GETTING IT WRONG WAS A GOOD THING. The expectation that COVID-19 spending would create high provincial deficits was wrong. In fact, so wrong that provincial deficits are now doing “a dramatic disappearing act,” according to David Macdonald, senior economist at the CCPA (Canadian Centre for Policy Alternatives) and author of Disappearing Act: The state of provincial deficits in Canada.
Macdonald’s number crunching reveals that thanks to rapid economic growth and lower than planned spending, six provinces (British Columbia, Alberta, Manitoba, Quebec, Nova Scotia and New Brunswick) will show surpluses this year or next.
Also, nine out of 10 provinces are paying less interest, as a proportion of GDP, than they were after the last recession.
The largest driver of these substantial revisions is provincial tax and resource revenue coming in over $59 billion higher than expected in 2021-22;
‘Stuffed with federal cash’
“As it turns out, dire initial deficit estimates from the provinces were far off the mark, says Macdonald. “Provincial cupboards aren’t bare, instead they’ve been stuffed with federal cash through major direct transfers and indirectly through the roaring economic growth federal spending created.”
In the first year of pandemic, most provinces initially overestimated the recession’s impact on revenue and the amount of money they would spend on COVID-19 mitigation efforts—perhaps underestimating how much heavy lifting the federal government would end up doing.
Every province finally ended up revising their initial budget estimates. B.C. was even able to completely erase its $8.7 billion deficit with the projection of a small surplus in 2021–22.
Macdonald writes: “Bottom line: the pandemic went easy on provincial finances. Revenue roared back far faster than originally hoped, largely due to federal actions. This happened directly through massive new provincial transfers and indirectly in that strong economic growth rapidly drove up provincial tax revenue.
Provincial tax revenue stayed strong
The largest single factor leading to lower deficits than predicted came from over-estimating how much tax revenue would fall due to covid. Contrary to expectations there was strong economic growth in 2021 and 2022. The result: provincial own-source tax revenue was $59 billion higher than expected in 2021–22.
In 2020–21, total provincial deficits only came to $48 billion—just a little over half of what was projected. In 2021–22, the provinces’ combined initial projected deficit fell again to just $22 billion—not even one third of the initial projection of $70 billion.
“What’s telling about provinces taking more time to balance their books,” writes Macdonald, “is how much this may be a policy choice, unrelated to the impact of COVID-19. Ontario and Saskatchewan collect among the least in revenue (adjusted to the size of their economy).
Tax cuts unnecessary
Pandemic tax cuts turned out to be unnecessary and even counterproductive. Macdonald points out, “If a province collected less in taxes as a proportion of GDP to begin with, it would gain proportionally less if economic growth quickly recovered. Consequently, it would register deficits for a longer period of time compared to other provinces.”
Consider Ontario: the province has provided a dozen tax breaks since the start of the pandemic. Those revenue shortfalls will cost the Ontario government $1.35 billion in 2021–22, which is the equivalent of 10% of the province’s deficit that year.
Saskatchewan reduced its revenue across several areas during the pandemic. In 2021–22, the total cost of these revenue reductions was $591 million, which amounts to 22% of Saskatchewan’s budget deficit.
Deficits the result of policy choices
Macdonald notes: “While expenditures are often blamed for a deficit, in the case of post-COVID-19 deficits, reduced revenue—not expenditures—is the cause of prolonged deficits in those provinces.
“The bottom line: ongoing deficits past 2022–23 aren’t being caused by the impacts of COVID-19; those deficits are being caused by a policy choice to not collect enough in taxes to cover provincial spending.
“With surpluses on the horizon or already here and low debt carrying costs, the provinces are in a strong position to reinvest after two very rough years for Canadians,” concludes Macdonald.
“It’s time for the provinces to pass their good fortune on to their residents by building a more sustainable, resilient system of public services and supports.”
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