Ontario’s debt is rated by four principal international credit rating agencies, based on their assessments of the province’s economic and financial outlook and future risks. These credit ratings represent the agencies’ opinions on the ability of Ontario to meet its debt-related financial obligations. This backgrounder provides an update on Ontario’s credit rating.
Employee wages and salaries are a major expense category for the Ontario government. This commentary reviews past and current trends in public sector employment and wages, as well as recent developments in Ontario’s labour market, to assess the potential implications for the government’s compensation expense going forward.
Ontario posted a strong job gain of 128,400 net new jobs in 2017, as the unemployment rate declined to 6.0 per cent. Looking behind the strong headline results reveals a changing labour market with both improvements for some workers, as well as continuing challenges for others.
In 2016, the average Ontario household owed nearly $154,000, representing 171 per cent of household disposable income. As interest rates increase, the share of household income spent on debt payments is expected to rise from 13.9 per cent in 2016 to 15.3 per cent by 2021. For the average household, the FAO expects annual debt payments to increase by $3,000 to $15,500 by 2021.
As part of the Fair Workplaces, Better Jobs Act, the government proposes to raise Ontario’s general minimum wage from its current rate of $11.40 per hour to $14 per hour on January 1, 2018 and $15 per hour the following year. While almost 1.6 million workers will benefit from the increase, a significant number of lower wage workers will lose their jobs and some businesses will struggle to cover higher payroll costs.
In the 2017 Budget, the government restated its commitment to reduce the net debt-to-GDP ratio to its pre-recession level of 27 per cent. The Province’s commitment is based on three unlikely assumptions. If any of these assumptions fall short of expectations, the government’s debt-to-GDP target would not be achieved.
The 2017 Ontario Budget projects balanced budgets beginning in 2017-18 and continuing over the next two years. Given the government’s spending plans, maintaining a balanced budget relies critically on an optimistic revenue forecast – and in particular, on very strong growth in tax revenues. However, there appears to be significant downside risk to the government’s forecast.
The Impact of a Housing Market Correction on Ontario’s Fiscal Position provides the FAO’s assessment of risk to Ontario’s finances from a potential housing market correction.
Ontario posted a relatively strong job gain of 76,400 net new jobs in 2016, as the unemployment rate declined to 6.5 per cent. However, looking beyond the headline results reveals a labour market that is undergoing both structural and behavioural changes as well as continuing challenges for some workers.
The annual deficit is a headline number in the Provincial budget and Public Accounts, as well as in the Financial Accountability Officer’s own Economic and Fiscal Outlook. However, this number is not a cash concept. Rather, it is based on accrual accounting. This commentary reviews the importance of understanding cash flow and how the different sources and uses of Provincial cash have changed over time.
Based on the FAO’s analysis of the Government’s 2016 Economic Outlook and Fiscal Review, the Province’s plan to balance the budget continues to rely on optimistic assumptions for revenue growth and program spending restraint.
Home energy spending, how much Ontarians pay to heat and cool their homes and power their appliances, is a frequent topic of debate in Ontario’s Legislative Assembly. Average household spending on home energy varies significantly by region. Households in Toronto and Hamilton-Niagara spend the least, while households in Northern Ontario on average spend the most. Household home energy spending in Ontario rises with income, but is a greater burden for lower income households. In 2014 households in the bottom 20% of the income distribution spent on average 5.9% of income on home energy, while those in the top 20% spent only 1.7% of their much larger incomes. A variety of provincial programs exists to assist households with paying for home energy.
The funding that the Government of Ontario provides for postsecondary education (PSE) doubled between 1998-99 and 2014-15, from $3.1billion in 1998-99 to $6.3 billion in 2014-15. However, Provincial funding has declined as a share of the revenue of PSE institutions, as a result of relatively stronger growth in revenues from tuition, fees and other private sources.
Universities receive the largest share of the funding to the PSE sector. That share has declined over the last decade, from 65 per cent in 2005-06 to 59 per cent in 2014-15. On the other hand, the share of Provincial funding that goes to colleges and students has increased over this period. Despite the considerable increase in Provincial PSE funding, funding per student only increased by 31 per cent between 1998-99 and 2014-15, reflecting a growing number of students.
Ontario’s international trade performance in 2016 is particularly important, since most forecasters expect exports will be a primary driver of Ontario’s economic growth.
In current dollars, Ontario exports have grown strongly so far in 2016, rising 10%, compared to the same period in 2015. However, real exports – a better indicator of the actual economic activity related to exports – declined 5.4% in the second quarter — the largest quarterly drop since the 2008-2009 recession.
The relative weakness of real exports over the first half of 2016 suggests that Ontario exports are not responding as strongly as hoped to the favourable economic conditions provided by the lower dollar and a growing U.S. economy.
Home energy costs, the costs Ontarians pay to heat and cool their homes and power their appliances, are a pocket-book issue for Ontarians and a frequent topic of debate in Ontario’s Legislative Assembly. Ontario home energy costs are higher than in Quebec, Manitoba, and British Columbia, but lower than in Atlantic Canada and Alberta. The share of after-tax income spent by Ontarians on home energy costs is similar to shares in Quebec and Manitoba, significantly less than in Atlantic Canada, but higher than in Alberta and British Columbia. From 2010 to 2014, Ontarians experienced average increases in home energy costs relative to residents of other provinces.
The Financial Accountability Office of Ontario (FAO) expects the Province’s net debt to rise by over $50 billion by 2020-21 to $350 billion. Understanding the nature of the risks of debt to the Province’s fiscal plan can help Members of Provincial Parliament in assessing any debt management and/or reduction strategy.
The Province’s debt burden is one of the highest among provincial governments in Canada. Ontario’s net debt increased significantly during the 2008-09 recession, and grew by $139 billion between 2007-08 and 2015-16. Ontario’s liabilities include non-market and market debt, which consists mainly of publicly held bonds, treasury bills, and US commercial paper issued in Canadian dollars and foreign currencies. Given the characteristics of Ontario’s debt (composition, interest rates, when it is due to be repaid and currency in which it is issued), interest rate risk is the most important risk associated with the Province’s debt. There is uncertainty surrounding the future level of interest rates due to market fluctuations and Ontario’s credit risk. All else equal, an increase in interest rates would lead to higher interest payments, which would reduce the Province’s fiscal flexibility.
The fiscal position of the provincial and local governments in Ontario has deteriorated compared to other provinces since the global recession in 2008-2009.
Statistics Canada’s recent survey of investment intentions revealed that total investment by Ontario businesses and public sector institutions is expected to edge down by 0.1% to $69.5 billion in 2016. This follows two strong consecutive increases of 11.5% and 9.6% in 2014 and 2015.
Ontario’s 2016 Budget reaffirmed the government’s commitment to eliminate the budget deficit by 2017-18, and to maintain a balanced budget going forward. The Province’s plan continues to rely on relatively optimistic assumptions for revenue growth combined with aggressive plans to limit the growth in program spending. Maintaining balanced budgets beyond 2017-18 will likely prove challenging as new spending pressures emerge and revenue growth remains moderate.
On February 5, Statistics Canada released international merchandise trade data for December 2015, which included annual Ontario exports and imports by trade category and country. According to Statistics Canada’s report, Ontario finished 2015 with a seemingly strong 10.5% increase in the value of its international exports, which followed an equally strong 8.0% gain in 2014.