Tuesday, April 27, 2010

2014 will be a wonderful year

As of Friday last week, provincial governments in Canada have now released all of their 2010- 2011 budgets. It has been interesting to see a pattern in their projections of returning to a balanced budget. Here's the data:

Prov 09 - 10 deficit Projected balance

Can $54 billion 2014

NL $295 million not given
NS $488 million 2013 - 2014
NB $754 million 2014 - 2015
PE $84.2 million 2013 - 2014
PQ $4.3 billion 2013 - 2014
ON $21.3 billion 2017 - 2018
MN $555 million 2014 - 2015
SK balanced balanced now
AB $3.6 billion 2012 - 2013
BC $2.8 billion 2013 - 2014

Please note that Saskatchewan balanced its budget using a $194 million withdrawal from its Growth and Financial Security fund or they would have had a deficit.

Notice how many provinces project that their budgets will be balanced in 2014? To the untrained eye, it almost appears that they are all using the same talking points or are using the same source for their economic forecasts. I wonder which is the case.

If we look at the recessions of the 20th century, we see that they occurred every 2 to 10 years with the average being around 5 to 6 years in the last half of the century. In the 21st century, the first recession ended in November 2001. The last Canadian recession (the Great Recession) started in the last quarter of 2008 and ended in the second quarter of 2009. If we use an average of 5 years between recessions, Canada could be due for another economic slowdown by 2014, just in time to ruin the economic forecasts of Canada's provincial governments. As well, the economic situation in the United States is precarious at best; huge budget deficits and rapidly growing government debt will markedly affect their ability to stay out of further economic difficulties. As we know, Canada is not immune to the economic malaise south of the 49th parallel.

As most Canadians with even the smallest amount of financial acumen know, financial forecasts are not worth the paper they are written on. Between one budget period and the next, Prince Edward Island moved it's balanced budget date back by 2 years and in 2009, Ontario projected that their budget would be balanced in 2015 - 2016. It is now projected to reach balance in 2017 - 2018. Provincial Treasurers and Finance Ministers would prefer to err on the side of optimism when forecasting a return to balance. Their forecasts have an alternative use in addition to their use as economic projections. They can also be used to convince voters that sunny days are just around the corner if only we are patient. "Please Mr./Ms. voter, pick me because if you do, things have nowhere to go but up, up, up!".

My suspicion is that many provincial governments are entering a phase where their deficits will become structural, that is, no matter how much the economy grows, they will never be able to run a surplus. Debt repayments and increased program spending outlays (most particularly health care) will quickly eat up any revenue surplus.

Unfortunately, I think we have been living in a tax dreamworld. I suspect we will have to brace ourselves for massive tax increases, most likely after the next round of provincial elections. Quebec is already feeling the wrath of tax increases and Ontario and British Columbia will soon experience the tax grab of harmonized sales taxes.

In part 2 of this missive, I will examine the debt situation of each of the provinces.

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