The financial situation in several provinces has deteriorated over the past year, but at least one bank believes that rising deficits do not necessarily mean governments are being irresponsible with their spending.
A Challenging Fiscal Outlook
With all provincial budgets tabled and the federal budget set to be released next Tuesday, many taxpayers and investors are feeling less optimistic about the state of the economy. This pessimism is partly due to the fact that Canada’s 10 provinces are projecting a combined annual deficit of over $30 billion, the largest recorded outside the pandemic.
Rising Deficits: A Cause for Concern?
While the projected deficits may seem alarming, Desjardins Group economist Marc Desormeaux argues that things could be worse. "We are seeing more challenging fiscal positions across most provinces…. But if we look deeper into the data, it’s not as bad as it could have been, certainly, or as bad as it seems," he said.
A Closer Look at the Numbers
Desormeaux noted that the record cumulative deficit comes as provincial economies have grown and are dealing with surging populations. On a relative basis, he said the provinces’ combined net debt-to-GDP ratio is set to rise but will still be below levels recorded during most of the decade prior to the pandemic.
Key Factors Contributing to Deficits
Desormeaux highlighted several factors contributing to the deficits:
- Legally mandated wage increases: Much of the overall increase in spending can be attributed to these mandatory increases.
- Population growth and inflation: Provincial plans to keep total spending from growing as fast as the population plus inflation is another mitigating factor.
Provincial Variations
While some provinces are expected to experience significant deficits, others are projected to outperform. Alberta and New Brunswick, for instance, are anticipated to remain in the black this year.
Economic Slowdown: A Factor to Consider
Provincial budget projections have taken into account an expected slowdown in the Canadian economy due to higher interest rates. With that in mind, most provinces are anticipating growth will be weak and revenues will follow suit. However, Desormeaux suggests there may be less risk to provincial finances than to federal finances in this respect.
A Word of Caution
While Desormeaux’s assessment provides some reassurance, it is essential to note that the fiscal situation remains challenging. Provinces must continue to navigate these difficulties while ensuring they can meet their financial obligations.
Conclusion
The fiscal picture for provinces may be worsening, but it’s not necessarily a sign of irresponsible spending. By examining the data and considering various factors, such as population growth and inflation, we can gain a more nuanced understanding of this complex issue.