Provinces focus in on spending cutbacks

But achieving this goal will be challenging, adds Jennifer Wong, assistant vice president with Moody’s Investors Service Inc. in Toronto: “Subdued economic growth in 2012 and 2013 will test the provinces’ abilities to meet their medium-term fiscal plans.”

Although the provinces have the fiscal flexibility to reverse the recent financial deterioration, Wong says, the task will be more challenging for some.

Mary Webb, senior economist and manager of provincial economics with Bank of Nova Scotia in Toronto, considers the provinces’ deficit-reducing plans credible, given the details they have provided on where the cost savings will come from in the near term.

However, implementation is no easy matter. Governments have always had trouble restraining program spending, and what’s being attempted translates into multi-year declines in real terms and even greater drops in real per capita spending. This is unprecedented at the provincial level since the Second World War, says Burleton. (It had been done federally by former finance minister Paul Martin in the 1990s, but much of that restraint came from cuts in transfers to the provinces.)

Still, cutting program spending is necessary because most provinces aren’t prepared to increase tax rates. The general rule of thumb – not just in Canada, but worldwide – is to achieve 80% of the deficit reduction through cuts to spending, says Burleton, and only 20% from increases in revenue.

There are exceptions, however. Burleton points to Quebec, which is very protective of its social programs and had chosen to raise taxes rather than cut into programs in 2010, including a two percentage point increase in its sales tax, a 4¢ increase in the fuel tax and a new $200 per adult health-care contribution – all implemented over a number of years.

Nova Scotia also had raised its sales tax by two percentage points in 2010, but not for the same reason. Its financial situation was so dire that it had to raise taxes as well as restrain spending. The province has promised to reverse the tax increase once it returns to a balanced budget.

Elsewhere, the 80/20 rule is pretty much being adhered to – even in Ontario, whose finances are in the worst shape of all. Overall, user fees have been increased and scheduled tax cuts delayed, but most of the restraint comes on the spending side. Only Manitoba and New Brunswick have raised major taxes, increasing their financial corporation capital tax rate to 4% from 3%.

There are some innovative approaches, but only Saskatchewan is changing the way its government operates, having instituted ongoing monitoring of measures and programs – and cancelling those that aren’t delivering what had been expected, such as the film-employment tax credit.

Most of the provinces are relatively close to having a balanced budget. Saskatchewan is in a surplus position now. British Columbia, Alberta, Quebec and Nova Scotia expect to balance their budgets in fiscal 2013-14; and Manitoba, New Brunswick and Prince Edward Island expect to do so in fiscal 2014-15. Newfoundland and Labrador had not yet introduced its 2012-13 budget at press time, but its 2011 budget had forecast a surplus in fiscal 2014-15. Only Ontario is far from the finishing line; it’s not expecting a balanced budget until fiscal 2017-18.

Here’s a look at the latest provincial budgets in greater detail:

– British Columbia. With a relatively low net debt/gross domestic product ratio, B.C. is in good shape, despite the need to repay Ottawa the $1.6 billion the feds had provided for B.C.’s transition to the HST because a B.C. referendum is forcing the return to the PST on April 1, 2013. The repayment was booked in this fiscal year, but will actually be repaid over five years.

To bring the deficit down, B.C. plans to sell assets not currently in use, earmarked for future use or of strategic benefit for the government, which could raise $700 million. The province also expects to sell the liquor-distribution warehousing activities and associated distribution services to the private sector. B.C. also will raise its health-care premium by 4% and postpone the planned elimination of its 2.5% small-business corporate tax rate indefinitely.

– Alberta. Even after four years of deficits, this province still has net financial assets. But the new right-wing Wildrose Party isn’t impressed. If it wins a majority in the April 23 provincial election – which was just after Investment Executive‘s print deadline – it would introduce legislation to prohibit deficits and put half of budget surpluses into the Heritage Fund.

A Wildrose government also would limit spending increases to no more than population growth plus inflation, without any cuts to nurses, teachers and social workers. As well, a Wildrose government would pay Albertans a portion of oil and gas royalties and institute a number of measures to help families – including a $2,000 tax deduction for each child under the age of 18.

