Provincial governments facing higher debts and more financial pressure

After riding a red-hot economy to shrink deficits and grow surpluses, provin‐ cial governments across the country are beginning to see their finances floun‐ der.

Each province has re‐ leased their budget for the upcoming year and collec‐ tively are facing higher spending and record-size de‐ bt.

Alberta and New Brunswick are the only provinces to publish bal‐ anced budget projections compared to eight of the 10 provinces reporting a surplus two years ago, when a strong national economy and high commodity prices helped fill many provincial coffers.

Now, the "shine is wearing off," describes a report by BMO Capital Markets, as revenue growth is slowing and spending is on the rise.

The combined provincial budget deficit is on track to swell from $10.6 billion last year to $27.9 billion this year. Total provincial net debt is expected to climb by more than $65 billion this upcom‐ ing fiscal year, which is a record annual increase and more than twice the underly‐ ing budget deficit, according to BMO.

Total borrowing is on pace to climb past $130 billion this year, which BMO described as the largest tally on record excluding the first year of the pandemic.

"The provinces are still in good fiscal shape, but the lustre and steady positive momentum is wearing off," the BMO report states.

Rising debt levels are also leading to higher expenses every year in interest pay‐ ments.

"We're seeing most provinces feeling some finan‐ cial pressure," said Pedro An‐ tunes, chief economist at the Conference Board of Canada.

"Long-term financing costs are going to be much more elevated in the future than they were even pre-pan‐ demic," he said. "It means more difficulty for provinces to deliver on other programs when they have essentially debt-financing growing as a share of their overall rev‐ enues."

Many provinces are in‐ creasing spending in the face of higher public sector wages and interest costs. At the same time, population growth is putting a strain on infrastructure, which is lead‐ ing to higher capital spend‐ ing.

"Across the board, bud‐ geted deficits appear to be largely driven by substantial spending needs, particularly in health care, education and transportation," said Aditi Joshi, vice-president of global sovereign ratings at Morn‐ ingstar DBRS, a credit ratings agency.

"Population gains of re‐ cent years have created im‐ mense pressure on public in‐ frastructure that will contin‐ ue to weigh on provincial fi‐ nances through at least the medium term," she said.

The most recent data from Statistics Canada shows the Canadian economy grew a modest 0.2 per cent in Feb‐ ruary, with early estimates for March indicating little change to the GDP.

The Bank of Canada has said it is getting closer to cut‐ ting interest rates as inflation shows signs of coming down and economic growth slows.