The hand-wringing or (in opposition circles) schadenfreude over whether the Harper government's nascent budget surplus is disappearing before its eyes is a colossal waste of time.
It matters not a whit whether Ottawa spends a few billion dollars more or less than the nearly $300-billion in tax revenues it will take in next year. Prime Minister Stephen Harper and Finance Minister Joe Oliver might rather eat glass than admit that falling oil prices have put their surplus in jeopardy. But the truth is that even if Ottawa stays in the red, it would be by a toe, not a leg.
What matters is whether Ottawa's financial obligations are sustainable over time. Has the federal government put its fiscal house sufficiently in order to ensure that it can meet its responsibilities for years to come without dramatically raising taxes or slashing spending? The answer is overwhelmingly yes, as the Parliamentary Budget Officer has repeatedly noted.
"The federal government has fiscal room to meet all the challenges of aging demographics under current policy," according to the PBO's latest Fiscal Sustainability Report. "It could increase spending or reduce taxes while maintaining sustainable public debt."
Of course, one way Ottawa has ensured the sustainability of its own finances has been by avoiding making open-ended commitments to the provinces. The federal government will transfer a record $67.9-billion in cash to provincial and territorial governments in 2015-16 – a two-thirds increase since the Tories took office in 2006. But it has capped its future liabilities.
Equalization payments now increase only in line with nominal economic growth. Starting in 2017, overall cash transfers for health-care will face a similar cap. They will still grow by at least 3 per cent a year, but that is a big drop from a decade of guaranteed increases of 6 per cent.
This is why other provinces cringe whenever they hear Ontario clamouring for more cash from Ottawa. Ontario, to borrow a famous metaphor, has become the great vampire squid of fiscal federalism. Each dollar it sucks from federal veins leaves less for other provinces to feed on.
The nearly $68-billion Ottawa will send to the provinces next year in health-care, postsecondary education and equalization transfers is an aggregate amount. But how that money gets divvied up between the provinces is based on a series of mind-bogglingly complex formulas that factor in tax revenues, population shifts, recent economic performance and a host of other variables.
That means that, although overall federal cash transfers will increase by 4.6 per cent next year, every have-not province except Ontario will see a much smaller increase. Overall, equalization payments will increase by $672-million next year. But Ontario will get 56 per cent of that total.
With $1.25-billion or 6 per cent more from Ottawa next year, Ontario will again replace Quebec as the biggest recipient of overall federal transfers, with a haul of $20.4-billion. Ontario Premier Kathleen Wynne might consider this only right, considering that last year, Ottawa cancelled a discretionary program that ensured no province would see its year-over-year transfers fall just as Ontario became eligible for it. That deprived Ontario of an estimated $640-million.
Still, since Ontario began collecting equalization in 2009, the five other have-not provinces have been getting squeezed. The result is that New Brunswick will see a meagre $3-million increase in equalization payments next year. Overall, its federal transfers will grow by a lowly 1.7 per cent.
Nova Scotia will fare even worse, with a 1.4 per cent increase in federal transfers. Manitoba will get $12-million less in equalization, while its overall transfers will increase by 2.2 per cent. Quebec will fare much better – with a 3.8 per cent increase – but not nearly as well as Ontario.
Ontario's increasing take "leaves comparatively less room for the smaller, equalization-receiving Maritime provinces and Manitoba," notes a recent study by the Frontier Centre for Public Policy and the Atlantic Institute for Market Studies. This presents "a significant fiscal challenge to all four provinces, as their expenditures perennially exceed revenues even in the context of Canada's continuing economic recovery."
It's not likely to get much better. Ontario's short-term economic prospects have brightened considerably with a lower dollar and oil prices. But its public finances are still on a collision course with reality. According to the C.D. Howe Institute, Ontario would need to increase provincial taxes by 70 per cent to finance its future health-care obligations on its own.
Luckily, Ms. Wynne has found part of the solution. Just blame Ottawa.
Konrad Yakabuski