The province of Ontario was warned last week that its credit rating may soon be downgraded.  This is a BIG deal.  It could result in a lot more of our hard-earned taxpayer dollars being spent on paying debt interest.  Is this what you want your tax dollars spent on?

Three key factors determine how much taxpayer money is spent on paying interest on government debt:

FACTOR 1: The size of the debt.  The larger the debt, the more we spend in absolute dollars on interest.  The Canadian federal debt is around $620 billion; the Ontario provincial debt is close to $300 billion; and Guelph’s debt is almost $100 million.  The good news is that the Conservative Government will start reducing the federal debt next year.  The bad news is that the Ontario and City of Guelph debts will keep growing because these governments plan to spend more than they collect in taxes over the next couple of years.

FACTOR 2: The interest rates charged by the organizations that hold these debts.  These debts are generally financed by international and domestic bondholders.  The good news is that they are currently charging very low interest rates (around 1%) for top-rated borrowers. The bad news is that financial experts expect this rate to increase another full percentage point for all borrowers by the end of 2015.

FACTOR 3: Long-term credit ratings.  All 3 of the major rating agencies (Standard & Poor, Moody’s and Fitch) set AAA as their highest rating.  The higher the credit rating for a given borrower, the lower the interest rate they pay.  The good news is that the Government of Canada has the highest rating, AAA, and will likely remain there for the foreseeable future.   The bad news is that the province of Ontario’s rating is much lower at AA- and may be downgraded to A+ soon due to its growing debt and poor fiscal policies.  Guelph’s rating is also lower, but was upgraded slightly from AA to AA+ in 2013.

Guelph residents face a grim picture for the next few years:  higher spending by our provincial and municipal governments, higher interest rates for all three levels of government, and a credit rating downgrade for Ontario.  Higher interest payments are GUARANTEED!

How much higher will they be? Dr. Jack Mintz, the renowned Canadian economist, estimates that each additional point increase in Ontario’s interest rate will add another $3-billion ANNUALLY in interest cost on the province’s gross debt.  That means we’re probably looking at another $6.2 billion ANNUALLY at the federal level and another $10 million ANNUALLY at the municipal level.

What’s the easy way for governments to raise the money to pay for these extra interest costs?  Take your pick – (a) raise taxes, (b) take on more debt, or (c) use some combination of a and b.   However, there’s an option that requires more effort but is more effective in the long run – we need to avoid extra interest costs by reducing debt.  How?  There are at least two ways: (a) eliminate unnecessary government spending and (b) operate government more efficiently. 

ANY way you look at it, our governments have to get serious about debt reduction now.   Most taxpayers don’t want to see their tax dollars given away to international and domestic bondholders to cover higher interest charges.  Furthermore, as Jim Flaherty suggested in his last federal budget (2014), debt reduction has numerous benefits for both current and future generations.  He wrote:

“Balancing the budget and reducing debt will:
• Ensure taxpayer dollars are used to support important social services—such as health care—rather than paying interest costs.
• Preserve Canada’s low-tax plan and allow for further tax reductions, fostering growth and the creation of jobs for the benefit of all Canadians.
• Help to keep interest rates low, instilling confidence in consumers and investors, whose dollars spur economic growth and job creation.
• Strengthen the country’s ability to respond to longer-term challenges, such as population aging and unexpected global economic shocks.
• Signal that public services are sustainable over the long run and ensure fairness and equity for future generations by avoiding future tax increases or reductions in services.”

Debt reduction – it’s the best and most sustainable way to go.  Our governments need to make it a priority NOW!