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Provinces copying Ottawa's high-risk budget strategy at risk of missing balanced budget targets; time to reclaim fiscal austerity of the 1990s and cut program spending

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Release Date: November 15, 2011
VANCOUVER, BC—Most provincial governments are poised to make the same budget mistake as Ottawa: relying on rosy revenue projections while attempting to slow the growth in spending, says a new book from the Fraser Institute, Canada’s leading public policy think-tank.

The federal government’s recent budget update confirmed that the Conservative government now doesn’t expect to balance the budget until 2015/16, a year later than originally anticipated.

“The federal government pinned its hopes on robust revenue growth averaging 5.6 per cent per year while planning to hold program spending increases to an average rate of two per cent. This is a plan fraught with risk,” said Niels Veldhuis, Fraser Institute vice-president of Canadian policy research and co-author of the new book Learning from the Past: How Canadian Fiscal Policies of the 1990s Can Be Applied Today.

“Unfortunately, most provincial governments are following the same high-risk plan as Ottawa with the likelihood that they will also fail to meet their targets for balancing their budgets.”

Learning from the Past: How Canadian Fiscal Policies of the 1990s Can Be Applied Today provides a historical overview that highlights how Canada’s federal government, as well as various provincial governments in the 1980s, attempted to slow the growth in program spending and wait for revenues to rebound strongly enough to close the gap between spending and resources. But it wasn’t until the spending reductions of the 1990s that both the federal government and the provinces returned to fiscal balance and achieved declining debt and interest costs.

The book singles out Ontario and Quebec, Canada’s two largest provinces, as facing among the most serious debt and deficit problems.

Ontario’s deficit of $16.3 billion, or 2.6 per cent of provincial GDP, represents almost 64 per cent of the total deficit of all the provinces combined in 2011/2012. The province’s debt has increased by 25 per cent in just three years and now represents almost half of the entire stock of provincial debt in the country. And while all the other provinces expect to reach a balanced budget either in 2013/14 or 2014/15, Ontario does not plan to balance its budget until 2017/18.

What’s more, Ontario’s current balanced budget plan relies on revenues growing faster (4.3 per cent) than program spending (1.4 per cent).

“Ontario’s plan to balance its budget is filled with risk. As we have seen at the federal level, any deviation in revenues or spending will result in larger immediate deficits and an even greater level of debt,” Veldhuis said.

“The policy implication for Ontario is clear. A tough but realistic plan to reduce and reform spending must be implemented immediately with a specific, perhaps even sole goal of reaching a balanced budget by 2014/15.”

The book suggests Ontario should look at its own experience in the 1990s and that of other reform-minded provinces such as Saskatchewan and Alberta, as well as British Columbia in the early 2000s, to glean solutions to the province’s serious spending problems.

Quebec also comes under significant criticism, with the book calling Quebec’s long-term fiscal position the worst in the country.

“Quebec’s debt represents more than 50 per cent of GDP, far and away the largest burden of provincial debt in Canada. Quebec needs to balance its budget and, more importantly, begin to reduce the burden of the province’s debt as a share of the provincial economy,” Veldhuis said.

The book notes that Quebec’s provincial debt is expected to reach $166.1 billion, a 10.7 per cent increase since 2009/10. The province’s deficit alone is nearly $3.8 billion, or 1.2 per cent of provincial GDP.

“Like Ontario, Quebec needs to re-embrace the fiscal austerity that helped put the province back on track nearly 20 years ago,” Veldhuis said.

The book also details the debt and deficit problems facing the other provinces but singles out Saskatchewan for praise, as it is the only province currently showing a balanced budget.

“Saskatchewan is in a unique and enviable position and should expect surplus budgets in the future. The challenge for Saskatchewan’s government is to avoid complacency or backtracking on policies that helped it create its current sound fiscal footing,” Veldhuis said.

While Alberta appears to be in one of the strongest positions amongst the provinces, being the only province without any provincial debt, the book points out this masks a fairly serious financial imbalance as Alberta’s deficit is expected to reach $3.4 billion this year with the expectation that it will remain in deficit until 2013/14. The province’s risky plan to eliminate the deficit assumes revenues will grow by more than seven per cent while spending will be limited to a 1.5 per cent increase.

Moreover, the marked draw-down of Alberta’s reserves, or asset accounts, should be cause for great concern. Since peaking in 2009/10 at nearly $15.0 billion, the province’s Sustainability Fund is expected to have fallen to approximately $5.3 billion in 2011/12, a decrease of 64.7 per cent in two years. It is expected to further decline to $1.7 billion by 2013/14, a decrease of 88.6 per cent.

“Alberta must move swiftly not only to achieve a balanced budget but also to restore the reserve accounts,” Veldhuis said.

The book concludes that politicians, policy-makers, and all Canadians need to learn from the successful lessons of the 1990s when governments of all political parties and ideologies from across the country rejected the failed policies of trying to slow growth in spending while hoping revenues would rebound sufficiently to balance their financial affairs.

Political leaders such as Saskatchewan Premier Roy Romanow, Alberta Premier Ralph Klein, Ontario Premier Michael Harris, and a number of their provincial and federal colleagues implemented purposeful programs to address deficits. These programs varied by government but all included direct reductions in program spending. Additionally, all the provinces made some cuts to the public sector as part of larger program of spending reductions. The results were stunning: provinces returned to fiscal balance and enjoyed declining debt, lower interest costs, and a more prosperous economy.


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