Canadians paying dearly for mounting provincial debt

As provinces unveil their re-opening plans and vaccination rates rise across the country, the Canadian economy will likely return to a form of normalcy in the near future. While this process unfolds, provincial policymakers should tackle their long-term fiscal challenges.

In Canada, government net debt (inflation-adjusted) has doubled from $1.0 trillion to $2.0 trillion between 2008/09 and 2020/21, due in part to emergency spending during the pandemic. But crucially, more than half of this debt accumulation occurred pre-COVID. Consequently, many provinces have dug a hole that will be hard to climb out from.

Every province will run a budget deficit this year (from 0.6 per cent of GDP in New Brunswick to 5.4 per cent of GDP in Alberta) due primarily to temporary developments such as lower revenues and higher spending on health care and income support.

Seven provinces have targeted dates to return to budget balance. Of that group, the earliest timeline for a return to balance is 2024/25 in Nova Scotia and Prince Edward Island. Other provinces including Saskatchewan, Newfoundland and Labrador, Manitoba, Ontario and Quebec project it could take the better part of a decade to halt debt accumulation and return to balance. The provincial governments in Alberta, British Columbia and New Brunswick have opted not to provide a date at all.

So why should Canadians care whether or not their provincial governments return to budget balance in a timely manner post-COVID?

First, running budget deficits during a period of economic growth will make it more difficult to withstand the next recession. There will be less fiscal room to use and less firepower available to combat another fiscal crisis during a potential economic downturn.

Second, governments are currently running deficits during a period of historically low interest rates. This has allowed debt interest costs to remain relatively low. But our fortunes could change quickly should interest rates rise. Higher interest costs would add to provincial debt accumulation and could consume a significant portion of government revenue. In other words, rising interest costs will leave fewer resources for important priorities such as health care, education and tax relief.

Third, Canada’s aging population will place immense pressure on our health-care system and economy over the next decade or so. As baby boomers continue to retire, the proportion of Canadians over age 65 will continue to grow, bringing required increases in health-care spending as our elderly population is more vulnerable to illness and chronic disease.

At the same time, provinces will likely experience waning tax revenues as a smaller proportion of Canadians are in the workforce and earning employment income. The result—a growing gap between government revenues and spending. Adding more debt on top of this will only exacerbate fiscal problems for provinces.

Finally, debt accumulation will burden younger Canadians who will be responsible for paying for today’s spending and interest payments on debt, potentially through higher taxes in the future. Returning to balanced budgets sooner rather than later helps reduce this burden on future generations.

The long-term health of provincial finances is a major issue for governments across Canada. As part of an effective recovery strategy, provinces should prioritize a prudent return to budget balance.