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The pandemic is pushing provincial governments further away from financial stability, and they will need to raise taxes or cut spending by a combined $12-billion a year in order to avoid a growing debt load, the Parliamentary Budget Officer reports.

Yves Giroux released an updated 75-year projection of government finances Friday that takes into account the billions in deficit-financed spending that Ottawa and the provinces have approved in recent months.

The report finds that, even with that spending, federal finances remain sustainable provided current emergency spending is wound down as scheduled. The finances of Quebec, Nova Scotia and Ontario are also rated sustainable, but those of the remaining provinces and territories are not.

The PBO defines fiscal sustainability as a spending plan that does not lead to a continuous increase in the size of the debt relative to the size of the economy.

Friday’s report is based on data up to Sept. 1, 2020, so it does not include measures announced this week in Ontario’s budget, which included record spending and a $38.5-billion deficit this year. Premier Doug Ford’s government said its legal requirement to outline a schedule for eliminating the deficit would not be met until the spring 2021 budget.

The PBO report looks at Canada’s total general government debt, which includes federal and provincial spending as well as government pension plans. The PBO says total government debt is sustainable and projected to remain below its 2019 prepandemic level in the long term.

Federal government debt is also sustainable despite the pandemic. The PBO says Ottawa could permanently increase spending or cut taxes by 0.8 per cent of GDP, or $19-billion, while stabilizing the net debt-to-GDP ratio at its prepandemic level of 28 per cent over the long term. Before the pandemic, the PBO said Ottawa had a sustainability cushion of 1.8 per cent of GDP.

For subnational governments – which include the provinces and territories, as well as municipal and Indigenous governments – the combined fiscal picture is not sustainable. The PBO says this level of government would need to raise taxes or cut spending permanently by a combined $12-billion, or 0.5 per cent of GDP, to reach sustainability. The PBO’s prepandemic assessment of subnational governments saw them facing a fiscal shortfall of 0.3 per cent of GDP.

On pensions, the PBO found the Canada Pension Plan has a “modest” shortfall in terms of sustainability – 0.1 per cent of GDP, or $1.3-billion.

The sustainability of the CPP is reviewed regularly by Canada’s chief actuary. A prepandemic assessment released in December, 2019, said the fund was sustainable over the long term at current contribution rates.

Quebec operates its own pension fund and is not part of the CPP. Friday’s PBO report says the Quebec Pension Plan is sustainable over the long term at current levels for contributions and benefits.

The report does not include an update of its federal fiscal forecast for the current year. In September, the PBO projected the federal deficit for the current fiscal year to be $328.5-billion and said the federal debt would climb above $1-trillion.

Finance Minister Chrystia Freeland is expected to release a fall fiscal update in the coming weeks.

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