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tax and spend

The fiscal outlook in Ontario and New Brunswick is rapidly brightening, with each provincial government this week unveiling fiscal updates showing a large surge in revenues compared with earlier projections.

New Brunswick is on track to post a record surplus, and Ontario’s projected deficit has shrunk by nearly two-thirds from the shortfall predicted in last spring’s budget. In both provinces, that is setting debt as measured against provincial gross domestic product on a sharp downward path.

That’s good news. But those buoyant updates from the two provinces underscore the political problem created by budgets that are consistently cautious in their projections. That creates an overly gloomy fiscal picture, and suffocates informed debate about public finances, argues Richard Saillant, an economist based in Moncton, N.B.

He points out that his province has – across both Liberal and Progressive Conservative administrations – consistently underestimated revenue when tabling budgets over the past 11 years. Then, later in the fiscal cycle, helpful surprises emerge, with an annual average revenue increase over the original budget of $350-million.

The windfall is much bigger in the current fiscal year, with the third-quarter update on Tuesday projecting revenue to be $832-million higher than estimated in the budget, about an 8-per-cent jump. The provincial Progressive Conservative government is holding the line on spending, with expenses rising by just $99-million, or less than 1 per cent.

As a result, New Brunswick’s original forecast of a $244.8-million deficit has flipped to a surplus of $487.8-million. But Mr. Saillant points out that the government never made the case for a fiscal plan to generate large surpluses. Instead, cautious forecasts have pre-empted any such deliberations. “It muzzles public debate over what to do with the surplus,” he said.

The situation is strikingly similar in Ontario, which published its third-quarter update on Monday. In its budget last March, the province’s Progressive Conservative government forecast revenues of $154-billion and a deficit of $33.1-billion. Eleven months later, that outlook has brightened considerably. Revenue estimates are up by $22.6-billion. As is the case with New Brunswick, Ontario is for the most part not spending those extra billions, with outlays rising just $2.8-billion. The provincial deficit has dropped precipitously, to $13.1-billion.

That smaller deficit likely presages a reversal of where Ontario’s debt burden is heading. In the March budget, the province forecast a rising debt-to-GDP ratio, hitting 48.8 per cent in the current fiscal year and continuing to increase to 50.2 per cent in fiscal 2023-24. The province now says that ratio will drop in the current fiscal year to just 40.8 per cent – not far from the prepandemic level of 39.6 per cent in 2019-20.

Rebekah Young, director of fiscal and provincial economics at Scotiabank, said what she describes as Ontario’s “prudent planning” puts the province on a path that could result in a balanced budget within a couple of years, without dragging down economic growth. Ontario’s revenue upside could also bode well for other provinces, she added.

The New Brunswick government echoed that view, saying in a news release that its results reflect a “nationwide trend of unprecedented revenue increases.”

University of Toronto economist Michael Smart said much of Ontario’s new-found corporate tax revenue – up $7.9-billion from the budget forecast – was the result of increased tax assessments from 2020, revised retroactively by the Canada Revenue Agency in December.

The federal government collects personal income, sales and corporate taxes on behalf of the provinces (other than Quebec), and then remits them monthly. Prof. Smart says Ottawa is continually monitoring collections data and adjusts those payments to the province accordingly. But there are nevertheless sometimes major revisions, such as the one that pushed up corporate tax revenues.

Prof. Smart says that points to a persistent problem with Ontario fiscal estimates, namely that the province is heavily dependent on data from the CRA. “Ontario has trouble forecasting what its revenues are going to be, partly because so much of their revenue comes from the CRA in Ottawa,” he said.

Back in Moncton, Mr. Saillant acknowledges that dependence on the CRA is also a factor in New Brunswick’s poor track record for accurately forecasting revenue. “But then we need to take account of the fact that we live in the real world,” he said.

It’s obvious that the economy is booming, Mr. Saillant said. Government revenue typically rises in step with growth in nominal GDP, he said. The windfall disclosed this week was, as would be expected, in line with the uptick in nominal GDP growth since the original budget was tabled, Mr. Saillant added.

Provincial governments have a responsibility to be transparent and to fine-tune their forecasts if they can see that numbers from the CRA are outdated, he said. “People need to have a sense that the numbers are mostly reliable.”

Tax and Spend examines the intricacies and oddities of taxation and government spending.

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