Ontario, Alberta Slowly Improving Financial Positions for the Long Haul 

Aging population to strain provincial finances even further  
March 3, 2020 Updated: March 3, 2020

News Analysis

Despite some short-term fiscal and economic challenges and looming concerns over aging populations, Ontario and Alberta look to be more financially stable for the long haul under recently elected governments, based on a new report by the Parliamentary Budget Officer (PBO).

The Fiscal Sustainability Report 2020, issued Feb. 27, illustrates the very long-term outcomes that the federal and provincial governments are heading toward under their current fiscal policies—policies that relate to how governments adjust taxes and program spending.

The metrics of Ontario and Alberta in the PBO’s 2020 report, compared with those in the report from 2017—prior to the elections of Doug Ford and Jason Kenney—show that both are in relatively better fiscal shape, even as economic growth is now projected to be weaker over the long run in Alberta and roughly unchanged in Ontario.

But currently, both provinces are in the red and have their own idiosyncratic issues. Alberta’s bottom line depends heavily on the price of oil. Ontario’s heavy debt load makes it difficult for the province to reduce its deficit.

The counterpoint is that both governments are making the fiscal policy changes needed to try to balance the books. Specifically, Alberta and Ontario are spending less on health and education as compared to their 2018 budgets.

The fiscal gap is falling for all of the provinces combined, and Ontario and Alberta are the primary contributors to this welcomed development, according to the PBO.

Expressed as a percentage of GDP, the fiscal gap is the amount that a government must raise taxes or cut spending by—or do some combination of both—to be financially stable over the long term.

“This demonstrates that policy decisions can have significant cumulative impacts over the long term and underlines the benefits of early policy actions,” the PBO stated.

Ontario’s Modest Improvement

Back in 2017, Ontario’s fiscal gap stood at 0.4 percent of GDP, and now in 2020 it has improved to -0.1 percent of GDP. So there’s actually room to spend more and/or cut taxes—albeit modestly. A narrower fiscal gap prevents the all-important debt-to-GDP ratio—a measure of debt sustainability—from eventually skyrocketing.

In 2017, Ontario’s debt-to-GDP was projected to rise to over 80 percent by 2091. Now in 2020, the province’s debt-to-GDP is projected to reach a sustainable 22.1 percent by 2093.

Ontario’s problem, however, is its debt burden and the interest expense its taxpayers have to bear. Even though it’s one of the provinces experiencing consistent economic growth—albeit not at an earth-shattering rate—its fiscal position is not improving that notably.

Ontario’s 2019 budget forecasted that the province would spend $13.3 billion in interest costs for the year—that’s $910 per Ontarian; however, the Dec. 31, 2019 update on its fiscal outlook, projected that this interest cost would be $630 million lower.

Alberta’s Reliance on Oil Revenue

Back in 2017 before Kenney came to power in Alberta, the province’s fiscal gap stood at 4.6 percent of GDP. Now, after Kenney’s first budget has been fully digested, the PBO calculates a much smaller fiscal gap of 0.7 percent of GDP.

Under the fiscal policy of three years ago, the debt-to-GDP ratio was projected to rise to over 320 percent by 2091. Now, that ratio is forecasted to grow to 52 percent by 2093 from the current 10.2 percent.

However, even though Alberta has made progress to get its finances in better shape, its debt level is still not sustainable, since it is growing as a share of the economy.

Alberta is still aiming to balance its books by 2022–23, and it’s planning to do so not only by cutting spending but also by lowering taxes to spur growth. This appears to be an idealistic objective considering the obstacles it faces such as falling oil prices and the political and ideological challenges in building pipelines.

BMO senior economist Robert Kavcic notes that, as a rule of thumb, for every dollar that the price of West Texas Intermediate (WTI) oil comes in below Alberta’s budget assumption, it costs the province about $300 million.

Alberta’s 2020 budget assumed that the price of WTI will remain similar to what it was last fall, when it was hovering between US$55 and US$60 a barrel.

The week leading up to and including the release of Alberta’s budget on Feb. 27 saw WTI plunge 16 percent into the mid-US$40s by Feb. 28.

“Alberta is always going to be at the mercy of global markets more so than most of its peers, and unfortunately recent events [and oil price moves] have the year starting off in a bit of a hole,” Kavic wrote in his analysis of Alberta’s budget.

“I have some concerns with the economic assumptions underlying this budget,” tweeted Trevor Tombe, economics professor at the University of Calgary. He wrote in an op-ed for CBC that Alberta is always gambling on oil revenues, regardless of which political party is in charge.

Problems of Aging Populations

Aside from the fiscal and economic challenges above, the PBO also warned of the aging population as a critical factor affecting government finances.

As the population ages, the government’s tax base doesn’t grow as fast, it becomes harder to generate economic growth, while at the same time more pressure gets piled on social programs.

The most acute period of population aging is slated to happen in the next 25 years, according to the PBO. The burden on the working-age population is going to climb significantly. The ratio of people 65 years and older to the population aged 15 to 64 will rise from 25.7 percent in 2018 to 46.1 percent in 2093.

Rising health-care costs due to aging populations will hurt provincial finances over the long term. The PBO says that reduced federal transfers are another contributing factor to the worsening provincial outlook.

Even with no end to federal deficits in sight, the PBO deems federal debt to be sustainable over the long haul. But at the total provincial level, it isn’t.

The burden on Ontarians is even heavier when the cost of interest payments on its massive provincial debt is factored in, and Alberta needs to see a rebound in oil prices if its budget forecasts are to even come close to being met.

Follow Rahul on Twitter: @RV_ETBiz