Tax hikes are making a comeback as provinces face up to high debt, challenging demographics and a sluggish economy that refuses to kick into high gear.
Tuesday’s budget in British Columbia – which announced higher personal, corporate and tobacco taxes – hints at what other parts of the country could soon expect.
For years, the notion of raising taxes was a non-starter politically, both in Canada and the United States. But it is back on the agenda in Washington, and some provinces are also looking at a mix of tax hikes and spending cuts to get their books in line.
First, the good news: By 2015, only Ontario and Manitoba expect to still be in deficit. All other provinces – and Ottawa – say they will back in black by then.
Yet economists warn any celebrations should be muted. Ottawa and the provinces are now carrying a lot more debt on their books than when they went into the recession.
Before the world economy took its big dive, Canada’s combined government debt was $778-billion. Now it is over $1-trillion. As interest rates inevitably rise, servicing that heavier debt load will become another growing expense for governments during a prolonged period of demographic challenges, such as rising health-care costs.
Canadians – particularly younger Canadians – should brace themselves financially for higher taxes and possibly less government service over the long term, said Fred Ketchen, director of wealth management for ScotiaMcLeod.
“The bills still have to be paid,” he said, in reference to the growing shift in the number of working-age Canadians versus retirees. “If the parents have passed on, then obviously the sons and daughters and the grandchildren are eventually going to have to continue to ante up and deal with this problem, so save [and] invest wisely.”
As for governments, Mr. Ketchen said they can’t afford to delay action on debt. “If it gets out of hand, then it’s going to be twice as difficult to try and deal with it.”
In 2007-08 – the last year of good financial times – Ottawa posted its 11th consecutive surplus, worth $9.6-billion. The provinces and territories also went into the recession with a collective surplus of $11.4-billion that year.
Then the two levels of government posted five years of deficits – including this year – worth a cumulative total of $234-billion.
In dollar terms, the figures are eye-popping. But when measured as a percentage of GDP, it becomes easier to understand why Canada’s finances remain well-regarded by debt-rating agencies.
Federally, Canada’s debt to GDP grew from 29.9 per cent in 2007-08 to 33.8 per cent in 2011-12. That is still far below the debt levels of the mid-1990s, when federal debt-to-GDP reached a high of 68.4 per cent in 1995-96, forcing extreme budget cuts to satisfy international investors.
While federal finances are far from the dark days of the mid-1990s, the same cannot be said for the provinces.
As a percentage of GDP, total net debt for the provinces and territories grew from 21 per cent in 2007-08 to 27.7 per cent in 2011-12. That is the same level as 1995-96. Provinces also face a future of higher health-care costs as more Canadians enter retirement.
Prime Minister Stephen Harper has used the front end of his first majority mandate to tackle Ottawa’s long-term costs. By 2029, all Canadians will have to wait until age 67 – instead of the current 65 – to collect the government-backed guaranteed benefits of Old Age Security.
Health-care transfers – a major expense for Ottawa – are also being reined in. The current practice of growing transfers by 6 per cent a year will end in 2016-17. After that, the growth rate will be tied to the rate of economic growth plus inflation.
Parliamentary Budget Officer Kevin Page has said these and other moves mean Ottawa’s finances are healthy over the long term. But he has also warned the changes risk saddling the provinces with big, long-term debt as Ottawa gradually covers a smaller percentage of the total health bill.
RBC chief economist Craig Wright said provinces will surely push for more money from Ottawa, but at least they have a clear picture of what they can expect.
“What you’d like to see is the more fiscally challenged provinces get back into a mode of reducing the debt,” he said. “That will enable them to be more flexible.”
Editor's note: An earlier version if this story referred to the Canada Pension Plan instead of Old Age Security.Report Typo/Error