How much will all the ‘freebies’ in Wynne’s budget cost? Brace yourself, Ontario

One of the great fiscal miracles of the decade since the 2008 recession was the low interest rate the Ontario government was able to maintain on its debt. Despite yawning deficits for most of the last decade, interest expenses as a share of spending barely budged. And the Wynne government’s provincial budget, tabled Wednesday, promises yet more “free” government-funded services for many, including subsidized prescription drugs and day care. The problem with “free” government giveaways is that the bill eventually comes due. It’s about to come due for Ontario.

Interest expenses are set to increase by over $2 billion from 2021 relative to the last fiscal year. If debt costs take up a larger share of total revenues, that leaves less room for other priorities. Let’s put that $2 billion in perspective. It will take all the province’s tax revenues from alcohol and tobacco just to cover the expected increase in interest expenses over the next few years. Similarly, the province’s expected revenues from the cap-and-trade carbon-control program are about how much interest expenses are set to grow. That $2 billion is also the entire budget of the provincial Ministry of the Attorney General.

Interest expenses are set to be the second-fastest-growing type of expense, besides children’s and social services. The projected annual 5.1-per-cent interest-expense increase will outstrip health-care expense growth.

The budget came clean about the interest-expense cost looming over the next few years, which is exactly what the independent Fiscal Accountability Officer (FAO) of Ontario had forecast in a recent report. With deficits set to continue past 2021, the interest bill is set to rise further. If the FAO’s other long-term predictions about future interest costs come true, Ontario will be in deep trouble.

The FAO projects that if the government doesn’t tackle the long-term fiscal challenges, the cost of debt will take up an enormous share of total government revenues. Interest costs currently sit at between eight and nine per cent of revenues. At current trends, Ontario’s interest costs will increase to a staggering 22 per cent of revenues in 2050–51. That leaves practically no fiscal room in the event of a sustained increase in interest rates beyond projected levels, or a nasty fiscal surprise.

Without a doubt, the looming future health-care liabilities for the provincial government are the largest fiscal threat and driver of new debt. As Ontarians age, the bill for the expenses they’ll incur on health care comes closer every year. One estimate pegs the total healthcare liability at over $1.4 trillion in Ontario.

Piling on additional demographically-driven expenses will worsen this problem. One budget promise that is very likely to have a steep economic cost is the plan to make drugs free for seniors. The Ontario Drug Benefit (ODB), before being expanded to include free drugs for all seniors, was already forecast to cost around two per cent of provincial GDP by 2030 and about 3.5 per cent of GDP by 2050.

Currently, the ODB covers prescription-drug costs for those aged 65 and over. The ODB costs $5.4 billion after including co-payments and deductibles that seniors were paying themselves. Starting in August 2019, seniors will be eligible for completely free approved medications, as is already the case for those under age 25, as announced in last year’s budget. Age cut-offs are arbitrary. Why would someone 65 years of age be more deserving of public support than someone who is 64, or someone who is 24 more worthy than 25?

Age-based criteria don’t address the core drug-cost problem: Most of those without sufficient coverage are either self-employed or in low-wage occupations without drug benefits. Granted the government plans on expanding drug coverage to include people of all ages without private drug plans. However, the program doesn’t appear to be income-tested. The net result will be a costly government program that doesn’t target those people who are most need of government support. A more fiscally responsible approach would have been to ensure that drug costs do not make up more than, say, four per cent of a person or family’s income — no matter their age — in case of a catastrophic need.

This budget’s spending spree will leave future Ontarians crippled with debt and bills to pay. Everything free has a cost. And that cost will be on future taxpayers.

Benjamin Dachis is associate director of research at the C.D. Howe Institute and author of the C.D. Howe Institute Commentary, Fiscal Soundness and Economic Growth: An Economic Program for Ontario.