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Ontario's debt putting everyone in a bad Moody's

July 04, 2014
Ontario's debt putting everyone in a bad Moody's

Less than three weeks after Election Day, the Ontario Liberals were back to work at the legislature with a plan to reintroduce the same budget that failed to pass on May 1st. As the Wynne government was touting its new team and big plans for the province, the celebration was disrupted with bad news from the bank about Ontario’s credit cards.

Moody’s Investors Services announced that Ontario’s credit outlook has been lowered, from stable to negative within its Aa2 standing.

What does this mean?

Well, it isn’t quite a credit rating downgrade, but it’s a warning that another downgrade is eminent. Unless Ontario can prove that it is serious about balancing the budget in 2017 – and actually demonstrate how they are going to do it (spending cuts, tax hikes, some combination?) – we will be dealt another devastating blow to our reputation and our pocketbooks.

Credit rating downgrades can be very costly to taxpayers. They are a measure as to how reliable lenders think their loan recipients will be on paying back a loan. If the recipient is very trustworthy and therefore creditworthy, they will have a higher credit rating and lower interest rate. Conversely, if there is less chance the loan recipient will pay the loan back, they will have a lower credit rating and pay higher interest.

Just like how the interest rate you are eligible for on your mortgage is based on your personal credit score, the price that Ontario receives for its debt is based on this credit rating, so downgrades are costly to our public finances. As our grade lowers, we will have to pay more to borrow money, which drives up the cost to taxpayers. If this trend continues, and especially as interest rates eventually go up, Ontario could be at risk of defaulting on its debt payments. In late 2009, the major credit rating agencies all began to downgrade Greece’s credit, thereby driving up the cost of debt and limiting Greece's ability to borrow any more. They could no longer afford to pay their bills and began requesting international bailouts to cover pension obligations. The credit downgrades sparked the beginning of European Debt Crisis.

Ontario is not quite there yet, but the province has not made a payment towards the principal of our debt since 2001. The outstanding total provincial debt now amounts to $20,116 for every woman, man, and child in the province.

This also means that more of our money is being spent on interest payments, and less is going to the front line services we depend on in this province. The “Ministry of Debt” is now the third largest expenditure in the province. Programs like healthcare and education are put at risk because of the Wynne Government’s inability to control spending.

Premier Wynne and her Finance Minister Charles Sousa need to listen to this warning, and not shrug it off with more spin about Ontario beating its own projections. Ontario’s own projections have lost credibility. That’s why Moody’s issued this assessment; they simply don’t trust Sousa’s numbers.  

It was just two years ago, following the 2012 budget, that Ontario received an embarrassing credit downgrade by Moody’s. Then-Finance Minister Dwight Duncan took the news seriously, agreeing that Ontario was facing major financial difficulties. It was a wake-up call for the McGuinty Government, who was already taking steps to address the problem. They had hired economist Don Drummond to provide a road map for Ontario and seemed committed to stabilizing our finances.

But then Kathleen Wynne took over, and her activist plans took precedent. She has ignores these fiscal warnings and continues to put her foot on the accelerator. 

But it’s not too late for Ontario. The Wynne Government should hold off on its urgency to reintroduce its failed budget. The government could balance the budget this year, if it wanted to. Wynne and Sousa should take some time to read up on the challenges we face, and come up with a plan to get us off the road to Greece.



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