A Coming Revenue Crunch?

Publication, Role of Government, Frontier Centre

Executive Summary

This study evaluates the fiscal year 2006/07 provincial finances for Western Canada and Ontario, using a standardized grading system developed at the Atlantic Institute for Market Studies (AIMS). With this approach, AIMS has evaluated the finances of the Atlantic provinces in three previous studies. Part of the grading methodology involves a retrospective assessment of budget forecast accuracy; this is why this paper assesses budgets for fiscal year 2006/07 that were delivered in the spring of 2006. Assessments of the spring 2007 budgets for the fiscal year 2007/08 will follow in the future.

To determine a single overall grade for each province, we first construct three separate subgrades:

• a measure of the fiscal health of each province just before the tabling of the fiscal year 2006/07 budget in spring 2006;

• a measure of the fiscal accuracy, or transparency, of the 2005/06 budget, which allows us to assess how the province has adhered to its 2005/06 budget forecast according to the revised data in the 2006/07 budget, and how the province’s data deviate from the more comprehensive statistics published by the Dominion Bond Rating Service; and,

• a budget impact grade, which is the assessment of the 2006/07 budget itself. We then average the three subgrades to derive an overall grade for each of the four western provinces and Ontario, with a C+ representing an average grade across all ten provinces.

As a group, the western provinces and Ontario generally score better than the ten-province average. Ontario leads the way with the highest overall 2006/07 grade, a B. Alberta and British Columbia are tied with the second-highest mark, a B–. Manitoba comes in next with an overall mark of C+/B–. Saskatchewan registers the lowest mark among the five provinces west of the Ottawa River with an average C+.

All five provinces earn better public finance grades than Quebec and the Atlantic provinces, which collectively registered a below-average 2006/07 mark of C. Nevertheless, the 2006/07 grades of the westernmost five declined a bit from the revised marks they received in 2005/06. Alberta’s grade fell the most, from a revised B in 2005/06 to B– in 2006/07. Manitoba’s mark declined slightly (to C+/B–, from B– in 2005/06), as did Saskatchewan’s (to C+, from C+/B– in 2005/06). Both Ontario, with a B, and British Columbia, with a B–, receive the same grade as in 2005/06.

Looking at the three subgrades, we note that Alberta boasts a stellar A/A+ mark for fiscal health as a result of its high surpluses and very low interest paid on its minuscule debt. Ontario records the second-highest fiscal health mark, at B+. British Columbia comes in third with a B–/B. Manitoba and Saskatchewan have the lowest 2006/07 fiscal health marks of the five provinces, at C+ and C, respectively. Since Saskatchewan’s fiscal health mark is lower than the ten-province average, we strongly recommend that the province begin a program to cut spending and reduce its debt.

On the fiscal accuracy, or transparency, of the 2005/06 budgets, we note that there is less disparity among the five provinces west of the Ottawa River. Ontario and British Columbia lead the way with slightly better than average B– grades, Manitoba comes in third with a C+/B–, Alberta is fourth with a C/C+, and Saskatchewan again comes in last with a sub-par C mark.

Finally, in evaluating the spring 2006/07 budgets, we award Saskatchewan the highest mark among the five provinces, a B+. This mark stems from the province’s plans to limit spending and lower some business taxes. Ontario and Manitoba come in tied for second with identical B– marks, and British Columbia is fourth with a below-par C–/C grade. Alberta, in our judgment, tabled the poorest 2006/07 budget of any of the ten provinces, with high spending increases and no announced tax reductions, for which we award it a poor D–/D mark. Recall, however, that here we grade the taxation changes announced in the budget, not the overall tax regime. On the latter, Alberta of course compares very favourably to other provinces.

In summary, the economies of Ontario and the four western provinces face considerable uncertainty. Ontario is in the midst of a noticeable slowdown in growth, given troubles with its auto and non-auto manufacturing exports. A possible slowdown in the economies of China and other Asian nations could depress natural resource prices. A growth slowdown — and possible economic recession — could lead to very little growth of provincial own-source revenues, not only for Ontario and the west, but for all ten provincial governments. Given the consensus among forecasters that an economic slowdown is imminent, the governments of Ontario and the western provinces should undertake tighter discipline, particularly to limit spending. The four western provinces must continue to record annual budget surpluses, and Ontario — which could fall into recession as soon as this year — must end its fiscal deficits. All five provinces should strive to improve their finances through fiscal year 2007/08 and beyond.

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