Chapter 4: Borrowing and Debt Management

Introduction

The Province conducts its borrowing program responsibly, respecting the people and businesses of Ontario by prudently managing interest on debt (IOD) costs. The interim outlook for the Province’s total funding requirement in 2018–19 is $3.5 billion less than anticipated in the 2018 Ontario Economic Outlook and Fiscal Review (2018 Fall Economic Statement or FES), primarily reflecting a $2.8 billion improvement in the projected 2018–19 deficit to $11.7 billion.

The Province completed $39.6 billion in long-term borrowing in 2018–19. That is a larger amount than any of the annual borrowing programs over the medium-term outlook, including in 2019–20 where the borrowing program is forecast to be $3.6 billion lower at $36.0 billion. As the deficit is reduced, a growing portion of borrowing will be used to refinance maturing debt, rather than finance new debt.

Building on the Independent Financial Commission of Inquiry’s (Commission) recommendations and taking into account new information, as well as government actions and decisions to date, the government is now projecting declining deficits over the medium-term starting with a $10.3 billion deficit in 2019–20 which is forecast to go down to $5.6 billion by 2021–22. Net debt-to-GDP is forecast to be 40.7 per cent in 2019–20, lower than the Commission’s revised baseline for 2018–19, before decreasing to 40.6 per cent by 2021–22.

Recognizing the need for meaningful action to address the debt problem, the government is moving forward with a debt burden reduction strategy. Balancing the budget and managing the Province’s debt burden are not ends in themselves. They are the only way to ensure Ontario’s hospitals, schools and other key public services have the sustainable funding they need for generations to come. This strategy follows the recommendations of the Commission, as well as the government’s commitment made in the 2018 Fall Economic Statement to address the Province’s debt burden. Through the implementation of the debt burden reduction strategy, the government is clearly setting out its intent to have Ontario’s net debt-to-GDP ratio reach more sustainable levels and be lower than the Commission’s forecast for 2018–19 of 40.8 per cent. See Chapter 1, Section A: Restoring Fiscal Balance in a Responsible and Sustainable Manner, for more details on Ontario’s debt burden reduction strategy.

Long-Term Public Borrowing

The Province continues to conduct its borrowing program responsibly, respecting the people and businesses of Ontario, through prudent management of the cost of borrowing. The interim outlook for the Province’s total funding requirement in 2018–19 is $3.5 billion less than the forecast in the 2018 Fall Economic Statement. The Province’s 2018–19 long-term borrowing program was $39.6 billion.

The projected annual borrowing programs in the medium-term outlook are all lower than the completed 2018–19 borrowing program with forecasts of $36.0 billion in 2019–20, $32.8 billion in 2020–21, and $31.5 billion in 2021–22. Over this period, the Province’s total long-term borrowing will primarily be used to refinance maturing debt. The Province is also modestly increasing short‑term borrowing over the outlook period to keep the proportion of short-term debt to total debt outstanding in the middle of the six to eight per cent range that has been maintained over the last decade.

The government will seek approval from the Legislature for borrowing authority to meet the Province’s requirements.

Approximately 77 per cent of 2018–19’s borrowing was completed in Canadian dollars, largely through syndicated issues, but also floating rate notes and a new Green Bond issue. This percentage is well above the Province’s target for Canadian dollar borrowing to be approximately 70 per cent of total borrowing for the fiscal year, but in line with the 78 per cent of borrowing in Canadian dollars completed at the time of the 2018 Fall Economic Statement.

The government continues to search for efficiencies in the borrowing program. Therefore, the Province has discontinued sales of Ontario Savings Bonds due to low sales and high administrative costs. Despite the discontinuation of future sales, all outstanding bonds continue to be safe and guaranteed, and the Province will honour these bonds until the time of redemption or maturity. Winding down the Ontario Savings Bonds program is one way the government is rethinking its programs to deliver value for money and protect the services that matter most to the people of Ontario.

