A Skeptical Review of Ontario’s 2023-24 Annual Report and Consolidated Financial Statements

Debt-to-GDP Ratio: Misleading Improvement

The Ontario 2023-24 Annual Report and Consolidated Financial Statements present a picture of fiscal prudence and improvement, with a focus on investments in infrastructure, healthcare, and education. However, a more skeptical examination reveals underlying concerns that may pose risks to the province’s long-term financial health and its ability to meet future obligations.

The report highlights an improvement in the net debt-to-GDP ratio to 37.3% from 38.1% in the previous year, positioning this as a sign of fiscal improvement. However, this calculation includes Canada Pension Plan (CPP) assets, which are not true assets available to the government. Rather, CPP represents a future liability that the government will need to address over time, particularly as the population ages.

By including the CPP in the calculation, the government artificially lowers the net debt figure, giving a distorted view of Ontario’s fiscal health. In reality, if CPP obligations were excluded, the debt-to-GDP ratio would be higher, suggesting Ontario is more heavily indebted than portrayed in the report.

Rising Debt Levels

While the net debt-to-GDP ratio appears to have improved, the absolute debt levels continue to grow at an alarming pace. Ontario’s total debt increased by $15.8 billion to $437.6 billion​(tbs-2023-24-annual-repo…). This is driven largely by infrastructure investments and operational costs. Though some of this debt is allocated towards long-term capital projects, a large portion of it reflects an operating deficit, suggesting that Ontario is borrowing to cover day-to-day expenses rather than just for future-focused investments.

Given rising interest rates, this debt will become more expensive to service, eating into the funds available for critical public services. The report boasts of reduced interest payments, but these reductions may only be temporary. Future increases in debt-servicing costs could force Ontario into difficult trade-offs between reducing services, raising taxes, or borrowing more.

Inflated Revenue Projections

The report cites an increase in total revenues of $13 billion from the previous year, with significant growth in taxation revenues, transfers from the federal government, and income from government business enterprises (GBEs)​(tbs-2023-24-annual-repo…). However, these increases may be overestimated, especially the revenues from corporate taxation. The report notes a decrease in corporations tax of $4.7 billion from the previous year​, yet future projections seem optimistic despite signs of economic volatility, including inflationary pressures, supply chain disruptions, and potential corporate profit declines.

This raises concerns about the sustainability of these revenue streams. Overreliance on volatile taxation and income from government businesses like the Liquor Control Board of Ontario (LCBO) or Ontario Power Generation (OPG) exposes the province to economic downturns that could drastically affect revenues in coming years.

Program Expenses: Outpacing Revenue Growth

The province has seen a $8.8 billion increase in program expenses, with healthcare, education, and social services being the largest drivers​(tbs-2023-24-annual-repo…). While investments in these areas are necessary, the rate at which expenses are rising—particularly in healthcare—poses risks. Ontario’s healthcare spending rose by 8.9%, largely due to increased compensation costs, operational hospital expenses, and expanding long-term care programs​(tbs-2023-24-annual-repo…). This pace of growth is unsustainable without corresponding revenue growth, and if economic conditions worsen, the province may face cuts to essential services.

Contingent Liabilities and Transparency Issues

The report discusses contingent liabilities such as Treaty rights, Aboriginal rights, and other claims against the Crown, which increased significantly in 2022-23​(tbs-2023-24-annual-repo…). These contingent liabilities may represent future financial obligations that could materialize without warning, further increasing debt and limiting Ontario’s fiscal flexibility.

Moreover, while the report provides a substantial amount of financial data, it leaves out key transparency issues. For instance, it does not adequately address the underfunding of future pension obligations, which could create significant financial strain in the future. Additionally, the inclusion of the CPP as an “asset” further raises concerns about the transparency and accuracy of the province’s financial reporting.

Reliance on Federal Transfers

Federal transfers account for 16.7% of total provincial revenue​(tbs-2023-24-annual-repo…), a significant portion. The report notes that these transfers have increased by 9.8%, but this revenue stream is largely beyond the province’s control and subject to changes in federal policy. As such, Ontario is vulnerable to any future federal budget cuts or shifts in funding priorities.

The reliance on external transfers further highlights the precarious nature of Ontario’s financial planning. If these transfers were to decrease, Ontario’s ability to maintain its current spending levels would be severely compromised, potentially leading to cuts in critical areas like healthcare and education.

Long-Term Infrastructure Investments: Future Burden?

Ontario is making historic investments in infrastructure, particularly in roads, transit, and healthcare facilities, with $23.6 billion allocated for infrastructure expenditures in 2023-24​(tbs-2023-24-annual-repo…). While necessary, these investments will add significantly to the province’s long-term liabilities, and the benefits may not be realized for years. There’s a risk that these projects, while well-intentioned, could face cost overruns, delays, or inefficiencies, adding further strain to the province’s finances.

The decision to rely on public-private partnerships (P3s) for many of these projects could also introduce new risks, as cost overruns or failures on the part of private partners could leave the province liable for additional expenses.

Final Thoughts

While Ontario’s 2023-24 Annual Report paints a picture of responsible fiscal management, a deeper, more skeptical look reveals several areas of concern. The inclusion of CPP assets in net debt calculations, rising program costs, inflated revenue projections, growing debt, and reliance on federal transfers all point to a potentially precarious financial future. Without significant adjustments in spending, more realistic revenue assumptions, and increased transparency, Ontario could face fiscal challenges that undermine its ability to deliver essential services in the coming years.