Can provinces address their deficits while Ottawa withdraws emergency transfers?

Provincial governments across Canada face significant fiscal challenges. Independent reports from the Parliamentary Budget Office and the Finances of the Nation project show that, cumulatively, provincial finances are unsustainable.

One reason for the fiscal challenges facing the province is that the pandemic and recession significantly increased their annual deficits. In 2020/21, the provinces ran a cumulative deficit of $59.8 billion. Those deficits would have been even larger if not for substantial COVID-related emergency assistance.

As the chart shows, in 2020/21, federal transfers to the provinces and territories increased by $23.4 billion—a nominal increase of 23.5 per cent. By comparison, in the previous fiscal year, the increase was 5.3 per cent.

It’s uncertain how quickly additional federal support will be withdrawn, but the federal government’s 2021 budget calls for it to decline quickly and the provinces should be prepared for such a development.

If they wish to avoid rapid debt accumulation, provincial governments must find ways to reduce deficits in the years ahead while the Feds wind down emergency transfers. The pace of this withdrawal is uncertain and will be important for budget-watchers across Canada, which is why our chart is one to watch in 2022.