After the recession and an orgy of stimulus spending, 2011 will be the year Canada's provinces begin the hard job of restoring their financial health.
The provinces are on pace to ring up record combined deficits of $26.6-billion in fiscal 2010-11, a gap that has grown 20 times larger in the two years since the global economic collapse.
Just three provinces are expected to balance their budgets this year in 2010 - Alberta, Saskatchewan, and Newfoundland and Labrador - thanks to recovering resource prices and, in Alberta's case, by dipping into a special reserve fund.
For the rest, the path back to budget balance will be long and fraught with hard choices between tax hikes, cuts to favourite programs and squeezing the civil service.
Ontario, for example, isn't expecting to be back in the black for another seven years, and getting there will depend upon uncharacteristic spending restraint.
"Canadians may think we're still living in the golden age, but times have changed," warned Glen Hodgson, chief economist at the Conference Board of Canada.
It's not clear Canadians are ready to have a "grown-up conversation about what sustainable fiscal policy looks like at the provincial level," Mr. Hodgson said.
Experts say the conversation begins and ends with health care, which sucks up nearly half of every dollar the provinces spend (42 per cent). In Ontario, the ratio is even higher, at 46 per cent. And it's an area many Canadians are loath to cut, particularly if it means longer wait times to see specialists, shuttered hospitals or fewer nurses.
"You can't talk about fiscal policy in any province without talking about health care," Mr. Hodgson said.
With the exception of Quebec, which has already moved to raise its sales tax and tackle health-care inflation, few provinces have clearly spelled out what they're prepared to do to balance their budgets. It's the "elephant in the room" that no one wants to confront, said Toronto-Dominion Bank economist Sonya Gulati.
"It's easy on paper to say you're going to cut health spending by 5 per cent, but where that's coming from is the challenge," she said.
Virtually all provinces are facing the prospect of limiting spending increases to 2 or 2.5 per cent a year for the foreseeable future, after nearly 15 years of spending excess. Health care outlays alone have been growing at a rate of 5 per cent to 7 per cent a year, and with the population aging, the pressure is intense to keep spending more.
Ontario Finance Minister Dwight Duncan has vowed to chop roughly a dozen provincial agencies and ban all perks for public-sector workers, such as golf memberships and season tickets to sporting events.
But he hasn't said what those efforts might save.
At the same time, the province is still adding to spending. Ontario recently committed to giving residential and small-business customers a 10-per-cent break on their electricity bills for the next five years. That's expected to cost $300-million in the current fiscal year, and at least $1.1-billion in the following years.
Adding to the provinces' fiscal challenges are looming elections in 2011 in four provinces - Ontario, Manitoba, Saskatchewan and Prince Edward Island - and a leadership race in British Columbia.
"Fiscal austerity is going to be very challenging given the political climate," Ms. Gulati said.
The result could push some of the tough choices to 2012 and beyond. Provinces may opt to lay out spending cuts and tax increases in this year's budget, but delay their application until the following year.
"Government are in a bind," Ms. Gulati acknowledged. "They want to make sure the recovery goes forward. On the other hand, they are saying 'we have these large deficits and we need to make sure we remain creditworthy.' It's a balancing act."
The good news is Canada and its provinces aren't in the kind of fiscal mess facing the United States and many European countries. And while the combined provincial deficit is a record in nominal terms, it's not nearly as large as it was in the mid-1990s.
Canada's combined deficit-to-GDP ratio (including the federal and provincial governments) reached 5.4 per cent of gross domestic product in fiscal 2009-2010. That compares to nearly 9 per cent in the 1990s, and deficits of 12 per cent in Britain and 11 per cent in the U.S.
"We're still in a manageable band for all the provinces in Canada," said Mr. Hodgson of the Conference Board. "We're certainly not Ireland or the U.K. But we have to take it seriously."
Canada's best and worst fiscal performers
Highest deficit-to-GDP (2010-11):
1. Ontario - 3.1 per cent
2. New Brunswick - 2.7 per cent
3. Quebec - 1.5 per cent
4. PEI - 1.1 per cent
5. British Columbia - 0.9 per cent
Highest debt-to-GDP (2010-11)
1. Quebec - 48.3 per cent
2. Nova Scotia - 39.6 per cent
3. Ontario - 36 per cent
4. New Brunswick - 33.5 per cent
5. Newfoundland - 35.2 per cent
Program expenses-to-GDP (2009-10)
1. PEI - 31.2 per cent
2. Newfoundland - 27.9 per cent
3. New Brunswick - 25.8 per cent
4. Nova Scotia - 23.7 per cent
5. Quebec - 20.4 per cent
Lowest deficit-to-GDP (2010-11)
1. Newfoundland - 0
2. Alberta - 0 (after using its "sustainability fund" to erase the deficit)
3. Saskatchewan - 0.1 per cent
4. Nova Scotia - 0.6 per cent
5. Manitoba - 0.8 per cent
Lowest debt-to-GDP (2010-11)
1. Alberta - 5.2 per cent
2. Saskatchewan - 6.7 per cent
3. British Columbia - 16 per cent
4. Manitoba - 25.4 per cent
5. PEI - 32.5 per cent
(Source: Toronto-Dominion Bank, Royal Bank of Canada, government estimates and forecasts)Report Typo/Error