Provincial budgets highlight need for equalization reform

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The public finances of Canada’s largest provinces have followed vastly opposite trajectories since the 2008 financial crisis.

While once-steady Ontario has sunk irretrievably deeper into debt, and Alberta’s budget has gone from an embarrassment of riches to just plain embarrassment, Quebec has moved to the head of the class owing to stringent spending controls and a resurgent economy.

Quebec was the only Canadian province (besides Nova Scotia) to have cut its public debt burden in the decade before the pandemic. After posting four budget surpluses in a row prior to last year, it has been able to weather the COVID-19 crisis with far less damage to its finances and will emerge from the pandemic on a more solid fiscal footing than Ontario and Alberta.

Alberta’s most recent budget tabled last month, and Ontario’s handed down last week, shed light on their stunning reversal of fiscal fortunes. Once the milch cows of fiscal federalism, sending tens of billions of dollars more in taxes to Ottawa each year than the federal government spent in their provinces, Alberta and Ontario have become fiscal basket cases.

Quebec, meanwhile, expects to become increasingly less reliant on federal transfers in coming years because of a better relative economic performance than in the rest of the country.

Quebec is still set to receive $13.1-billion in equalization payments from Ottawa in the 2021-22 fiscal year, a slight drop from the previous year, while neither Ontario nor Alberta are currently eligible for equalization. But after years of seeing its equalization take increase annually, Quebec now projects the amount it receives to decline modestly in coming years.

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The province’s 2020-21 and 2021-22 budget deficits are proportionally much smaller than Ontario’s and Alberta’s, and it is poised to return to balance far sooner than the other two. Indeed, if annual projected deposits to Quebec’s debt-reduction Generations Fund are subtracted from the equation, Quebec’s budget could be back in the black by 2024.

All bets are off as to when Ontario and Alberta will be able to eliminate what have become pernicious structural deficits. In its budget last week, Ontario Premier Doug Ford’s government pledged to hold the province’s ratio of net debt-to-gross domestic product below 50.5 per cent. That remains 11 percentage points higher than it was before the pandemic and more than four times the level of debt the province had on its books when Bob Rae’s New Democrats took power in 1990. While the province’s debt stabilized during the Mike Harris years, it took off after the 2008 financial crisis and is now the largest in the country after Newfoundland.

Ontario’s debt burden “will rise to levels seldom recorded for regional governments around the world,” Moody’s Investors Service warned in a note after last week’s budget, which it deemed “credit negative” for the province.

Alberta, which was debt free in 2015, has seen its net debt-to-GDP more than double during the pandemic to 24.5 per cent. That figure is expected to rise to 26 per cent next year. With no future oil boom on the horizon, Alberta finds itself in an increasingly desperate fiscal situation.

Quebec, however, has grasped control of its finances. Quebec’s net debt ratio, which had soared to 50 per cent by 2014, fell to 39 per cent just before the pandemic struck. Although the ratio is expected to rise to 45.5 per cent next year as pandemic-related budget deficits are absorbed, it is projected to start falling again by 2023.

While the declining fiscal fortunes of Ontario and Alberta are mainly because of years of negligence by current and previous governments, both provinces have called on Ottawa for a reform of equalization and other federal transfer programs to help them climb out of the hole. Those calls are only likely to grow stronger and more insistent in the postpandemic period.

According to Statistics Canada data compiled by the Fraser Institute, Ottawa took in $280-billion more in taxes and other revenue from Alberta between 2007 and 2019 than it spent in the province. In Ontario, federal taxes and revenue collected exceeded spending by $126-billion in the same period. Quebec, meanwhile, was a net beneficiary of federal spending to the tune of $200-billion. Equalization payments, which aim to enable have-not provinces to provide comparable public services at comparable levels of taxation, account for more than half Quebec’s net take. Without them, the province could not have balanced its budget.

While griping about equalization has long been a national pastime, there is an increasing sense that an excessively technical equalization formula needs to be reworked to reflect changing economic dynamics within the federation. For Alberta and Ontario, it may be their only hope.

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