Fiscal picture for provinces getting worse, but don't blame irresponsible spending

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Finances have deteriorated in a number of provinces over the past year, but at least one bank believes that rising deficits don’t necessarily mean governments are being irresponsible in their spending.

With all provincial budgets tabled and the federal budget set to come out next Tuesday, many taxpayers and investors are feeling less optimistic about the state of the economy. That’s in part because Canada’s 10 provinces are projecting a combined annual deficit of more than $30 billion, the largest recorded outside the pandemic.

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Among the hardest hit have been Quebec and British Columbia, which are both expecting to run historic shortfalls this year, as well as Ontario.

But despite ballooning debt loads, higher spending and a softer outlook for revenues, Desjardins Group economist Marc Desormeaux said things could be a lot worse.

“We are seeing more challenging fiscal positions across most provinces …. But if we look deeper into the data, it’s not as bad as it could have been, certainly, or as bad as it seems,” he said.

Desormeaux noted that the record cumulative deficit comes as provincial economies have grown and are dealing with surging populations.

On a relative basis, he said the provinces’ combined net debt-to-GDP ratio is set to rise but will still be below levels recorded during most of the decade prior to the pandemic.

He also flagged nuances in the spending growth, such as the fact that legally mandated wage increases drove much of the overall increase, as signs that provinces were not necessarily expanding services. Provincial plans to keep total spending from growing as fast as the population plus inflation was another mitigating factor.

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Among the provinces, Alberta and New Brunswick are projected to outperform and stay in the black this year.

“We’d give some credit to Alberta and New Brunswick after their budgets,” he said. “They were the two provinces that maintained surplus projections throughout the fiscal forecasts window even though there were some challenges on the economic front.”

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Provincial budget projections have also taken into account an expected slowdown in the Canadian economy as higher interest rates are increasingly felt by consumers and business. With that in mind, most provinces are anticipating growth will be weak and revenues will follow suit.

However, Desormeaux said there’s perhaps less risk to provincial finances than to federal finances in this respect. Provinces tend to issue longer dated bonds, resulting in less risk of renewing at a higher rate in a given year.

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