We took on debt so you didn’t have to. That has been Ottawa’s response whenever it was challenged on the hundreds of billions it spent to fight the economic ravages of the coronavirus.
The Liberals used that mantra to underscore how they ramped up income supports to buoy household finances (and to a lesser extent, businesses). But it turns out that at least some of the provinces benefited indirectly from Ottawa’s spending spree.
Ontario’s final accounts for the last fiscal year showed an unusual $13.4-billion surge in personal and corporate income taxes from what had been forecast in the budget last November, a big factor in the province turning in a much-smaller-than-expected deficit for the last fiscal year.
That is a big departure from what typically happens during a recession, when economic contraction leads to shrinking household incomes and falling corporate profits, and declines in personal and corporate income taxes.
Why was the coronavirus contraction different? Ottawa’s transfers to individuals and to businesses, and to a lesser extent, provincial pandemic programs. That flood of spending not only buoyed household and corporate incomes; it is taxable. So, all those billions of dollars sent out under the Canada Emergency Response Benefit and the Canada Emergency Wage Subsidy program ended up sloshing through the economy – and spilling over into provincial coffers. It’s a roundabout way of helping to bolster provincial finances. Nevertheless, Ottawa’s spending on income supports amounts to a very real, if unproclaimed, fiscal rescue.
In a recent e-mail (and letter to the editor), Constance Smith of Victoria writes that much of the discussion over the federal government’s debt burden is predicated on the wrong measurement. Ottawa measures its debt burden by calculating net federal debt, and then comparing that with the size of national gross domestic product.
Ms. Smith, and others, point out that such a calculation ignores the debts incurred by the provinces and other subnational governments. That’s particularly problematic for a decentralized federation such as Canada.
But there is an even bigger distortion that makes Canada’s position look better: using net debt rather than gross debt. Net debt subtracts financial assets whereas gross debt does not. How does that work in Canada’s favour? As the Fraser Institute has laid out, the net-debt calculation includes the assets of the Canada and Quebec pension plans, even though those funds are sequestered for use only to pay pension benefits.
Exclude such assets, and just look at gross debts, and Canada’s relative debt performance is far less positive. On a net basis for general government debt, Canada ranks first in the G7 and 11th overall among 29 advanced economies in 2020. Using gross debt, however, Canada falls to fourth in the G7 and 25th overall.
Needs (lots of) improvement: The federal government is worst-in-class in Canada for its financial reporting, according to a report issued last week from the C.D. Howe Institute that ranks Ottawa, the provinces and territories on accessibility, timeliness and reliability of their budget documents. The federal government got a grade of F in 2021 on the annual ranking, down from a B in 2020, in part because it took so long to actually produce a budget. Meanwhile, Nunavut was a star student, with a grade of A-, up from a D in 2020.
Sign up for the Tax and Spend newsletter here