Total government debt is projected to reach the $758-billion level
HOW PROVINCES SPEND
Total government debt is projected to reach the $758-billion level
It is an old trick of budget makers to tuck the bad news into the fine print in the back pages. So when Quebec Finance Minister André Bourbeau rose in the National Assembly last week, his message initially appeared as welcome relief to the province’s hard-pressed residents. Personal income taxes were cut. The sales tax declined on most goods. There were extra breaks for low-income families, including a refundable tax credit for day care expenses. Revenues were heading upward. The annual deficit was heading downward. With an election to be held within the next six months, there was little emphasis on the fact that Quebec has missed its rosy deficit targets by wide margins in each of the past three years. And all of those deficits will add up to a total debt of $69.8 billion on March 31,1995.
The Quebec announcement capped the annual crop of 10 provincial budgets, which have popped up across the nation like daffodils since mid-February. The first seven— Saskatchewan, Alberta, New Brunswick, Newfoundland, British Columbia, Prince Edward Island and Manitoba— indicated real efforts to control deficits and debts. In sharp contrast, the last three—Nova Scotia, Ontario and Quebec— countered those trends. Based on those documents and Ottawa’s Feb. 22 budget, most financial analysts have concluded that the two largest provinces—and the federal government—are not doing enough to curb their prodigious appetite for borrowing. The debts, in fact, are piling up in amounts that are almost too staggering to grasp. By March 31,1995, Ottawa and the 10 provinces will be another $58 billion deeper in debt for a total of about $758 billion. The 10 provinces alone will owe an extra $18 billion. “The good news is that the [national] deficit is going down,” says
Warren Jestin, chief economist at the Bank of Nova Scotia.
“The bad news is that the improvement has been painfully slow.
We are spending massively more than we are collecting.”
The sheer size of those numbers has already affected every Canadian taxpayer. And the situation is likely to get tougher before it gets easier. Because the debt is growing every year, the percentage of revenues devoted to interest payments is getting higher every year. To meet those bills, governments face unpopular decisions: they can raise more taxes or they can further cut the proportion of their revenues that they devote to such programs as health care and education.
Worse, governments have required so much money that they have been increasingly forced to scrounge outside the country for funds. Together, Ottawa and the provinces now owe about $280 billion of their current $700 billion debt to foreign investors—and that amount is growing by $2 billion to $3 billion each month. As the debts mount, those investors are becoming increasingly jittery. To soothe them, and to ensure continued access to funds, Canadian interest rates have increased at a much faster pace than American rates over the past few months. “It is partly because of our deficit and debt problems that interest rates have been high across the board,” asserts Ted Carmichael, senior economist at Bums Fry Ltd. “Rapidly rising debts in Ottawa, Ontario and Quebec have affected the interest rates facing all provinces, consumers and business.”
The provinces, and Ottawa itself, are in a perilous position. They are already paying interest charges on short-term bonds that are about two percentage points higher than comparable U.S. rates. If foreign investors become seriously worried about the nation’s ability to meet its debts, governments would have to pay astronomically high short-term rates to borrow money. Most analysts warn that Canada can no longer afford even a momentary loss of confidence among its lenders. If those investors start to worry about the threat of Quebec independence or if Finance Minister Paul Martin cannot deliver a solid federal-provincial plan to control fiscal transfers and to reform social policy, the cost of loans could devour the revenues of all governments. The very quality of the nation’s social fabric could slip dramatically. “We have so much debt that we can’t take even a temporary crisis,” warns Brian Neysmith, chief executive officer of Canadian Bond Rating Service. “Canada’s biggest
GOOD, BAD AND UGLY
export is now debt. We have lost our financial sovereignty.”
Such news is especially distressing to the seven provinces that have made a serious effort to grapple with their budgetary woes. Alberta has slashed its spending to $13 billion, down $1 billion from 1993-1994. Saskatchewan’s deficit will dramatically drop for the third consecutive year to a projected $189 million. Despite the economic catastrophe in its fishing industry, Newfoundland’s 1994-1995 deficit will decline by $26 million to $197 million. And although Manitoba missed its 1993-1994 deficit target of $367 million, it still achieved an 18-per-cent reduction in its deficit. This year, its deficit is expected to decline by another $165 million. In a recent interview, Premier Gary Filmon bitterly told Maclean’s that while his government has taken
tough measures, freezing taxes and cutting spending, Ottawa has dithered. ‘They go merrily along their way, spending more money, year after year, and then say, “You in the provinces are going to have to ante up some more,’ ” he said. “It doesn’t make sense.”
The offending governments are more beleaguered than merry. Ottawa itself faces a 1994-1995 deficit of $39.7 billion and debts of $551 billion. Nova Scotia’s projected deficit is 3.2 per cent of its economic output, the highest among Canada’s provinces. Although both Ontario and Quebec have struggled to control their deficits in previous years, they relaxed that fight for 1994-1995, largely because they face tough election campaigns. Ontario maintains that its deficit will drop to $8.5 billion. But that decline merely represents the magic of new accounting techniques: the province actually needs to borrow $10.2 billion in 1994-1995. Quebec, in turn, maintains that its deficit will drop to $4.4 billion from $4.9 billion, conveniently overlooking the fact that last year’s budget predicted a 1993-1994 deficit of $4.1 billion.
There are no easy fixes for this complex, disturbing situation. A decade ago, the problem was largely confined to the federal government—because it was borrowing the lion’s share of the money. But, throughout the 1980s, the provinces expanded their social programs—even though Ottawa was curtailing the growth of its transfer payments for those services. To pay their bills, the provinces developed an addiction to the capital markets. (Ontario, with its projected direct net debts of $90.4 billion, is now the largest borrower in the world that is not an independent nation.) Belatedly, Ottawa and the provinces have realized that international analysts now scrutinize the health of all 11 governments before they lend money to any individual government. In response, the 11 are struggling to redesign the social safety net to ensure that future cuts are made with care and efficiency. And when the country’s finance ministers meet in late June, they will try to devise a joint management agenda for deficit and debt reduction. “You cannot look at Ottawa in isolation any more,” says a senior finance official. “At the end of the day, there is no way that we can let Newfoundland just go broke.”
That co-ordinated approach will not avert the need for tough choices. Federal and provincial debt is now growing at almost double the rate of economic growth. As a result, Ottawa and the provinces cannot rely on economic growth alone to eradicate their entire deficits. The gap between spending and the highest revenues that growth is likely to produce is now an estimated $35 billion. That so-called “structural deficit” could clank like a rusty tin can tied to those governments if they enter another economic downturn. The consequences could be dire, probably involving unpayable interest charges and loan defaults. Most analysts believe that the only way to avert that catastrophe is to make further cuts in the cost of government services, now. Unless those cuts are skilfully and sensitively performed, Canada’s cherished social safety net could be savaged. Predicts the Bank of Nova Scotia’s
Jestin: “This is one economic forecast that you can take to the bank— the arithmetic points very clearly to a further, very substantial retrenchment in government programs.”
If there are any lessons from the last crop of budgets, it is that no government, whatever its economic schemes, can nurse itself back to economic health in isolation. Ottawa and the provinces have borrowed too much, especially from foreign investors. And the money lenders are nervous. “All governments contributed to this problem but, so far, only some are taking really tough measures,” warns economist Carmichael. “This is not a sustainable path that we are on here.”
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