Much of the establishment media has failed to point out that debt can seem sustainable one moment, and then turn into a disastrous debt spiral the next, meaning it needs to be dealt with before it gets to that point.
The Ford Government in Ontario has taken a lot of heat for their reductions to spending in certain areas.
While a recent poll showed 52% of Ontarians supporting cuts to spending, that poll also showed the PCs losing support, and falling into a three-way tie with the provincial Liberal and NDP parties.
However, in the coverage of the spending cuts, one thing often gets left out:
Debt can seem sustainable one moment, and then turn into a disastrous debt spiral the next.
For example, many of the big US banks were immensely leveraged, yet seemed to be in great shape. Then, when confidence collapsed, those seemingly ‘sustainable’ banks were insolvent, with some of them simply going bankrupt and collapsing, while others were bailed out.
Ontario – with the largest sub-sovereign debt in the world – could face a similar disaster situation. In the event of a serious recession or financial crisis, the province could see their debt costs skyrocket, and their ability to get new debt evaporate.
The province would be forced to massively cut spending across the board to service the debt, which would cause a further economic contraction – making any impact of a recession even worse.
Then, as seen in places like Illinois, the combination of massive debt-caused spending cuts and tax hikes causes people to flee the province, reducing overall revenue, which then leads to higher taxes on those still there, which lowers growth even further and makes the debt problem worse.
The alternative to that disaster is to make tough decisions while that opportunity still exists. By reducing the rate of spending growth, implementing targeted spending reductions, while ensuring the economy and population continues to grow, Ontario’s debt can be brought to a more reasonable level.
And that is a big part of why credit rating agencies (despite often being corrupted by big banks) are very influential. Their projections and predictions can impact the cost of debt and impact the availability of that debt.
So, the recent move by the Fitch Rating Agency to upgrade the ‘watch’ for Ontario’s debt is important, and helps give more credibility to the fiscal sanity being brought in under the Ford Government.
Here’s what the Ontario Government said in a statement:
“Today, the Fitch rating agency announced that they are moving the province from Negative watch to Stable and going to maintain our rating at AA-.
The steps our government has taken to start Ontario down the path to fiscal sustainability are starting to bear fruit. During a meeting with Fitch officials recently, we explained our five-year path to balance, our debt burden reduction strategy, and the initiatives we have already taken to control runaway spending. At the same time, our government is creating a climate that is open for business and open for jobs by lowering taxes, providing training programs that are more focused, and the elimination of unnecessary regulations and red tape. For these and other reasons, Fitch concluded that Ontario’s risk profile was “stronger”. This comes two days after DBRS confirmed the Province of Ontario at AA (low) with trends on all ratings at Stable. DBRS stated that “The ratings are supported by the Province’s diverse and growing economy, effective debt and liquidity management practices as well as the improving direction of fiscal policy.” They further added, “The change in fiscal policy is clearly positive from a credit perspective and there appears to be a genuine and credible commitment to addressing the Province’s budget imbalances and gradually reduce the debt burden.”
Spending cuts are never easy, and there is often a price to be paid in short-term popularity. But the moves being made by the Ford Government could very well prevent a much bigger disaster down the road.
Photo – YouTube