A recent report by the Fraser Institute comparing California and Ontario’s debt rate has some advisors weighing in on how to better protect clients.
The report, released Tuesday, indicates that although California is known for “irresponsible government spending coupled with poor cash management,” Ontario stands on far shakier ground in terms of debt burden.
According to the report, when looking specifically at government-issued bonds, California carries US$144.8 billion (based on the most recent data) worth of debt, while
Ontario holds almost double that amount at CAD$267.5 billion. Meanwhile, relative to economic size, the gross debt in the form of bonds is 7.6 per cent of California’s economy, while it is 40.9 per cent of Ontario’s economy.
Furthermore, each Ontarian owes an average of CDN$20,166 (or five times the per capita level of debt) compared to US$3,844 for each Californian. In terms of interest rates, 9.2 per cent of Ontario’s budget revenues are devoted to interest payments compared to 2.8 per cent in California.
“I always find it interesting because Ontario is well-rated. Overall, people would feel very comfortable depositing in an Ontario bond; a credit union for example,” said Toronto advisor, Chris Rugel of Rugel Asset Management. “But I don’t think that is reflective of reality. I think Ontario’s budget is not in line with where it should be. I think it probably merits a closer look from the rating agency but it becomes a political issue.”
Rugel says investors have a false sense of security, often seeing Ontario’s economic situation through rose-coloured glasses due to how governments spin the state of the economy.
“It does make it challenging in that you have to educate investors more because there is a perception of infallibility from the provincial government, or the federal government,” he says. “This sentiment that it will never fail ... the truth is, though we are not close to going bankrupt, it’s not the case that the Ontario government could never go bankrupt, especially if we don’t keep an eye on financing. It could definitely spiral out of control.”
Toronto advisor, Brian Weatherdon of Sovereign Wealth Management, sees Ontario’s debt burden through a slightly different lens. Weatherdon points to the plaguing issue of an aging population, which is predicated to have a severe impact on nations across the globe within the next decade. (continued.)