The Province will continue to regularly borrow in currencies other than the Canadian dollar to diversify its investor base. This helps reduce Ontario’s overall borrowing costs and ensures the Province will continue to have access to capital if domestic market conditions become more challenging. The Province will be revising its target for Canadian dollar borrowing to be a range, rather than a fixed point, to recognize that market conditions change rapidly and the Province needs to continue to be flexible in its approach to borrowing to minimize interest on debt costs. For 2019–20, that range will be set at 70 to 80 per cent of total borrowing.

As committed to in the 2018 Fall Economic Statement, the Province has updated the Green Bond program to support the government’s approach to addressing environmental challenges. Green Bonds are an important tool to help finance public transit initiatives, extreme weather resistant infrastructure and energy efficiency and conservation projects.

On January 31, 2019, the Province issued its fifth Green Bond for $950 million. Ontario is currently the largest issuer of Canadian dollar Green Bonds, with five issues totalling $4.0 billion issued and $3.5 billion currently outstanding. The Province plans to issue its next Green Bond in 2019–20.

Net Debt

In 2018–19, the net debt-to-GDP ratio is projected to be 40.2 per cent, or 0.3 percentage points lower than the 40.5 per cent forecast in the 2018 Fall Economic Statement and 0.6 percentage points lower than the Commission’s forecast.¹ However, it is 2.6 percentage points higher than was forecast in the 2018 Ontario Budget primarily due to an increase in the deficit resulting from the Commission’s findings on revising the previous government’s accounting treatment of global adjustment refinancing and jointly sponsored pension plans (JSPPs). The revised accounting treatment for JSPPs includes the impact of adopting the accounting treatment on a retroactive basis from 2001–02 onward, which added a cumulative $14.6 billion to net debt. There is no impact on the Province’s borrowing requirements, either going forward or looking back to 2001–02, from this accounting change.

Building on the Commission’s recommendations and taking into account new information, as well as government actions and decisions to date, the government is projecting declining deficits over the medium-term of $10.3 billion in 2019–20, $6.8 billion in 2020–21, and $5.6 billion in 2021–22. Net debt-to-GDP is forecast at 40.7 per cent in 2019–20, lower than the Commission’s revised baseline for 2018–19, before decreasing over the medium-term outlook.

A key feature of the new proposed Fiscal Sustainability, Transparency and Accountability Act, 2019 (FSTAA) is strengthening government requirements related to setting out goals and plans for reducing the Province’s debt burden. It would require the government to report annually in the Budget on the progress made in relation to the debt burden reduction strategy. The government is already meeting these requirements, even before the legislation is enacted, by clearly setting out its intent to have Ontario’s net debt-to-GDP ratio reach more sustainable levels and be lower than the Commission’s forecast for 2018–19 of 40.8 per cent. The government is actively pursuing a debt burden reduction approach to public finance to improve the fiscal position of the Province and lower the debt burden. See Chapter 1, Section A: Restoring Fiscal Balance in a Responsible and Sustainable Manner for more details on Ontario’s debt burden reduction strategy.

When compared with the other Provinces, Ontario had the second highest net debt-to-GDP ratio in Canada in 2018–19.

Net debt per capita has increased from $13,162 per person or $52,648 per family of four, at the beginning of the 2008–09 global economic downturn to a projected $23,979 per person, or $95,912 per family of four in 2018–19. This rate of increase per person was 4.4 per cent per year greater than Ontario’s inflation rate over the same period. The population in the core working ages of 25 to 64 years makes up the majority of taxpayers in Ontario. At $44,246 per person, the debt burden per person for these Ontarians is even greater.

Compared with the other provinces, Ontario had the second highest net debt per capita in Canada, after Newfoundland and Labrador. Ontario continues to have the highest subnational debt of any jurisdiction in the world.

Cost of Debt

The global decline in interest rates over the last 25 years showed signs of reversing last year.  This 25 year decline has meant that interest on debt has not risen as quickly as the Province’s debt, especially over the last 10 years, in spite of the Province’s debt load more than doubling over that period. However, with interest rates now potentially rising, the Province faces higher interest on debt (IOD) costs going forward. Chart 4.7 shows the effective interest rate that the Province is paying on its total debt portfolio of over one-third of a trillion dollars; after declining for a quarter century, these rates are forecast to rise.

