Some provinces are prolonging deficits by handing out tax cuts: report
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OTTAWA—Provincial deficits are on track to disappear much faster than initially predicted despite unprecedented spending to fight COVID-19, according to a new report from the Canadian Centre for Policy Alternatives (CCPA).
The report, Disappearing Act: The state of provincial deficits in Canada, reviews provincial finances and finds that major positive revisions of revenue projections mean fiscal surpluses have either already arrived or will soon. The provinces are also in better fiscal shape now than after the last recession.
“As it turns out, dire initial deficit estimates from the provinces were far off the mark. 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,” says report author and CCPA Senior Economist David Macdonald.
In Ontario and Saskatchewan, deficits will persist for longer. However, these provinces collect among the least in taxes compared to the size of their economies. As economic growth surges, these provincial coffers see less relative benefit. Tax cuts during the pandemic represented 10 per cent ($1.35 billion) of Ontario’s deficit and 22 per cent ($591 million) of Saskatchewan’s in 2021-22.
“The bottom line is that failing to collect enough in taxes to cover provincial spending is the result of policy choices, not the impacts of COVID-19,” says Macdonald.
Among the report’s findings:
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Six provinces (British Columbia, Alberta, Manitoba, Quebec, Nova Scotia and New Brunswick) will likely show surpluses this year or next;
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Together, provinces cut their deficits in half in 2020-21, from initial projections of $93 billion to $48 billion, and by two-thirds in 2021-22, from $70 billion to $22 billion;
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The largest driver of these substantial revisions is provincial tax and resource revenue coming in over $59 billion higher than expected in 2021-22;
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Newfoundland and Labrador, Ontario and P.E.I. should have manageable deficit-to-GDP ratios of less than one per cent by the next fiscal year—Saskatchewan is projected to be sitting near two per cent by that time;
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Nine out of 10 provinces are paying less interest now, as a proportion of GDP, compared to after the Great Recession in 2009-10, saving them a combined $6 billion in 2021-22 alone.
“Provincial revenue roared back far faster than originally hoped, largely due to federal actions. Hopefully, their residents will now see provincial good fortune translated into tangible action on the lessons the pandemic taught us. That includes improving health care system resiliency and building a humane long-term care system, in addition to other outstanding issues like addressing climate change and pushing back against inequality,” adds Macdonald.
Disappearing Act: The state of provincial deficits in Canada is available for download on the CCPA website. Territorial financial reporting generally provides less detail and makes direct comparisons challenging. In previous reports, Macdonald tracked which level of government picked up the tab for COVID-19 programs.
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