The view of Canada as a current beacon for fiscal responsibility perhaps doesn’t reveal the whole truth
Now that we’re into election season (which, unfortunately, kicks off as much as a year before we actually get to vote), there will be much talk about the federal government’s return to budgetary surplus. The better part of the past decade has been characterized by deficit spending from Ottawa, as revenues took a hit with the recession in 2008 and spending was increased to put a floor under aggregate demand, and, as the story goes, to “create jobs.”
After adding more than $100 billion to the national debt, we’re now back in the black at the federal level. This is good news.
Moody’s, a leading credit-rating agency, recently affirmed this with a continuation of Canada’s triple-A credit rating. But in that same report, the ratings agency sent us warnings on an issue that gets much less attention than our sterling federal books: the collective state of our provincial, territorial, and municipal finances.
NOT AS ROSY
Here, the picture is much less rosy than in our nation’s capital. And it is in the provinces (and our biggest cities) where the greatest disconnect appears between spending responsibilities and revenue raising opportunities.
Moody’s reminded us that with better-than-expected numbers this year at the federal level, the much-watched debt-to-GDP ratio declined from 33.5 per cent to 32.5 per cent, which compares us favourably to the median (45.9 per cent) among our triple-A rated brethren.
When all sub-national government debt is taken to account, however, that ratio increases dramatically to 79.7 per cent, much higher than most of our triple-A rated counterparts. The two biggest provinces — Ontario and Quebec — have debt ratios in excess of 40 per cent each and, like all provinces, have spending obligations that threaten to increase this number a great deal in the decades to come.
More than half of all public debt in Canada originates in the provinces and municipalities that are responsible for so much of our public spending. This puts us at the head of the pack of all countries rated by Moody’s in terms of subnational debt. On the surface this appears alarming, but part of it can be explained by the vast powers and constitutional responsibilities our provinces possess. It is the provinces that are responsible for the delivery of items like healthcare and social programs — things that tend to be centrally administered and financed in most countries.
MAJOR CLOUT
Even U.S. states don’t have the same taxing and spending authority as our provinces, which negotiated huge constitutional heft as part of the original deal that created Canada almost 150 years ago. Even today, the provinces never miss a chance to slam Ottawa for intruding on their spending turf. In the rich world the only subnational governments that come close to Canadian provinces in their autonomy are the 26 Swiss cantons that make up that loosely-tied federation.
Most of what Ottawa does is cheque-writing to individuals and to other governments. In a federal budget that’s approaching $300 billion per year, only about $80 billion is spent on direct federal program spending, such as national defence and First Nations programs. The rest is sent to individuals in the form of employment insurance and old-age security cheques, and to cities, provinces and territories as dedicated transfers to help them pay for their huge liabilities in infrastructure, health care, social spending and beyond.
And while the federal government sometimes likes to heckle its provincial counterparts for not having their books in order, there’s not a province in the federation that wouldn’t trade fiscal places with Ottawa. The provinces and big cities have program responsibilities that vastly outstrip those of the federal government, and yet they often lack the taxation powers to adequately pay for them. The plight of our biggest cities is particularly bleak: faced with precious little in the way of revenues, all they can do is beg the provinces and the federal governments for cash to finance much needed municipal infrastructure programs.
Failing that, they issue debt, the interest on which is much more than the rock-bottom federal rates Ottawa gets to pay.
Furthermore, tax arrangements between the levels of government can mean policy changes at the federal level can have a serious impact provincially. By one estimate, if the federal government were to implement its income splitting commitment in full, it would cost Ont. alone almost $1 billion per year in foregone revenue. This is not to say that Ottawa shouldn’t have the power to change its own tax law, but that doing so while hectoring the provinces and simultaneously reducing their revenues will not make for cordial federal-provincial relations, so vital in a federation as decentralized as Canada.
So the next time you’re treated to a rant on Ottawa’s fiscal rectitude, spare a thought for your premier and your mayor who are facing different fiscal circumstances, and the reality that our government finances are not as squeaky clean as often portrayed.
