Question

The formula we use to evaluate government debt situation is Debt as a percentage of GDP. Canada's federal debt as a percentage of GDP was about 35% in 2018. This percentage does not include any provincial debts. Please research about Ontario's debt situation and compare that with Canada. Evaluate the debt situations for both Canada and Ontario and make comments on them. If you were the policy makers, what course of actions would you recommend on the debt situations in Canada and Ontario? Why?

Answer 1

Ontario is the fourth largest province of Canada and famous for its manufacturing industries. However, compared to other 13 provinces of Canada, Ontario is however deficient in mineral resources and receives lesser funds from the Federal government. The Ontario government spends around $9829 on the average on its development programs which is lowest than other provinces. The overall debt amount of the Ontario government in 2018-19 is projected at $325 billion which means on the average $22500 debt per person living in Ontario. The financial accountability office projects total debt of Ontario to touch $360.1 billion by 2020-21. The world renowned credit rating agency analyzed the debt position of Ontario and other provinces of Canada and found that the debt owed by the provincial governments consists of money borrowed from foreign institutions, commercial banks and government agencies. The increase in debt amount of Ontario government is due to interest payments that accumulates with the government debts. In 2017-18, the total interest payment of the Ontario provincial government accounted for 8.3% of its gross revenue. The current credit ranking of Ontario is AA2 as per Moody's analysis and other provinces holding the same credit rankings are Quebec, Nova Scotia, New Brunswick, Alberta, Prince Edward Island and Manitoba. The current credit rating of Ontario indicates that the province has still high potential of revenue generation and the main reason of Ontario's mounting debt is the sky rocketing loan interest rates.

The total debt of the Federal Government of Canada was $901.8 billion in 2017-18, which accounted for 53.4% of the GDP of Canada. The debt amount of the federal government include borrowings from foreign investors, commercial banks and foreign governments. Most of the borrowings of the Federal government is for the infrastructure development, technological innovation, exploration of mineral resources and healthcare facilities. Canada follows the economic policies of its neighborhood especially United States. There was recent tax sops announced by the Trump administration in United States and that also forced Government of Canada to provide certain tax rebates to its people. This has reduced the overall revenue of the Federal government of Canada.

According to rules of the Federal government of Canada, provinces that are rich in mineral resources receive lower grants and aids from the federal government than provinces deficient in mineral resources. Ontario receives high tax revenues from manufacturing and service industries but receives low royalties from mineral resources and grants from federal government. But other mineral deficient provinces such as New Brunswick, Prince Edward Island and Nova Scotia receives highest Federal grants under Equalization program.

As a policy maker, I would have first changed the rule for transfer of Federal grants to provinces. Because in spite of mineral deficient province, Ontario receives lowest federal grants because of its high tax revenue. Next, the Federal government should not blindly imitate the policies of the neighboring country. Foreign trade of a country is obviously affected with the policy changes abroad but that does not affect largely the resource mobilization, capital investment and other public activities in a home country i.e., Canada.