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.
Ontario’s debt is rated by four principal international credit rating agencies, which typically publish an annual update of their view of the province’s finances and the quality of Ontario’s debt.
Following the tabling of Ontario’s 2016 Budget, each of the four rating agencies affirmed their current rating of Ontario’s debt, indicating that they believe the province has taken adequate steps on both revenues and expenditures to achieve its plan to restore fiscal balance by 2017-18.
However, if Ontario’s fiscal position deteriorates beyond 2017-18, either through an easing of expenditure restraint or unexpected revenue weakness, the agencies could be expected to lower Ontario’s credit rating, which could lead to higher borrowing costs and a more challenging fiscal position.
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.
The FAO’s Economic and Fiscal Outlook is released each spring and fall, providing an assessment of Ontario’s medium-term economic and fiscal outlook.
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.
This report is the FAO’s first review of the current economic outlook and the state of the provincial government’s finances.