Canadians are feeling the pinch of higher prices these days. But this is not the case with provincial budgets. Coffers are filling, with many provinces reducing the size of their deficits or increasing their surpluses, leaving most of these governments in a much better position than they were earlier this year.
The scorching economy is a common factor driving up revenues, in addition to high commodity prices. Even skyrocketing inflation helps generate additional cash.
Still, experts warn the windfall will be short-lived as the economy begins to slow and interest rates rise, among other challenges.
Alberta is seeing the biggest change in fortunes, as an initial budget surplus of $511 million is now expected to hit $13.2 billion.
Since provincial governments released their budgets last spring, only Nova Scotia is on the verge of posting a larger deficit. Prince Edward Island and Newfoundland and Labrador have not yet released updates for the first quarter.
“It’s been pretty much pervasive,” said Robert Kavcic, senior economist at BMO Capital Markets.
“Almost everyone was very conservative with their economic outlook, and the economy just came back and performed much stronger than anyone expected. So that led to some very significant revenue surprises on the upside.”
The dollar figures could improve further, Kavcic says, as the year progresses.
Soaring commodity prices benefit not only Alberta, but also Saskatchewan and Newfoundland and Labrador similarly, as oil, natural gas and fertilizer prices soared following Russia’s invasion of Ukraine.
In Manitoba, higher river levels and higher electricity export prices are the main reasons a projected deficit of $548 million has now fallen to $202 million.
“Things have been going well for the provinces lately,” said Ted Mallett, director of the Conference Board of Canada’s economic forecasting team.
“Just the happy coincidence of a number of factors [that] came together.”
Inflation has been a sore spot for individuals and businesses, but rising prices are also helping to boost government revenue as tax revenues rise. The rate of inflation has been much higher and more persistent than experts initially expected.
“Inflation would have an effect on both income and expenditure, but it appears to have had more of an effect on income,” Mallett said.
British Columbia, Saskatchewan and Quebec originally forecast a deficit this year, but are now expecting a surplus. Ontario’s deficit has shrunk, but is still expected to be over $18 billion.
Many provinces have announced new spending programs aimed at reducing energy and fuel costs in an effort to fight inflation. Some provinces are using part of their windfall to pay off part of the debt that has accumulated over the past few years.
The overall financial improvement of provincial governments is “dramatic” and “rapid”, said Travis Shaw – senior vice president of DBRS Morningstar, a credit rating agency – especially given the amount of debt accumulated in 2020 and 2021 during the worst of the pandemic.
“Things seem to be showing a pretty remarkable turnaround and that’s even compared to the previous spring’s budget[s]. So in the space of just one quarter, we saw a pretty substantial increase in provincial revenue,” he said.
Yet his advice to provincial finance ministers is not to let the windfall go to their heads.
Instead, he urges caution, especially as the economy begins to slow and a recession could be imminent.
“We have to be mindful of tougher times as we look to next year and beyond,” Shaw said.
In particular, it highlights the need to control public sector compensation given that these expenditures typically account for between half and two-thirds of government operating expenditures.
“In an inflationary environment, wage demands are much higher. It may be affordable today, but…perhaps you have been locked into higher expenses at a time when your income may decline “, did he declare.
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