Budget Officer reports deserve more attention from provincial politicians

The Conservatives managed to squeeze in a small gotcha in the last question period of the fall session of the Nova Scotia legislature. The topic was something of a snoozer – the annual Fiscal Sustainability Report (FSR) from Ottawa’s Parliamentary Budget Officer (PBO).

In numerous QP exchanges over the past year the Premier and various ministers have extolled the government’s budgetary brilliance by citing the PBO’s 2017 conclusion that among all provinces and territories only Nova Scotia and Quebec could boast sustainable fiscal policies. The PBO’s 2018 report, released a few weeks ago, shows that Quebec is now the only province with a sustainable current fiscal policy. As revealed in QP last week, Nova Scotia is back with all of the other provinces and territories – projected to have debt grow faster than their economies unless they increase taxes or reduce services.

The McNeil Liberals may have to drop the PBO’s report from its self-congratulatory message track, at least until the next year’s report comes out. But in the meantime, the annual PBO reports are more than fodder for question period. Now in their ninth year, the FSRs have been helpful in dispelling some of the myths that cloud talk of government deficit and debts in this country, while pointing out the need to increase federal transfers to the provinces to account for the ageing population.

The latest report doesn’t spell out why Nova Scotia fell from the ranks of the sustainable in 2018, but a six per cent increase in expenditure in 2017-8 resulting from one-time revenue windfalls and investments would be a good guess. The 2017 report said Nova Scotia could cut taxes or increase spending by $200 million while keeping its debt constant. Spending went up by nearly $700 million. But with austerity scheduled to resume this year, the province may be back in the PBO’s good books a year from now – albeit at the continuing expense of public sector workers, patients, residents in long-term care and recipients of income support

Federal finances fine

The reports on fiscal sustainability don’t generate much sustained discussion among the politicians they are meant to enlighten, perhaps because they are a bit arcane. For one thing, the PBO projects federal and provincial government finances over 75-years, a time frame most people find hard to fathom. And the fact that fiscal sustainability is defined as maintenance of the current ratio of debt to GDP produces a surprising result. Quebec now has the worst debt to GDP ratio of any province – 43 per cent versus 27 per cent for Nova Scotia.[1] But because the out-going Liberal government has been putting the squeeze on spending, Quebec’s ratio is projected to be the lowest by 2042 and gone a few years later.

As the FSR explains: “To evaluate fiscal sustainability, we take a snapshot of current policy and our interpretation of government intentions for the ongoing structure of policy. We then roll that policy forward over the next 75 years using demographic and economic projections.”

The snapshot changes from year to year and can produce radically different results from one year to the next. But despite some big provincial swings resulting from short-term change, four of the PBO’s last five reports have maintained that for government as a whole – federal, provincial and local – current fiscal policy is sustainable over a 75-year time frame. According to the FSR for 2018, “relative to the size of the Canadian economy, total government net debt is projected to remain below its current level over the long term.”

Furthermore, as my report on the 2015 FSR discussed, the PBO analysis takes into account the grey tsunami – the ageing population that some say has us between the rock of government bankruptcy and the hard place of medicare’s demise. The latest analysis also includes the tax cut, expanded child benefit and infrastructure spending of the Trudeau government, despite which the federal government is still on a path that will see its debt eliminated – as in gone –  by 2055.

However, the positive federal picture masks a looming fiscal problem for provinces and territories, brought on by demographics, health costs and changes in federal transfer payments. Primarily due to the new formula for health transfers introduced by the Harper Conservatives and maintained under the Liberals, most provincial and territorial governments continue to be faced with a Hobson’s choice – raise taxes, cut spending or watch debts soar. As the table shows, maintaining 2017 levels of spending and taxation will lead to big debts in the smaller provinces – the Atlantic region and Manitoba.

Debt/GDP ratio by province and year (per cent)

Source: FSR 2018

The big scary debt numbers projected for seven of ten provinces ( don’t fret for Alberta, a small sales tax would solve its problem) are years away. But that doesn’t mean the underlying issue should not be addressed soon, before some federal government decides to take advantage of its happy fiscal outlook to slash taxes or speed up debt reduction while provinces like Nova Scotia are forced to squeeze health care and other public services or increase their already higher levels of taxation.

The feds can certainly afford to fix the problem. The FSR estimates that Ottawa could reduce taxes or increase spending by $29 billion a year while maintaining net debt at the 2017 level of 31.1 per cent of GDP. On the other hand, provinces and territories would need to increase revenues or cut spending by $18 billion to maintain the 2017 average ratio of 25.7 per cent.

The good news, based on the doing the math from latest PBO snapshot, is that both levels of government can be made fiscally sustainable with an increase in federal transfers to the provinces of $18 billion a year – and Ottawa would still have $11 billion left over. To bring about that positive change sooner rather than later, Nova Scotia politicians would do well to cite the PBO reports to make a case for increased transfers instead of just cherry picking their contents for question period gamesmanship.

[1] The PBO measures net debt using Statistics Canada’s Government Financial Statistics (GFS), producing different results for debt-GDP from those reported in government public accounts. For Nova Scotia, the public accounts number is higher – 34.6 versus 27.0 per cent for the PBO.