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Ottawa’s decision to scrap the sweetheart deals it reached on carbon pricing four years ago and to impose the federal fuel charge next year in Nova Scotia, Prince Edward Island and Newfoundland and Labrador led to predictable complaints about the burden that consumers in those provinces will soon face.

But so far, there hasn’t been much discussion about the impact on provincial budgets, where the disappearance of carbon-levy revenue will put a pinch on finances in P.E.I. and Newfoundland and Labrador.

Some of the uproar about household costs is overblown. Household rebates will offset the direct costs for a majority of households, as the federal Liberals point out, while studiously avoiding mention of the fact that the indirect economic costs of carbon pricing increases the number of households that are net losers.

Unsurprisingly, the Liberals also failed to mention another factor that will ease the carbon-pricing pain felt by consumers in P.E.I. and Newfoundland: Their governments have already slashed their taxes on motor fuels to offset carbon pricing under provincial plans. Those reductions were explicitly aimed at neutralizing the effect of the carbon tax, and meant that on a net basis, drivers in those provinces weren’t paying an additional fuel levy. (That’s why it is far from surprising that the Liberals studiously avoided this point: acknowledging it would have meant acknowledging that carbon pricing has been mostly fictional in those provinces over the last four years.)

However, the federal carbon offset payments that households will start to receive next year don’t take into account those provincial tax cuts. Consumers will get a rebate based on the (much higher) nominal carbon levy rather than the (much lower) net tax. In effect, residents of P.E.I. and Newfoundland will be getting rebates for carbon charges that they are not paying at the pump. (The same is not true for home heating fuels, which both provinces exempted from their carbon pricing plans.)

Nova Scotia is in a different category, having opted for a cap-and-trade like scheme that did not involve a direct carbon levy. Households in that province will be on a more or less equal footing with those in the other four provinces where the federal backstop is in place: Ontario, Manitoba, Saskatchewan and Alberta.

That’s helpful to household budgets. But the reverse is true for the budgets of P.E.I. and Newfoundland, both of which will lose tens of millions in carbon revenue – and now face the choice of raising taxes, cutting spending or adding to deficits.

In its 2022-23 budget, Newfoundland forecasts $117-million in carbon tax revenue, just over 2 per cent of overall provincial tax revenue. But the resulting hole in the budget would increase the province’s projected 2023-24 deficit of $309-million by around one-third, in lieu of any tax increases or spending cuts.

P.E.I. is in a similar position. That province forecasts carbon-tax revenue of $31.6-million in its 2022-23 budget, an amount equal to 2.5 per cent of its overall tax revenue. Like Newfoundland, however, P.E.I. is also projecting a deficit next fiscal year, of $51.9-million. If nothing else changed, the disappearance of provincial carbon tax revenue would push up that deficit on the order of 60 per cent.

Those estimates are somewhat conservative, since carbon revenues would have increased in fiscal 2023-24.

Neither province would say what remedial steps they might take to deal with the shortfalls, although P.E.I. did say in a statement that intends to continue with energy-efficiency rebate programs formerly funded by carbon-tax revenues.

Whatever choice each province ultimately makes, the effect will be the same: a portion of carbon costs are being transferred from households to provincial budgets.

Taxing questions

Responding to a recent article about former Bank of Canada governor Stephen Poloz’s views on rising interest rates, one reader contended that Ottawa won’t feel any fiscal pressure since most of its debts are in long-term bonds locked in at low interest rates.

That contention is flatly wrong. It is true that the government has increased its issuance of longer-term bonds, for the reason that the reader mentions. Bonds with maturity date of 10 years or more accounted for 18.3 per cent of the federal government’s unmatured direct securities (excluding non-marketable securities) as of last month, up from 16.8 per cent in February, 2020. Because the overall federal debt is much higher, that seemingly small increase of 1.5 percentage points translates into a dollar increase of $76.1-billion.

But shorter-term instruments still account for the majority of Canada’s accumulated debt issuances. In February, 2020, those shorter-term issuances (treasury bills, and bonds with a maturity of three years or less) made up 53.2 per cent of the total. As of last month, those issuances made up 53.9 per cent of a much larger total.

Line Item

Inflating taxes: Ottawa and some provincial governments should ease the bite of inflation by broadening the use of indexation within the tax system, argues the C.D. Howe Institute in a posting last week. William Robson, the institute’s chief executive officer, and Alexandre Laurin, its director of research, acknowledge that personal income tax brackets are fully indexed at the federal level, and for most provinces. But not everywhere: Ontario does not index its top two rates, while Nova Scotia and P.E.I. index none.

There is also scope for action by Ottawa, however: a slew of other taxes, tax credits and thresholds are not indexed, the authors point out. The failure to distinguish between nominal and real capital gains is one of the most prominent examples.

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