The Clock is Ticking

provincial flags

Provincial governments across Canada got a wake-up call this week from the annual tome entitled “Fiscal Sustainability Report” from the Parliamentary Budget Office (PBO), which outlined the looming armageddon for provincial finances in Canada.  No provinces were spared bad news, although the situation is more dire in some provinces than in others.  The report essentially looks forward 20 to 30 years and forecasts the amount of debt that the various provinces will be facing at that time if current trends continue.

Smaller provinces are in the most trouble, with New Brunswick, Newfoundland and Manitoba very likely looking at having to default on their debt a couple of decades or so down the road unless they do something soon to change their big-spending ways.  Projecting debt/GDP ratios out 25 years, these three provinces are expected to be flirting with ratios of about 100 per cent as compared to 30 to 40 per cent today.  Levels of 100 per cent or more represent a crisis point for any government.  Even the large provinces of Ontario and Alberta are forecast to have debt/GDP ratios approaching 50 per cent in 25 years, at which point the deterioration becomes much faster and the needed remedies much more extreme. Interestingly, the province currently in the best fiscal health is Quebec.  While Quebec was once the financial basket case of Canada, recent financial prudence has changed its status dramatically. And it doesn’t hurt that Quebec continues to receive significant transfer payments from other provinces, currently running around $10 billion annually.

This dreary situation should be of great concern to all Canadians.  Although these numbers are forecasts and therefore subject to change, the tendency of governments to only look at the short term and favour politically popular spending over sensible financial restraint suggests the PBO’s estimates are likely not far off the mark, and may even be on the conservative side.

The financial deterioration of the provinces is being driven by a number of trends that cannot be reversed, notably the ageing population which means lower revenues to governments as there are fewer working-age Canadians supporting a growing number of retirees, coupled with higher spending on health care.  Health care spending already eats up about half of most provincial budgets and unless this sector is structurally reformed that proportion will increase in future.  Indeed, despite the false belief of many Canadians that Canada has the “best health care system in the world”, the financial crisis soon coming to a province near you will probably be the catalyst to force the kind of structural reform of health care that should have taken place long ago.  Many other countries in Europe and elsewhere have reduced costs and improved health care outcomes with a hybrid public/private sector model, and Canada would do well to learn from them.

But until we see some substantial reform of health care and other services provided by provincial governments, the financial problems of most provinces will only get worse, leading to pressure for increased taxes at a time when taxes in Canada are already too high.  Some provinces will also undoubtedly seek more funds from the federal government, which is rapidly cooking up its own financial difficulties by maintaining big deficits and adding significantly to the national debt at a time of economic growth.  Many provinces will likely ignore or downplay the warnings in the recent PBO report, but they do so at the peril of all Canadians.  The longer governments procrastinate in doing something to avoid this looming crisis, the more painful the ultimate, inevitable fix will be for everyone.

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