Provinces have surpluses, need political will, to support programs for Canadians, report finds

A new report says provinces have enough surplus funds to pay for the programs Canadians rely on “to survive and thrive,” and choosing to spend them is a matter of political will.

“I think it’s taking some time for people to catch up to the fact that the provinces are in great fiscal shape. They’ve got plenty of money to spend on priorities that might have been highlighted during the pandemic, things like improving a health care system or long-term care,” Canadian Centre for Policy Alternative (CCPA) senior economist David Macdonald said in an interview.

“They’ve got the money to do it now, and so it’s not really a fiscal question. It’s very much a political question now as to what they want to do with these surpluses.” 

In his report published on Wednesday titled Flush With Cash: The provinces are richer than they think, Macdonald examined the long-term impact of the pandemic on provincial finances. He highlights that all 10 provinces have experienced surpluses since the onset of the pandemic. 

The result of these surpluses, he wrote, is that nine out of 10 provinces are anticipating a larger fiscal balance than before the pandemic. The exception is Newfoundland and Labrador, which will see “surpluses for as far as the eye can see,” but just not quite as high as in 2019-2020.

“There was certainly an impact in the first year of the pandemic where you saw increased (provincial) deficits compared to the year before, no doubt about it,” Macdonald said. 

“By the second year…the fiscal impact of the pandemic was gone from provincial books. They were already in a slight surplus position in the aggregate in 21-22, and this year they’re in an even bigger surplus position and we’re only halfway through the year.”

Although significant deficits were initially expected in the pandemic’s early days, Macdonald said federal assistance and a “much more rapid” than expected economic recovery helped bolster provincial coffers and enabled provinces to avoid the initial “doomsday deficit scenarios.” 

Macdonald said in the last six months there’s been an even bigger shift in light of “huge” budget revisions. Despite substantial deficits expected across all provinces for the 2022-23 fiscal year, the $48.5 billion spring deficit projection has shifted to an estimated surplus of $7.1 billion for 2022-23. 

“Even that is probably pessimistic, because we haven’t seen fulsome revisions, particularly in Ontario and Quebec, which are likely to raise that (surplus) even further,” he said

Driven by inflation

This is being driven by inflation. 

“On the one side, inflation is great for provincial books insofar as it increases revenues on sales taxes, in particular because the sales taxes are being charged on these higher prices,” Macdonald said. 

“But the other piece of it of course is corporate profits, which have gone through the roof as this recovery has proceeded. And as a result of that, there’s higher corporate income taxes.”

Macdonald said food inflation and high gas prices are a boon for provincial budgets. He believes an important step provinces could take is properly indexing provincial cash transfers and social assistance to inflation, as well as limiting the increase in the prices of rent.   

Surpluses, he said, mean that provinces now have the funds to do that. 

“It wouldn’t have mattered as much when inflation was 2%. When inflation’s 7% or 8%, it matters a lot more,” he said. 

“They’re making more money off inflation. They should be offsetting some of those impacts on lower income households by indexing their benefits.”

In the report’s provincial breakdown, Macdonald highlights the fact Nova Scotia had a $2 million surplus just before the pandemic began (2019-20). The surplus for 2021-22 was $351 million, and Macdonald wrote that in that sense “the impact of the pandemic on the province’s finances had been eliminated by the end of last year.”

The deficit, he said, will remain at or under 1% of the province’s gross domestic product through the rest of its planning horizon.   

“Nova Scotia is one of only two provinces that saw an increase in its deficit in the fall 2022 update. The province registered over $900 million in additional unanticipated revenue, similar to other provinces,” Macdonald wrote.

“However, the province also increased its program expenditures by over $1 billion, so the net result was a slightly higher deficit than initially anticipated.”

‘Open up our imagination’ to what provinces can do

Macdonald said surplus funds give the provinces a means to address other issues related to cost of living and/or the pandemic. These include rebuilding health care capacity and improving long-term care.

“When the prices get higher, cash floods into provincial coffers. The upside for the provinces is now they have the means to attempt to address some of these (social) issues,” Macdonald said. 

“These are all issues highlighted during the pandemic, and I certainly hope that they’re not forgotten just because the pandemic isn’t quite as in the front of our mind as the cost of living crisis.”

In the report’s conclusion Macdonald wrote that the pandemic revealed many problems with provincial health care systems, many of which were a result of chronic underfunding made worse and exposed by COVID-19. He said there’s no longer any financial excuse for the provinces to ignore chronic issues, only political ones, because the funds exist “to fix glaring problems.”

He also wrote:

The provinces are flush with cash. While inflation has weighed heavily on Canadians, it has buoyed provincial and federal finances. Both the cost of goods and corporate profits have skyrocketed due to inflation, yielding higher government revenues through the tax system. 

“I think that we should open up our imagination of what provincial governments can do. In the past, provinces will often say, ‘Well, we’re running a deficit, we can’t do those things, we don’t have any money.’ Now there is money,” Macdonald said.

“Now is an opportunity to think about what are some things we should be doing, that we could be doing with this money that is useful in terms of helping lower income Canadians, helping critical services like health care, long term care, like education.”