Fiscal sustainability—a good New Year’s resolution

In the summer, Canada’s Parliamentary Budget Officer (PBO) released an updated report on the fiscal sustainability of Canada’s federal and provincial governments. Unfortunately, the report showed a deterioration in public finances. Addressing these problems and making Canada’s public finances sustainable would be a good New Year’s resolution for governments across the country.

The PBO report uses the term “sustainability” with a specific technical meaning—that is, a government’s finances are deemed unsustainable if its debt-to-GDP ratio (a key measure of the sustainability of government debt) is forecasted to increase in the future, absent policy change. 

Based on this metric, the PBO projects that seven out of the 10 provincial governments are on an unsustainable fiscal track. The provinces of most concern are in the Prairies and Atlantic Canada, as Saskatchewan, Alberta, and Newfoundland and Labrador require the most policy action to correct their unsustainable trajectories.

Meanwhile, an independent analysis published by Finances of the Nation had a somewhat brighter long-term outlook for the federal government, but also showed that taken together the finances of the provinces are currently unsustainable.

Indeed, the PBO’s Yves Giroux warned that this unsustainable state of affairs was “the big elephant in the room that nobody seems worried about or wanting to address.”

In 2022, with the COVID recession now behind us, governments across the country should resolve to acknowledge this “elephant in the room” and bring sustainability back to Canada’s public finances. There are several important reasons to do so. All else equal, a rising debt-to-GDP ratio means that government debt interest costs will rise relative to the size of the overall economy. Expenditures on rising interest costs will drain away money that could otherwise be used for government services or provide tax relief for Canadian businesses and families.

The good news for Canadians is that the PBO’s long-term projections are not written in stone but in fact are best estimates of how much debt Canada will accumulate if policymakers don’t change course. In other words, our governments can set Canada on the path to sustainability if they’re willing to enact policy changes to achieve this goal.

As Canadians make their own personal resolutions for 2022, our governments should pledge to work restore public finances and create a brighter fiscal future for the country.