With five provincial governments projecting balanced budgets or surpluses for the 2017-18 fiscal year and the five others looking at reduced deficits, provincial finances are showing signs of improvement.
However, a continuation of this trend depends on how U.S. trade and tax policies affect Canadian businesses and, thus, economic growth. Renegotiation of the North American Free Trade Agreement is slated to begin in late August, and that could seriously impede Canadian exports to the U.S.
As well, U.S. President Donald Trump wants to cut the U.S. corporate tax rate to 15% from 35%, which could make Canada a much less attractive production location for U.S.-based firms. These moves would dampen provincial economic growth.
For now, most provinces are concentrating on supporting program spending. In their 2017 budgets, seven provincial governments included increases in expenditures of at least 3.3% in this fiscal year, which ends on March 31, 2018. The exceptions were Alberta, with just a 2.1% rise in spending, and Saskatchewan and Newfoundland and Labrador, with cuts of 1.2% and 3.4%, respectively.
Spending increases were particularly high for British Columbia and Ontario, at 7.1% and 4.7%, respectively. Both provided substantial additional spending for education and health care. B.C.’s plan also includes more money for transportation infrastructure and support for low-income children, individuals and families. In addition, Ontario’s budget includes $2.5 billion in electricity subsidies over three years, which is needed to support cuts in electricity rates of 25%.
The B.C. Liberal government’s budget, introduced before the May 9 provincial election, projected a $295-million surplus. However, neither the Liberals nor the New Democratic Party (NDP) won a majority of seats in the provincial legislature and will need the support of the Green Party to govern. So, the final nature of that budget is unclear.
The situation also is murky in Nova Scotia, which is holding an election on May 30, after Investment Executive (IE) goes to press. The governing Liberals’ pre-election budget projected a $136-million surplus. However, the Conservatives say that if they win, they will cut taxes, eliminate all road tolls, put in a refundable film tax credit and enhance services to seniors, which would bring the budget balance to zero.
On the tax front, Saskatchewan was the only province with major tax changes. The provincial sales tax rose to 6% from 5% as of March 23 and the tax base has expanded to include clothing, restaurant meals, insurance premiums and property renovation. This was only partially offset by 50-basis-point declines in the personal and corporate income tax rates on July 1 this year and July 1, 2018.
Outside of that, B.C.’s budget cut the small-business tax rate to 2% from 2.5% and New Brunswick reduced its corresponding rate to 3% from 3.5% (both moves effective as of April 1). Nova Scotia raised the threshold for its small-business tax rate to $500,000 from $350,000 and Manitoba raised its threshold to $500,000 from $450,000, both retroactive to Jan. 1.
Newfoundland and Labrador also cut 4¢ a litre from the temporary gas tax of 8.5¢ imposed in last year’s budget, effective June 1.
Here’s a look at the provincial budgets in more detail:
– British Columbia. This province has financial flexibility, given its 16.1% debt/gross domestic product (GDP) ratio, but some of that may disappear (depending on which party forms the government). There’s the possibility of more spending on daycare, elimination of road tolls and an increase in the corporate tax rate. The NDP and Green Party oppose expansion of the Trans Mountain pipeline and there’s also concern about the impact of oil and gas fracking.
– Alberta. This province has very little debt, at 3.1% of GDP, so it can afford the deficits it’s planning to run for the next six years. The budget lays out projections only to fiscal 2019-20. At that point, the net debt will be $45.2 billion, but still a relatively low 12.4% of GDP.
Nevertheless, there are budget critics. Robert Hogue, senior economist with Royal Bank of Canada, notes: “Most of the improvement in the budget balance over the fiscal horizon results from a recovery in resources royalties and growth rather than government actions to contain spending or raise revenue.”
There were only a few new measures, such as extending the post-secondary education tuition freeze and capping the education property tax.
– Saskatchewan. Although this province has the second-lowest debt/GDP ratio at 13.8%, the governing Saskatchewan Party chose to bite the bullet and get rid of deficits as fast as possible.
Mary Webb, director of economic and fiscal policy with Bank of Nova Scotia, calls this move “courageous” because it involves structural changes to make the province’s finances “sustainable” even in periods when economic conditions are challenging.
– Manitoba. The Conservative government is relatively new, having been elected in April 2016, and hasn’t fully developed a deficit-reduction plan or a target date for a balanced budget. The government will, however, be introducing a Fiscal Responsibility and Taxpayer Protection Act, which will include cabinet ministers forgoing 20% of their salary every year that targets aren’t met.
In the meantime, the budget included adjustments to or elimination of a number of tax credits. The only plus for residents is that personal income tax brackets will be indexed to inflation.
– Ontario. Canada’s biggest province is not getting a lot of applause. Analysts are pleased that Ontario has achieved a balanced budget, but are not enthusiastic about the province increasing spending rather than accumulating surpluses to pay down a debt load that has climbed rapidly to 37.8% of GDP vs 2% in fiscal 2007-08.
“It is important to remember that a government should prepare for the next downturn by ‘reloading’ its fiscal tool during good economic times,” says Hogue.
There’s also the problem of soaring house prices. The province announced a 15% tax on purchases of houses by foreigners before the April 27 budget. That may initially cool the market, as a similar tax cooled prices in Vancouver last summer, but may not solve the problem.
– Quebec. Analysts are pleased with the improvement in this province’s finances. “A lot of hard work and sacrifices went into bringing Quebec’s fiscal situation back onto a sustainable path and restoring some fiscal flexibility in recent years,” says Hogue.
However, the province faces challenges with an aging population, which is shrinking Quebec’s labour force and putting pressures on health-care costs, says Sébastien Lavoie, chief economist with Laurentian Bank of Canada.
The budget had a number of measures benefiting families, including a significant increase in the basic personal tax credit and raising the threshold for the lowest tax bracket. The renovation tax credit also was increased and there’s tax relief on the sale of a family business.
– New Brunswick. This is probably the most challenged province, says Lavoie. It has raised tax rates in recent years because the labour force is declining due to an aging population and little immigration. Furthermore, there aren’t any major projects to boost economic growth.
– Nova Scotia. There are a number of economic drivers – a convention centre in Halifax is being completed, there are major shipbuilding contracts and ongoing construction of a liquid natural gas facility. This province’s finances were, however, up in the air as IE went to press.
– Prince Edward Island. This budget had few new measures. Says Hogue: “Despite the risk of unforeseen events and lack of a contingency reserve, the province’s fiscal situation is quite solid overall.”
– Newfoundland & Labrador. This province went into crisis after the plunge in oil prices in 2014. Even after cutting the deficit in half last year by raising virtually every tax and fee, the province’s debt rose to 47.6% of GDP as of March 31 from 26% four years earlier.
Webb says that the province has responded admirably. She says it’s making some “courageous” moves to restructure its finances so that they are sustainable – even in periods when economic conditions are challenging.
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