Provincial finances go topsy-turvy from Ontario to B.C.
Recently, RBC Economics published a report about the impact of COVID-19 on provincial finances, which contained bad news for everybody, forecasting budget deficits in all 10 provinces totalling $63.1 billion—a tenfold increase over last year.
A closer look at the report, however, reveals some remarkable changes among provinces. Simply put, provinces that used to have some of the strongest government finances in Canada are now in deeper trouble than provinces that once had reputations for poor fiscal management.
Let’s start by looking at the situation in Central Canada. At the turn of the century, Ontario was in better fiscal shape than neighbouring Quebec whose net financial debt (all liabilities minus financial assets) stood at 38.2 per cent. That was 8.7 percentage points higher than Ontario, at 28.3 per cent. This situation was the norm—the provincial government in Quebec had been consistently more indebted (relative to the size of its economy) than Ontario every year for decades.
But what a difference two decades can make. Now, according to the RBC report, Ontario is more indebted than Quebec, and will remain so post-pandemic. An even more recent report from Ontario’s Financial Accountability Office forecasts Ontario’s deficit will be larger—and its economic contraction worse—than the RBC report suggested. If these dire forecasts materialize, the indebtedness gap between Ontario and Quebec could grow further still—a situation that would have been unthinkable two decades ago.
In Western Canada, an equally remarkable inversion has taken place. In 2000, the Government of British Columbia was coming off a period of rapid debt accumulation. Saskatchewan was in the process of improving its balance sheet, but still held significant debt. By comparison, Alberta’s finances were in great shape—its financial assets actually exceeded its debts. This enviable situation was unique among Canadian provinces.
Now things are different. Thanks to three recessions in less than 15 years and an approach to fiscal management that has vacillated between complacency at best and profligacy at worst, according to the RBC report forecasts, Alberta’s debt burden is set to eclipse Saskatchewan and B.C.’s this year. Out west, like in Central Canada, the former fiscal leader is quickly becoming the regional laggard.
While bad luck for Alberta and Ontario has played a role, so too have policy decisions at the provincial legislatures in Toronto and Edmonton. Free spending in good times, and failures to adequately scale back spending in the wake of recent recessions, have substantially contributed to both provinces’ fiscal woes. Meanwhile, comparatively responsible fiscal management in B.C. during the 2000s and 2010s, and in Quebec in recent years, has allowed those two provinces to make fiscal progress.
In short, provincial finances have gone topsy-turvy. Alberta and Ontario are now in trouble, while Quebec, B.C. and Saskatchewan face challenges but have in recent years put themselves in a better position to weather the current storm. Once the COVID crisis passes, the governments in Ontario and Alberta must develop credible plans to get their fiscal houses in order, or else risk falling even further behind the former laggards of their respective regions.