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Provincial budget woes soon to be a federal problem

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Ottawa, be warned: The grim budget news out of Canada's two westernmost provinces is on a fast train to the nation's capital.

While British Columbia's new budget and Alberta's quarterly fiscal update show a pair of provinces on very different courses – Alberta's deficit swelling alarmingly, B.C. pledging austerity and tax hikes to balance its ledgers – both bear the ugly scars of a Canadian economy deteriorating faster than economists can update their forecasts.

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British Columbia pegged the province's 2013 real gross domestic product growth at 1.6 per cent – a half a percentage point lower than the province's private-sector economic council forecast barely a month ago. Alberta slashed its 2013 real GDP growth forecast to 2.9 per cent from 3.8 per cent.

These latest growth downgrades come three months after Quebec, in its 2013-14 budget, reduced its own GDP growth forecast for this year to 1.5 per cent from 1.9 per cent. Given the tepid national economic numbers that have surfaced since then (pointing to real GDP growth of about 1 per cent annualized in the fourth quarter, after growing just 0.6 per cent annualized in the third quarter), Quebec's forecast may have been naively optimistic.

Predating the bleak economic updates from all three of those provinces (which, combined, account for roughly half of Canada's economy) was Ottawa's own most recent economic outlook, on which its own fiscal projections are based. In mid-November, the federal Finance department forecast 2013 real GDP growth of 2 per cent, based on an average of private-sector economists' forecasts. Today, the average forecast of 31 private-sector economists compiled by Bloomberg calls for 1.77 per cent, down from 2.1 per cent in November.

In a report last week, Toronto-Dominion Bank pegged nominal GDP growth for 2013 – that is, GDP growth before removing the impact of inflation – at 3.6 per cent. That's nearly half a percentage point lower than what Ottawa forecast in November.

"Economic planning assumptions are highly tied to the pace of nominal GDP growth," wrote TD senior economist Sonya Gulati. "With the annual profile described here, government revenue growth is expected to be modest."

With the provincial updates beginning to confirm economists' fears, the federal budget looks certain to run into some harsh reality when Finance Minister Jim Flaherty unveils it, likely toward the end of March.

Consider the federal government's fiscal projections for its 2013-14 budget year, from last November, which called for the budget deficit to shrink by $9.5-billion from 2012-13. To get there, Ottawa was counting on its revenues to increase by nearly $13-billion in the year – the side of the ledger that is highly dependent on nominal GDP. Based on Ottawa's own estimates of its budget sensitivity to nominal GDP declines, the current forecasts for 2013 GDP point to 2013-14 revenues roughly $1.5-billion lower than the November projections.

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That will mean Mr. Flaherty will either have to abandon his deficit-reduction targets, or find $1.5-billion somewhere on the spending side to make up for the revenue shortfall. And significant spending cuts are a Catch-22 – potentially creating another drag on an already strained economy.

These tough decisions now look unavoidable. As Mr. Flaherty watches the budget-season clouds gather around the country, he had better prepare to deal with the storm headed his way.

David Parkinson is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights.

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About the Author
Economics Reporter

David Parkinson has been covering business and financial markets since 1990, and has been with The Globe and Mail since 2000. A Calgary native, he received a Southam Fellowship from the University of Toronto in 1999-2000, studying international political economics. More

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