With fiscal catastrophes in Portugal, Ireland and Greece continuing to dominate headlines, one American strategist recently observed “the halo around Canada is sustainable for a while.” Yet that halo tarnishes once one considers the alarming fiscal trajectories of some provinces.
If you’re searching for Canada’s PIGs, look eastward. Western provinces carry comparatively low debt burdens and are quickly patching up the recession’s damage. “The easternmost provinces tend to be older and aging more rapidly than western provinces,” explains Colin Busby, senior policy analyst at the C. D. Howe Institute in Toronto. “That dampens expectations for future revenue growth, and at the same time heightens expectations of rising health-care expenditures.” The stream of workers migrating westward in search of jobs further complicates matters.
Take New Brunswick. Seeking to attract corporations and workers, its previous government embarked on ambitious tax cuts. “That was introduced just before the onset of the recession, which was quite unfortunate,” says Travis Shaw, assistant vice-president of public finance at DBRS, a bond-rating agency. That tipped the province into some of the largest deficits (relative to GDP) witnessed in Canada. New Premier David Alward presented his first budget in March, introducing a mix of spending restraint and new revenue generation. Although committed to balancing the budget by 2014–15, however, the government’s long-term plan remains unclear.
Quebec weathered the recession better than most North American jurisdictions. That’s a relief, because it’s by far the most indebted province. After a decade of relative fiscal stability, it suffered a gaping shortfall in 2008–09. It responded with a mix of tax increases and spending cuts praised by many observers. “It’s encouraging that they’re taking the problem seriously,” says Busby. But Pierre Fortin, an economics professor at l’Université du Québec à Montréal, warned recently that “carrying out the planned spending cuts will prove politically and administratively difficult.”
Ontario is sailing toward a fiscal iceberg. It expects to report a whopping $16.7-billion budget shortfall for the year ended March 31 (about 3% of GDP), its third consecutive deficit. Worse still, the bleeding is projected to continue until 2017–18. And that’s an optimistic scenario. Yet when he released his budget on March 29, Finance Minister Dwight Duncan seemed to shout, “Steady as she goes!” from the poop deck. “We are choosing to fight the deficit while also protecting education and health care,” Duncan boasted in a breezy speech. “These two goals can be pursued at the same time.”
This is doubtful. Combined, health care and education account for about 60% of the province’s total budget. Although Duncan believes he can contain growth of health-care spending at 3% a year, that’s less than half the rate observed over the past 15 years. The trouble is, the number of Ontarians aged 65 and over is growing at a rate three times faster than the overall population. Meanwhile, debt servicing costs already consume an additional 10% and are likely to rise. The Certified General Accountants of Ontario are one of many organizations urging Duncan to act more aggressively. In pre-budget consultations, it recommended cost-cutting in all ministries, including health, “even though we know that, politically, this is an area that can pose challenges.”
Although it’s difficult to synthesize Ontario, Quebec and New Brunswick into a swinish acronym, their respective fiscal quandaries introduce the risk that Ottawa may one day be forced to rescue them. And none have much breathing room should they suffer another unexpected economic shock.
“The combined finances in the federal and provincial spheres are very near the tipping point,” argued the Canadian Federation of Independent Business in a recent report. “The early stages of a crisis are here now.” Although foreign bond investors seem unconcerned, they can be a rather fickle lot—as the Portuguese have lately discovered. “What concerns me about the sovereign debt markets is how quickly [bond risk] repricing can take place,” observes Busby.