Provinces urged to eliminate deficits in five years

Finance Minister Jim Flaherty is calling on provinces to commit to balancing all their deficits within five years, even as some doubt Ottawa’s own resolve.

In a surprising declaration Thursday, Flaherty said he wants all provinces and territories to commit to the five-year target — as Ottawa has done — at this weekend’s finance ministers meeting in Kananaskis, Alta.

And without naming any provincial government, he cast doubt on whether some are committed to the task.

“I think they share the concern (about deficits), and some share a desire for action,” he said.

“I also hope they will commit to seeking ways to accelerate balanced budget plans, if possible. The earlier we can get rid of those deficits, the better.”

One issue being discussed in Kananaskis is the federal-provincial health care agreement, which currently sees Ottawa increasing funding annually by six per cent. With the deal set to expire in 2014, provinces are gearing up to get Ottawa to commit to at least the same level of annual increases.

But Flaherty has suggested such annual boosts are neither sustainable nor justified, noting again Thursday that it represents a rate “significantly faster than economic growth, even with inflation.”

The challenge on deficits appears to be aimed at the Ontario government, which has set a seven-year target to eliminate the shortfall, and cast doubt on whether Ottawa’s plan is achievable.

Dwight Duncan, Ontario’s finance minister, recently scoffed at Flaherty’s claim he will balance Ottawa’s budget by 2015-16. Parliamentary Budget Officer Kevin Page has also expressed doubt that the five-year target is achievable given the current projections on economic growth.

“It’s just not doable,” Duncan said earlier this month.

“It’s just like in November of ’08 when they looked the country in the eye and said they don’t have a deficit,” Duncan added. “I was laughing because ... we knew what was happening to our revenues. They have the same revenue source and they just weren’t being completely candid with the people of Ontario and the people of Canada.”

Economists have argued that fiscally it is irrelevant whether Ottawa balances the budget in its timeframe or merely comes close.

Canada’s national debt as a proportion of the economy is far smaller than any other country in the G7 at about 35 per cent — half what it was in the mid-1990s when the country faced a fiscal crisis. Adding provincial debt takes the number to 62 per cent.

But economists have also said that some provinces, particularly Ontario, face a fiscal crunch in the future as the baby boom generation begins to retire and soak up more health care dollars.

Ontario’s $18.7-billion deficit is proportionally higher than Ottawa’s, expected to come in at below the $45-billion estimate, but only slightly — 3.1 per cent of gross domestic product versus 2.8.

With the exception of Ontario, all other provinces are on track to eliminate their deficits at the same time or before Ottawa, says TD Bank economist Sonya Gulati. But those plans require governments to restrict spending increases to two to three per cent for an extended period, something few have achieved in the past.

“All governments across the country are facing the same challenges,” Gulati said.