An Update on Government Finances

July 16, 2018
Jock Finlayson

In last week’s Monetary Policy Report, the Bank of Canada indicated that the Canadian economy is now operating at full capacity, with little or no “slack” available to help spur faster growth over the 2018-20 period. Against that backdrop, it is useful to consider the current state of government finances.

Projected Government Budget Balances,
Federal Government $18.1 billion deficit
Alberta $8.8 billion deficit
Ontario $6.7 billion deficit
Newfoundland $683 million deficit
Manitoba $521 million deficit
Saskatchewan $365 million deficit
New Brunswick $189 million deficit
Quebec balanced operating budget
PEI $2 million surplus
Nova Scotia $29 million surplus
B.C. $219 million surplus
Source: RBC Economics.

With the national economy having reached potential, now is not a propitious time for governments to be running fiscal deficits. Yet, collectively, they are doing just that.

As shown in the accompanying table, Ottawa and provinces together are on track to report more than $34 billion in red ink in 2018-19. More than half of this reflects the federal government’s still substantial fiscal shortfall. The Trudeau government seems to have abandoned any interest in balancing the books, ever. Among the provinces, Alberta and Ontario stand out for their large operating deficits. B.C., in contrast, continues to post a small operating surplus, along with Nova Scotia and PEI.

Added together, the deficits being incurred by Ottawa and several of the provinces amount to a little over 1.5% of Canada’s gross domestic product (GDP). By international standards, that’s not a bad performance – under President Trump and the Republican-led American Congress, for example, the U.S. government has a deficit of around 4% of GDP, despite a booming economy.

Still, the failure of the Canadian public sector to eliminate its aggregate fiscal shortfall at this stage of the economic cycle is worrisome. By any metric, the economic expansion cycle that took hold following the 2008-09 global financial crisis is well-advanced. Within the next two years, Canada is likely to experience a major economic downturn or outright recession. At that point, it’s a safe bet that government deficits will rise steeply as taxation revenues slump and some categories of public spending (e.g., support for the unemployed) increase.

Beginning in the late 1990s, Canada acquired a hard-earned reputation for strong fiscal management. Arguably, that reputation is now in some jeopardy as the country’s public sector continues to post significant annual deficits at a time when overall macroeconomic conditions suggest that Finance Ministers in Ottawa and the provinces should be aiming for balanced budgets or modest surpluses.

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