Provinces spiral towards debt crisis as Ottawa boasts of sound finances

Why the feds aren't painting a full picture of government debt

Photo illustration by Sarah Mackinnon

Finance Minister Jim Flaherty likes to draw up comparisons with other advanced economies. Even when announcing in November that the federal deficit would come in at $26 billion, $5 billion higher than predicted in the 2012 budget, the minister couldn’t resist gloating: “Unlike many of Canada’s counterparts in the G7, we remain on track to return to balanced budgets over the medium term.”

But with provincial deficits swelling from coast to coast this year, and rising health care costs expected to ravage provincial coffers in the coming decades, federal figures are starting to paint an increasingly misleading portrait of Canada’s government debt situation.

Lower-than-expected revenues have dug a $4-billion hole in Alberta’s finances and inflated Newfoundland’s deficit to over $700 million (almost triple what was initially projected), adding resource-rich provinces, along with long-time offenders such as Ontario and Quebec, to the list of fiscally challenged jurisdictions.

The long-term forecast looks scarier still. Even assuming, as the Parliamentary Budget Office does, that Ottawa’s debt will steadily shrink and disappear around 2040, provincial, territorial and local governments are on track to swell Canada’s total public debt to the equivalent of 100 per cent of GDP by 2070.

You wouldn’t know by looking at government statistics. Ottawa doesn’t publish any of its long-term analyses that show how federal and provincial fiscal trends add up, a practice common among several industrialized countries and recommended by the Organization for Economic Development and Co-operation and the International Monetary Fund.

When Auditor General Michael Ferguson prodded Finance Canada last fall to make such comprehensive forecasts available to the public, the department politely declined, noting that “the federal government is not accountable for the fiscal situation of the provinces and territories.”

It’s easy to sympathize with that view. After all, provincial governments absorbed very little of the deficit-slashing lesson of Liberal prime minister Jean Chrétien. While Ottawa’s share of public sector debt shrunk from 62 per cent in 1991 to 33 per cent in 2011, the provinces and territories’ grew from 34 to 47 per cent, according to Statistics Canada. (The balance is made up of debt owed by local governments and the Canada and Quebec pension plans.)

Yet one might feel more lenient toward Canada’s provinces after considering that they shoulder the brunt of what is expected to become one of the heaviest burdens on government balance sheets across the industrialized world: health care costs. It’s the ever-higher medical bills of a rapidly aging population that are setting provinces on a path to fiscal ruin, according to the Parliamentary Budget Office.

Conversely, one of the reasons why the federal government’s fiscal trajectory looks so promising is that Ottawa “cleverly insulated itself” from such a long-term threat by capping health transfers to the provinces, according to economist Don Drummond. In December 2011, Ottawa moved away from six per cent annual increases in such transfers, pegging them instead to growth in non-inflation adjusted GDP beyond 2016. Those cost risks, though, might boomerang should a province’s debt become unsustainable and require a federal bailout, Drummond and others have warned.

That would be every taxpayer’s problem, and that’s why Canadians deserve to have a full picture of government debt—wherever it might be hidden.

Looking for more?

Get the Best of Maclean's sent straight to your inbox. Sign up for news, commentary and analysis.