If the Progressive Conservative Association of Alberta wins a majority, the Feb. 9 budget would be passed; it forecasts a budget surplus in fiscal 2013-14 – even with program spending increasing by 3.3% this fiscal year and by 4.6% in fiscal 2013-14. There were few revenue measures, but Premier Alison Redford had promised several targeted tax credits during the campaign.

– Saskatchewan. This province has been in a surplus position since 1994-95 on direct government operations and expects a small surplus on broader government activities, which includes Saskatchewan’s not-for-profit insurance organizations, even with a 5.3% increase in program spending (including 2011 flood costs).

Saskatchewan is not, however, abandoning restraint. It is in the third year of a four-year program to reduce its civil service by 15% and it has raised some user fees.

– Manitoba. Although this province also had suffered from floods during the past year, sending its deficit above the $1-billion mark, Manitoba still is expecting to have a budget surplus in 2014-15.

In addition to an increase in the financial corporation capital tax, the province has raised tobacco and fuel taxes and some user fees, broadened the sales tax base and expects to raise $75 billion from asset sales. It is holding the line on spending, permitting some targeted business tax credits.

– Ontario. This province was heading for a $30-billion budget shortfall in fiscal 2017-18, according to the government-appointed Commission on the Reform of Ontario’s Public Services. However, by adopting some of the commission’s recommendations and acting in “the spirit” of others, as Webb puts it, Ontario expects to balance its budget in fiscal 2017-18.

Ontario’s plan is credible, Webb says, but notes that it depends on achieving zero increases in compensation across the public sector – and that may prove difficult to achieve. Certainly, the province has had difficulties achieving the voluntary zero compensation program during the past two years.

The provincial Liberal government says it will take administrative and legislative measures to ensure wages are frozen – but that may be easier said than done, especially for a minority government dependent on the New Democratic Party to remain in power.

Ontario will be even more challenged in fiscal 2015-16 and 2017-18, when it expects to keep growth in program spending to an average of 0.3% a year. There’s also the risk of an economic slowdown or recession at some point in the next six years.

Ontario is keeping its corporate income tax rate at 11.5%, postponing the scheduled drops that were to take effect this year and next. It also has postponed further reductions in the business education tax rate and eliminated several grants.

The province also is in the midst of a 5% reduction in the civil service; plans significant changes to pensions to ensure it pays no more than 50% of contributions; and expects to sell buildings worth more than $500 million.

– Quebec. This province plans to harmonize with the GST, abandoning the hybrid sales tax it had established in 1991. This qualifies for $2.2 billion in federal transition money, which will be paid in fiscal 2012-13 and 2013-14; these monies will allow Quebec to balance its budget in fiscal 2013-14.

This year’s budget includes enhancements of existing personal and corporate tax credits and has introduced some new ones – including a refundable credit to encourage new financial services firms, as well as tax breaks for those who work beyond age 65 and for firms that retain workers of that age group.

Quebec’s voluntary retirement savings plans, similar to the federal pooled registered pension plans, are expected to be available in January 2013 and will be required for firms with at least five eligible employees as of January 2015.

– New Brunswick. Besides raising its financial corporate capital tax, this province also has increased its real property transfer tax rate to 0.5% from 0.25% as of June 1 and has raised several user fees.

New Brunswick also announced a “government reorganization,” effective March 15, that includes staff reductions, integrating corporate services and amalgamating some departments.

– Nova Scotia. This province is reducing its small-business tax rate to 3.5% from 4%, confirms that the 0.5% capital tax on non-financial corporations will be eliminated as of July 1, 2012, and has increased several other tax credits.

However, all this comes at a cost. Program-spending growth is expected to average only 0.4% a year between fiscal 2012-14 and 2015-16, the greatest restraint among all the provinces.

– Prince Edward Island. P.E.I. plans to adopt the HST at a rate of 14% as of April 1, 2013, as that tax’s broader tax base will generate additional revenue, and also will be raising user fees.

P.E.I. also is restraining growth in health-care spending, freezing education spending next year and cutting other expenditures by 3%-5% this year before freezing them. Measures include the elimination of grants and contributions to various community agencies and the elimination of 300 civil-service jobs, mainly through attrition.IE

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