European-style bailouts in Canada?: Quebec and Ontario’s debts add up to trouble for nation

Equalization, Frontier Centre, Media Appearances, Quebec (historic), Taxation, Uncategorized

Just before his recent meeting with provincial finance ministers, federal Finance Minister Jim Flaherty sent a warning shot across the bow: balance your books lest EUstyle transfers to bail out chronic red-ink provinces become a reality in Canada. The minister’s reference to Europe, where Germany, through EU transfers, seems to be bailing out a litany of red-ink partners through various contributions, might seem an exaggeration.

However, the deficits faced by some provinces are severe and that has the potential to become a national issue. Consider the fate of several provinces: This year, Ontario will run a $19.2-billion deficit and forecasts one almost as high next year; Quebec is running a $3.2-billion red ink budget this year; that will increase to $4.6 billion next year.

Annual deficits cause debt, unless a province can draw down on its savings as Alberta is doing in the present environment — the lone exception. And some provinces have scary debt levels: Ontario’s provincial net debt will hit $220 billion next year, 37 per cent of its Gross Domestic Product; Quebec’s will be $152 billion, 48.7 per cent of GDP. Manitoba, New Brunswick and Nova Scotia will also be deeply in the red relative to their economies, with debt-to-GDP ratios of 26.8 per cent, 32.5 per cent and 39.6 per cent respectively.

This is and will be a problem for the rest of the country, especially the western provinces of Alberta, B.C. and Saskatchewan. It should be remembered that an EU-style transfer mechanism already exists in Canada in the form of equalization and transfer payments. In the current year, transfers of all types to the provinces from the federal government will amount to $55.7 billion this year, up $13.2 billion from just five years ago, and set to increase again by another $2.6 billion next year.

These increases cannot continue forever, especially not when the federal government is itself running an almost $50-billion deficit. Moreover, much of the money for federal transfers on a net basis originates in the West. While one may support equalization in some form — the constitution requires it, but is non-prescriptive on specifics and even federal Liberals under Jean Chretien and Paul Martin cut such transfers in the 1990s — the original intent of equalization is not exactly being realized. As the Frontier Centre for Public Policy pointed out in 2010, many of the so-called "have not" provinces have cheaper tuition, cheap day care, better doctor and nurse ratios per population, and other amenities not available in the have provinces, even though the money for above-average public services is coming from the have provinces.

Flaherty is right. The provinces need to balance their books, and soon. Otherwise, Albertans in particular can expect to see even more of their federal tax dollars paying for interest on provincial debts elsewhere, this in addition to above-average services.