority (OFA) website. They also use net debt throughout to obfuscate the issue so you have to dig to find information on the total debt and who holds it. This total debt is what the province is paying interest on as the OFA describes.

These interest payments are fixed obligations. Failure to make a payment is called a default and when sovereign and sub-sovereign states default on their debt it is a major financial crisis for the state. It leads to higher interest rates on renegotiated and future borrowing. With additional borrowing impaired and higher interest payments in the budget, programs and costs much be slashed, taxes raised, and austerity measures imposed.

There is a test that can be performed to show the difference between the reality of total debt and the fictional accounting construct of net debt. The OFA has a record of every individual series of bonds issued identified by a unique CUSIP number. You can look them up in the OFA’s Ontario’s Bond Issues database. Collectively these comprise the total debt. The question then to ask is what are the CUSIP numbers of the bonds comprising the net debt. The answer, since the net debt is less than the total debt is it can’t be done. No specific debt instrument can be identified with net debt.


States that have their own currency devalue it making exports more competitive and imports more expensive. This decreases the citizens’ standard of living but stimulates the economy creating economic growth. Over time, this leads to increased government revenue to help reduce the burdensome debt.

The IMF has imposed this strategy on defaulting nations time and again to help them out of their debt crises. Unfortunately, Ontario does not control its currency and, like the case of Greece, does not have this option available to it. Prolonged austerity is pretty much the only option and this is what Ontario faces at some point in the future.

Reinhart and Rogoff’s seminal work, This Time is Different, is the classic study of all sovereign defaults up to 2009 including those of the USA and Canada. It is academically thourough but readable for those of you who want a deeper understanding of where our world is headed.


Recall that a year ago, the Liberals were talking about balancing the budget for the period 2018-20. From the government’s Budget in Brief, “A Stronger Healthier Ontario”, we read (emphasis added):

Ontario is balancing the budget for the first time since the 2008–09 global recession and maintaining a balanced budget for the next two years. A strong economy, together with a balanced budget, is creating more opportunities for individuals and businesses in Ontario to get ahead and stay ahead.

A balanced budget also gives the government the fiscal flexibility to do more to help people.

Referring to Liberal deficits, the Toronto Sun reported, April 2, that Liberal MPP Bob Delaney had said I was very proud of those projects … I would be pleased to go into the streets with that track record and I would do it again,”. My immediate reaction was that they can’t balance their budget so they are praising their deficit spending. Sure enough, when I looked at the new budget, I saw deficits as far out as they project. This leads one to wonder if they have lost their self-proclaimed “fiscal flexibility”.

Let’s look closer at the smoke and mirrors of the deficits the government is discussing in this budge, the figures for which may be found in TABLE 3.20 Change in Medium-Term Fiscal Plan since the 2017 Budget. The document claims the government operated with a $600 million surplus in 2017-18 rather than any deficit. They project a deficit of $6.7 billion in 2018-19 and $6.6 billion in $2019-20.

We know the total debt went up $15.7 billion in 2017-18 and is projected to increase by $10.0 billion in 2018-19. The layman may be excused for wondering how you can rack up $15.7 billion in debt while claiming you had a budget surplus of $600 million. This is a second case of Liberal accounting magic.


Ontario had a population of 14.0 million in 2016 (TABLE 3.27 Ten-Year Review of Selected Financial and Economic Statistics) and a total debt of $333.1 billion. In contrast, the State of Illinois in the same period, had a population of 12.8 million and a total budget debt of $235.9 billion USD (source: 2016 Financial State of Illinois) including unfunded pension obligations. Given today’s exchange rate of 0.7910, this woks out to $298.2 billion CDN.

Illinois, with its population slightly less than Ontario’s and a debt 89.5% the size of Ontario’s, had their debt rating downgraded by rating agencies last year: S&P, Moody’s Downgrade Illinois to Near Junk, Lowest Ever for a U.S. State.

Now Illinois has been a poorly managed state for decades whereas Ontario has been managed, arguably,  reasonably well to this point. The key for both is in the pension obligations to unionized government employees. In the end, debt is debt and it eventually strangles the debtor when not respected.

In the words of the immortal Alfred E. Neuman (yeah – I’m that old):

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