 | | Glen Hodgson
Senior Vice-President and Chief Economist |
 | | Matthew Stewart
Senior Economist
National Forecast |
The financial crisis and recession wreaked havoc on the fiscal positions of governments around the globe. Canada was not spared from the shock, but The Conference Board of Canada still expects federal books to be back in balance by 2015, a full year ahead of the government’s plan. However, some provincial governments will have difficulty re-balancing their books in the foreseeable future, especially as health care costs continue to mount.
When the financial crisis and recession began, Canada was in much better fiscal shape than almost any other industrial country. The federal government and some provinces spent a decade slowly paying down debt. The federal debt-to-GDP ratio declined from 68 per cent in FY1995-96, to just 29 per cent in 2008-09. Most provinces also saw an improvement in the public debt load.
In sharp contrast, public debt levels in Europe, Japan and the United States were rising even during a period of sustained economic growth and have exploded since the recession began. Massive deficits are pushing debt levels upward in the United States and United Kingdom, but the most stunning situation is in Japan, where public debt has already surpassed 200 per cent of GDP. Canada’s fiscal approach created room to maneuver when the recession began and its own deficits began to increase—something governments in other countries just don’t have.
In its March 2010 budget, the federal government expected a deficit of almost $54 billion (3.1 per cent of GDP) in FY 2009-10, due to a combination of rapidly declining revenues and added stimulus spending. Based on aggressive spending restraint and rising revenues, the federal budget projected the deficit to steadily decline –down to $1.8 billion by 2014–15 and eliminated the following year.
Here’s the good news for the federal government: a more positive fiscal outcome now appears to be unfolding. The Conference Board forecasts nominal GDP growth in 2010 to exceed significantly the consensus view used in the federal budget. Nominal GDP, which drives government revenues, is now expected to expand by a solid 7.2 per cent in 2010, considerably stronger than Budget consensus of 4.9 per cent. This projection is a very strong first step on the path to restoring fiscal balance at the federal level.
With a deficit of $47 billion projected, preliminary year-end results from the Department of Finance for 2009-10 were better than expected. The fiscal results for the first two months of FY 2010-11(April – May 2010) provided more good news. The deficit fell to $4.4 billion compared to a $7.5 billion deficit during April and May a year ago. If spending restraint can be kept on track, the federal government should be able to balance its books a full year earlier than projected. The federal debt-GDP ratio will peak at about 35 per cent in 2010-11—still well within manageable levels and significantly better than every other major industrial economy.
In comparison to the federal outlook, provinces, most notably Ontario, now face a structural fiscal challenge. During good economic times earlier in the decade, many provinces ramped up expenditures on priorities such as health care. In this area, spending increased by an average of 7 per cent annually over the last five years.
But provinces also experienced shrinking tax revenues during the recession, and felt the need to match federal infrastructure spending to help kick-start their economies. As a whole, provincial governments have estimated their collective deficits to be almost $34 billion in fiscal year 2009-10. Their collective deficits are expected to improve slightly in 2010-11.
Provinces are now facing some hard choices to regain fiscal health. Structural changes will be needed in how services are delivered, given the health care demands of an aging population and the impact of those same demographics on revenues.
Notwithstanding the structural fiscal challenges of the provinces, Canada is in a much stronger fiscal position than almost every other industrial country. This bodes well for the performance of the Canadian economy as we navigate through stormy global seas.