Who, or What, Is to Blame for the Accumulation of Debt in Ontario and Quebec (And What Will It Take to Stop the Bleeding?)

Abstract

What is the main reason for government debt accumulation in Canada? Is the main driver of debt the public policy choices made by governments, or are non-policy factors, like interest rates and the economic environment to blame? Answering this question is the first step for governments burdened by high levels of government debt to introduce policies aimed at getting that debt under control.

The effort to curtail debts in the mid-1990s prompted research into the sources of debt accumulation. The goal of this research was to determine whether the cause of debt was a set of poor fiscal policy choices in the form of overly generous social programs and/or insufficient taxation, an overly tight monetary policy driving up interest costs on existing debt and slowing growth, or simply bad luck in the form of unavoidable world events. That research aspired to identify the sources of debt accumulation so those mistakes, once identified, might be avoided in the future.

This paper looks at Ontario and Quebec; two provinces with high and growing debt to GDP ratios and representing the two largest provincial economies in Canada. Introducing an original data set describing the finances of these governments over the period 1980-81 to 2011-12 and a new approach for identifying the causes of debt accumulation, this paper finds that the causes are disproportionate policy based. Finally, this paper offers a way out of debt for these governments. The solutions demand difficult policy choices; choices that will require a significantly heavier burden be borne by the citizens and taxpayers of Ontario than those in Quebec.

Keywords: Ontario debt, Quebec Debt, debt accumulation, provincial economics

JEL Classification: H60, H63