Unexpected influx of revenue does not give provinces licence to spend

This budget season, there’s some much-needed good news. Across Canada, provincial government revenues are on track to be much higher than anticipated, which means several provinces could run budget surpluses or much smaller deficits than previous projections. However, this influx of revenue does not simply give provinces a renewed licence to spend.

Why?

First, provinces can’t expect high revenue growth every year. Alberta, Saskatchewan, and Newfoundland and Labrador have benefited greatly from unexpectedly high prices for natural gas and oil in 2021/22. But resource revenues are volatile and these governments have a bad habit of spending most of it as it comes in the door, creating a boom-bust cycle in provincial finances where governments increase spending to unsustainable levels during boom times then incur budget deficits when commodity prices decline. Instead of spending all of their resource revenues, provinces should save a portion of it so they can stabilize finances for the long-term.

Second, spending more money on health care (a common call from certain precincts) will not solve our health-care problems. Provinces struggled with long wait times and dearth of acute care beds and physicians before COVID—and not because of a lack of funding. Among 28 countries with universal health care in 2019, Canada’s performance was mediocre to poor on most key metrics despite ranking as the second-highest spender.

Indeed, other countries have built health-care systems that perform better than Canada’s at a comparable or lower cost. Blindly spending more money on health care without learning from those countries and reforming elements of our universal system is ill-advised to say the least.

Canadians are also having fewer children and living longer lives, which means our population is aging quickly. According to projections, while Canadians age 65 or older currently account for roughly 19 per cent of our total population, that proportion will reach nearly 24 per cent by 2040. As the senior population increases across the country, we’ll see significant pressure on all provincial health-care budgets. It’s paramount that provinces are prudent with finances now so they can handle the effects of our aging population.

Lastly, provinces should stop accumulating debt and prioritize balanced budgets. Debt accumulation was an issue for more than a handful of provinces pre-COVID and the pandemic only exacerbated the problem. Since 2007/08, provincial net debt levels have more than doubled (inflation-adjusted). Newfoundland and Labrador, Ontario and Alberta are among the worst culprits as they all increased their debt-to-GDP ratios (an indicator of a jurisdiction’s ability to pay down its debt) by more than 10 percentage points over the past 15 years.

This budget season, a failure to restrain spending today will add even more debt to the books and make it difficult for provinces to improve their financial sustainability. Canadians today and in the future will pay for this debt via government debt interest payments. While current interest rates are near historic lows, residents in all provinces pay more than $500 per person annually on government debt interest. Once interest rates rise, debt interest payments will consume more revenue and leave less money for health care, education and other priorities.

An unexpected influx of revenue does not give provinces a licence to spend. Governments must be prudent with finances or they’ll repeat past mistakes and burden future generations.