The interest rates that the Province must pay on new or refinanced debt issued every year have been rising for the past two years. As shown in Chart 4.8, which shows historical borrowing rates and the forecast used to estimate future IOD, the average interest cost for 2018–19 has increased by about three-quarters of a percentage point since the low point in 2016–17, reinforcing the need for the debt burden reduction strategy.

An additional one percentage point increase in interest rates above forecast would add an additional $350 million in interest costs in the first full year. To protect the Province from this increase in interest rates, the government has extended the term of its debt to lower the amount that must be refinanced every year. Going back to the beginning of 2010–11, to lock in low rates, Ontario has issued $80.1 billion of bonds longer than 30 years, or approximately one-quarter of total debt, including $9.6 billion in 2018–19.

As a result, the average term of Ontario’s debt portfolio has been extended, from 9.7 years in 2009–10 to 10.6 years in 2018–19. The Province monitors interest rates daily. It continually assesses and determines, based on demand for its debt and how high interest rates rise across the yield curve, whether it remains cost-effective to continue to extend the term of its debt. The Province currently plans to continue to keep the average term of its debt in the same extended range that it has been over the past five years.

A high level of debt crowds out other government priorities and is unfair to future generations. It also limits the Province’s flexibility in responding to economic downturns. This is why the government is taking action to manage Ontario’s debt load. Since the 2018 Fall Economic Statement, the government has reduced the projected deficit for 2018–19 by $2.8 billion to $11.7 billion. This is a $3.3 billion improvement from the inherited $15.0 billion baseline deficit forecast identified by the Commission.

The government remains committed to reducing the Province’s net debt-to-GDP ratio to a sustainable level by implementing the new debt burden reduction strategy. The government is clearly setting out its intent to have Ontario’s net debt-to-GDP ratio reach more sustainable levels and be lower than the Commission’s forecast for 2018–19 of 40.8 per cent.  See Chapter 1, Section A: Restoring Fiscal Balance in a Responsible and Sustainable Manner for more details on Ontario’s debt burden reduction strategy.

While net debt-to-GDP is the primary measure of sustainability of the debt burden the Province faces, another ratio that measures the affordability of debt is the IOD-to-revenue ratio. It represents how much the Province needs to spend on interest for every revenue dollar received. The current forecast is 8.6 cents of interest cost for every dollar of revenue in 2019–20. This means that the Province is spending 8.6 cents of every dollar it receives to pay interest, instead of using this revenue to provide essential services to the people of Ontario, or to lower taxes.

The government is committed to transparency with respect to reporting on measures of debt affordability. This includes updating the public on the amount of every dollar the government receives that goes towards interest to service the Province’s debt load, or the IOD-to-revenue ratio.

Ensuring Adequate Liquidity Levels

Coming out of the financial crisis, the Province created large, liquid 10- and 30-year benchmark domestic bond issues in 2009–10 in response to investor demand. This lowered Ontario’s borrowing costs while enhancing the Province’s access to capital. However, as a result of these large bond issues, the Province will have large cash outflows on single days commencing in 2019–20, rather than having maturities spread more evenly throughout the year. In anticipation of the need for cash reserves to meet these requirements for large outflows on a single day, the Province has built larger cash reserves, as noted in Chart 4.11.

The Province’s short-term borrowing program in the Canadian and U.S. dollar money markets is relatively small, accounting for only six per cent of Ontario’s debt. This is at the lower end of the six to eight per cent range it has been at over the last 10 years. The unused short-term borrowing capacity that this provides, combined with high levels of unrestricted liquid reserves, ensures the Province will always have adequate liquidity to meet its financial obligations.

Consolidated Financial Tables

Footnotes

• [1] To ensure consistency and comparability of numbers between the current outlook, the Commission’s baseline forecast and prior year results, the Commission’s Net Debt as a Per Cent of GDP estimate was revised from 40.5 per cent to 40.8 per cent in the 2018 Fall Economic Statement.