Quebec Finance Minister Eric Girard presents his budget in the legislature, in Quebec City, March 25, 2021.Jacques Boissinot/The Canadian Press
Ontario and Quebec delivered their budgets this week, giving an accounting of the havoc that the coronavirus has wreaked on their finances – and hints of what Ottawa could be saying in its first pandemic-era budget next month.
On Wednesday, Ontario laid out fiscal plans that leaned heavily on sustained economic growth to balance the province’s budget by the end of the decade, eschewing tax increases or significant spending cuts. Quebec took essentially the same stance on Thursday, temporarily abandoning the goals set out in its balanced-budget legislation, but projecting a return to balanced budgets years ahead of its neighbour.
Together, however, Ontario and Quebec each laid out a vision of an economy that has started to recover from the coronavirus faster than previously expected, pointing to a boom in household spending that led both to upgrade their estimates for gross domestic product from their projections in November.
“The numbers seem to be a lot better,” said Mostafa Askari, chief economist at the Institute of Fiscal Studies and Democracy.
Quickening pace of economic rebound
Ontario and Quebec both have less grim assessments of how quickly their economies are recovering from the coronavirus, and a more upbeat view of growth next year.
Both provinces say GDP fell less in 2020 than originally feared. Ontario now estimates that GDP fell by 5.7 per cent in 2020, better than its November projection of a 6.5-per-cent drop. There’s a similar story in Quebec, where the province had forecast in the fall a drop of 6 per cent; that decline is now estimated to be 5.2 per cent.
And both are projecting a surge in growth through 2021 and 2022, once more widespread vaccination allows the economy to reopen more fully and Canadians get a chance to spend the tens of billions of dollars they’ve saved during the pandemic.
Quebec is forecasting that its real GDP will regain its prepandemic level of December, 2019, by the end of this year. And the province says employment will return to prepandemic levels by the end of June, 2022. By the end of next year, the budget predicts, the unemployment rate will fall below 6 per cent – with the economy running at full capacity.
What might that mean for Ottawa? On one hand, a faster-growing economy will reduce the cost of Employment Insurance and other income-support programs, as well as increasing tax revenues. That will help the federal government’s bottom line.
But politically speaking, that could make it more complicated for the government to make the case for massive economic stimulus. In November, Finance Minister Chrystia Freeland said Ottawa would spend $70-billion to $100-billion on economic stimulus – above and beyond the costs of fighting the pandemic – over the next three years.
Ms. Freeland did say the timing and amount of stimulus would be tied to “fiscal guardrails” of economic and employment growth. The plan was to spend no less than $70-billion – but that was before the extent of the strength of the economic rebound became clear. Mr. Askari said the strengthening economy may allow Ottawa to shift some of that spending from short-term stimulus to expenditures aimed at boosting productivity over the longer term.
Go-slow approach to deficit reduction
Ontario Premier Doug Ford and Quebec Premier François Legault both head conservative-leaning governments, but neither has tabled a cost-cutting budget. Both provinces went out of their way to stress that they were not cutting back services (or raising taxes). Instead, they are relying on a growing economy to lift their budgets toward balance.
Of the two, Quebec has the quicker path by far. According to its projections. it will return to a balanced budget by 2024-25 without any aggressive action on cutting expenditures or increasing taxes. Ontario, however, doesn’t expect to hit a balanced budget until five years later. Ben Eisen, a senior fellow at the Fraser Institute, said the spending habits of Ontario’s Progressive Conservative government are much the same as its Liberal predecessor.
In any case, neither of those right-leaning governments have taken an axe to expenditures, leaving any critics of federal Liberal spending without an obvious foil.
Quickly shifting ground for interest rates
In November, Ontario, Quebec and the federal government all issued economic forecasts that saw long-term interest rates rising only gradually from the historically low levels they hit in 2020. Since then, however, yields on 10-year Canada bonds have surged, pushing up those long-term rates.
The surge was substantial enough to leave Ontario’s budget projections this week looking somewhat outdated. The province forecast 10-year bond yields hitting 1 per cent in 2021 and 1.4 per cent in 2022; they’re currently sitting at just under 1.5 per cent. Those projections were finalized on Feb. 3, while yields were still below 1 per cent.
Quebec’s budget is more attuned to events of recent weeks, forecasting higher average yields for 10-year bonds of 1.4 per cent in 2021 and 1.7 per cent in 2022.
Throughout 2020, the federal Liberal government pointed to the decline in long-term interest rates as a key part of its argument that its deficit spending and rising debt levels were sustainable. Rates are still low by historical standards, but they are headed upward. The question for Ottawa to answer next month is – how fast?
Fiscal anchors, but loosely chained
Ontario kept its promise from last fall to reintroduce a fiscal anchor, a publicly articulated metric to constrain its debt and spending. However, the province’s choice – for its debt to not exceed 50.5 per cent of Ontario’s GDP – isn’t much of a constraint, Mr. Eisen says, noting that the government has essentially taken the peak level of its debt projections and called that a fiscal anchor.
Quebec, too, has been only loosely tied to its fiscal anchor, saying it will temporarily suspend its Balanced Budget Act “so that it does not trigger any obligations that could hinder sustainable economic growth or the quality of services.”
In Ottawa, Ms. Freeland has instead talked about “fiscal guardrails” that will indicate when the government should ratchet back its planned stimulus spending. No targets have been articulated, but the fall economic statement did cite the employment rate, total hours worked and the level of unemployment in the economy as guardrail possibilities. All of those economic indicators have rebounded from the lows they hit last April and May, but are still below their prepandemic levels.
As for a fiscal anchor, the federal Liberals have yet to say when they will reintroduce a long-term fiscal anchor, after having cut loose from their previous commitment of a declining ratio of debt to gross domestic product in July. The government’s fall economic update said it would articulate a new anchor “when the economy is more stable.”
Mr. Askari said he does not expect the Liberals will spell out a fiscal anchor in next month’s budget. “I think that’s premature,” he said. “There’s a lot of uncertainty.”
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