Feds and provinces' long-term fiscal sustainability going in opposite directions

OTTAWA – Federal finances and the Canada and Quebec pension plans are in good shape over the long term, but the provinces are in trouble, according to a new report from the parliamentary budget office.

The long-term fiscal sustainability report — which forecasts current trends out over a 75-year horizon — says Ottawa has room to cut taxes, increase spending or a combination of both without harming its current debt-to-GDP ratio over the long haul.

The Conservative government put federal finances on a sustainable path in 2011 when it unilaterally announced that hefty annual funding increases for health transfers to the provinces would be sharply trimmed, starting in 2017.

According to the report, that change in health care funding “transferred the fiscal burden to provinces and territories,” with officials calling it the “key factor.”

The Conservatives announced in December 2011 that the current six-per-cent per year increase in the Canada Health Transfer will end in 2017, when it will be scaled back to average growth in GDP.

Carrying that six-per-cent growth out 75 years would “essentially wipe out the fiscal room of the federal government,” said a budget office official, while eliminating three quarters of the provincial fiscal gap.

The report said Ottawa has almost $25 billion in fiscal room in 2013 — meaning that it could cut taxes or increase spending immediately by that total and still end up in 2087 with the same debt-to-GDP ratio Canada has today — 37.4 per cent.

The provinces collectively, by contrast, are more than $36 billion in the hole over the same time frame.

Prime Minister Stephen Harper committed earlier this month at a G20 summit in St. Petersburg, Russia, to reduce the federal debt-to-GDP ratio to 25 per cent by 2021.

According to the report, Ottawa is “on track to achieve the government’s G20 commitment.”

In fact, officials in a background briefing said if federal governments do nothing else, they’ll “easily” surpass the 2021 target.

The budget report notes that it is a “what if” scenario that relies on current government spending and taxation remaining unchanged over decades, so the report cannot be taken as a prediction of the future.

For instance, the report doesn’t take into account Finance Minister Jim Flaherty’s recent announcement freezing Employment Insurance premiums for the next three years, nor does it factor in the cost of Conservative campaign promises such as income splitting for families with young children.

However even under scenarios that include higher interest rates, enriched elderly benefits, slower economic growth and “more costly demographics,” federal finances remain sustainable in the long term, said the report.

By contrast, “other levels of government have unsustainable financing even under the best-case alternative scenarios.”

The budget office did not break down province-to-province variations in sustainability.

The Conservative government projects a deficit of $18.7-billion this fiscal year, while the federal debt will clock in at $627.4 billion.

Under the current long-term scenario, according to the budget office, Canada would reduce its net federal debt to zero in 2044.

It’s worth noting that fiscal sustainability is a relative measurement based on a given year’s debt-to-GDP ratio.

When the Conservatives came to power in 2006, the federal debt-to-GDP ratio was 35.1 per cent and falling, hitting a low of 29 per cent in 2008-09.

Since the global economic recession began in 2008 and the government fell back into deficit, Ottawa has added almost $170 billion in federal debt.

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