Magazine article Government Finance Review

Provincial Fiscal Perspective

Magazine article Government Finance Review

Provincial Fiscal Perspective

Article excerpt

There has been an appreciable increase in the size of Canada's public-sector fiscal deficit in recent years. Since the late 1980s, this deficit has increased 70 percent with much of the gain taking place in the last two years as the economic downturn slowed revenue growth and generated upward pressure on spending, particularly in the area of social services. At the same time, however, here has been a fundamental shift in the structure of the budgetary imbalance in Canada's public sector, with provincial government deficits becoming a much more significant component of the imbalance. As seen in Exhibit 1, the provincial element of the deficit increased from 16 percent in 1988-89 to 41 percent by 1992-93 of the public sector's fiscal gap. Small reductions in provincial deficits are budgeted for in the current 1993-94 fiscal year, but in most cases, not without a combination of spending controls and significant tax increases.

Many factors contributed to this shift in the public-sector deficit profile. For instance, comprehensive budgetary reforms within the provincial sector were in earlier stages of both conceptualization and implementation than they were at the federal level. A complicating factor for the provinces' revenue situation was that some of the measures the federal government undertook to control its own deficit consisted of restricting the growth of major transfer payments to provincial governments. In some of the poorer provinces, these transfers account for as much as 45 percent of the revenue base.

On the expenditure side, the provinces have had to deal with spending pressures arising from the economic downturn, as has the federal government. However, the situation at the provincial level was compounded by ongoing structural cost pressures in major spending areas which fall under provincial jurisdiction, such as health care and social services. Among the many sources of structural pressures on the expenditure base of provincial governments are the aging of the population, the advent and acceptance of new medical technologies, ongoing or new social problems, and rigidities in government employee benefit packages.

Another important change reflected in the new deficit profile of the public sector is the major shift in fiscal direction in Ontario, which began in the late 1980s. The widening of Ontario's deficit from 1990-91 through 1992-93 accounts for more than half of the total deficit increase of the provincial government sector. The increase in Ontario's deficit reflects the severity of the economic downturn in central Canada, years of large base budgetary expenditure growth and the sheer size of the province in relation to others.

1992-93 Deficits

As in the case of the federal government, budgetary estimates released by provincial governments indicate that the budgetary imbalance in the provincial sector was noticeably larger last fiscal year than projected during the 1992-93 budget season. According to official projections, the aggregate budgetary deficit for the provinces is now estimated to have reached C$24.9 billion, up 22.7 percent from the estimates that were put forth in the spring of 1992. Despite provincial efforts to reduce the deficits from the levels reached last

year, the latest estimates indicate that there was deterioration. As a result, the ratio of the deficit to the gross domestic product (GDP) was marginally higher this year than the level recorded in the 1991-92 fiscal year.

Exhibit 3 illustrates for 1992-93 the fiscal gap relative to the revenue base, which reflects budgetary deficiencies in both the operating and capital accounts. More important, however, is that the 20 percent deficit-to-revenue ratio for the provincial sector suggests that the imbalance has a structural component which--unlike the cyclical portion--will not recede as economic performance recovers. Exhibit 3 also shows that the fiscal challenge is national in scope: only Newfoundland's deficit-to-revenue ratio is under 10 percent. …

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