When Finance Minister Eric Cline triumphantly delivered Saskatchewan’s eighth consecutive balanced budget last spring, he had every reason to be proud. The then New Democratic Party government had struggled throughout the early 1990s to claw the province out of one of the highest per-capita deficits in the nation. It had curtailed spending, raised taxes, overhauled the health care system. And it had won. It had even tucked aside $775 million for hard times.
The troubles commenced this summer. Drought crippled agriculture production. Exports—which represent 68 per cent of the province’s GDP—dwindled as the American economy sputtered. Natural gas prices dropped—so royalties declined. In his March budget, Cline had already announced plans to dip into a third of his Fiscal Stabilization Fund because he expected the economy to slow. Now, in the wake of the Sept. 11 terrorist attacks, with revenues declining further, he has opted to scoop an extra $95 million out of the kitty. “Conditions are very difficult—-but we do not plan to have a deficit,” he says firmly. “We have the option of not hacking and slashing away at spending because we can balance our budget out of savings.
We’re very glad we have some.”
Few provinces have been so prudent.
As the economy slips into recession, all 10 provincial governments are struggling against an insidious tide of red ink. How they fare in the bad times ahead will depend to a large extent on how they handled themselves when revenues were healthy. Most squandered their opportunities. BMO Nesbitt Burns Inc. figures the combined provincial balance of $ 11 billion in surplus last year will turn into a deficit of almost $2 billion this year. From Newfoundland, which forecasts an $80 million deficit in 2001-2002, to British Columbia, which is braced for a $2 billion shortfall, the outlook is now very grim.
Revenues are plummeting. The pressures to spend on everything from health care to security to social assistance are growing. Worse, many provinces have scheduled multi-year tax cuts—which now appear like relics of a time when happy days seemed here again after years of sacrifice. “The provinces are back into fiscal problems,” says Toronto-Dominion Bank chief economist Don Drummond, who calculates that every province would slide into deficit in 2002-2003—if some did not have the ability to dip into contingency or stabilization funds. “This is going to come as an unwelcome surprise to many Canadians who thought we could now rebuild the health and education sectors,” he adds. “That is
Many provinces will slide back into deficit thanks to squandered opportunities when times were good
going to have to be postponed for at least a year or two.” There are lessons here. For starters, the provinces that will have more cash at their disposal are those that eliminated their deficits quickly—and began paying down their debt. Throughout the mid-1990s, Saskatchewan put roughly one-third of its annual surplus towards debt repayment. Resource-rich Alberta is more than eight years ahead in its 25-year plan to wipe out its debt. In contrast, Nova Scotia never did manage to eliminate its annual shortfall: its debt is now a whopping 46 per cent of the size of its entire economy. Debt charges gobble roughly 18 cents of each revenue dollar—the highest share among the provinces. As interest rates drop, that burden is diminishing. But it still represents a large chunk of cash that could have been so much better used elsewhere. “The lesson is: never let debt build up,” says Drummond. “The federal and provincial debt problem is going to curse us all for another 10 or 20 years.”
Worse, many provinces did not seize the chance to make fundamental reforms in their health care or education systems when they were flush with cash. William Robson, research director at the C.D. Howe Institute, says Ontario should have implemented major reforms when it had enough money to smooth the transition. It could have tried to emulate British experiments where funds are channeled direcdy to schools, bypassing cosdy school boards. It could have shifted from fee-for-service payments to physicians to fee-per-patient payments. “An opportunity was clearly missed to move from hacking away at spending into making careful, quality changes in the way services were delivered,” says Robson. “When the budget is tighter, reform is more difficult.” Now what? Tax cuts could be deferred: Newfoundland announced in October that it would not implement the third stage of planned cuts in personal income taxes next year. In fact, provinces should resort to almost anything short of major across-the-board hacking in recessionary times. Quebec is using most of its $950 million reserve to balance its books in 2001 -2002. Ontario is dipping into its $ 1 billion contingency fund. But British Columbia’s plan to cut up to a third of its government work force over the next three years and chop departmental spending is probably too harsh—and may only add to its economic woes. Still, governments that do slip into red ink will face the voters’ wrath. “Every survey sends the message: no backsliding,” warns Michael Marzolini, chairman of Pollara Inc. “Deficits are political poison.” The message? Governments that wasted the good times now face troubles with their books—and at the polls. E3
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