British Columbia faces a pivotal moment in its upcoming election. Despite being among the wealthiest provinces, it is grappling with a rapidly rising deficit this year and even larger long-term challenges. Amidst concerns over health care, affordability, and economic growth, the next government (whoever that ends up being) will inherit a more precarious financial landscape than many realize.
But B.C.’s challenges—and the lack of public awareness—are not unique.
Across the country, many overlook the mounting fiscal pressures facing their provinces, focusing more on federal finances instead.
Even recent analysis suggests concern may not be warranted. The Parliamentary Budget Office (PBO), for example, often assesses government sustainability, and its latest report released last month offers reassurance: Canada is in decent shape. Public pensions are secure, and the federal government has fiscal room, with Ottawa able to spend more or cut taxes while stabilizing debt over the very long run.
Their analysis concludes that, overall, provinces are sustainable. While some face more significant challenges than others (they rightly find B.C. has the biggest challenge), the PBO still suggests a stable fiscal picture.
But this is an overly optimistic view, and Canadians shouldn’t rest so easy.
My analysis suggests a far more dire picture for the fiscal future of our provincial governments, especially British Columbia but also for nearly all provinces.
Without changes in how we manage public services—particularly health care—and how we structure our taxes, provinces may find themselves on an unsustainable fiscal path.
How do we know finances are sustainable?
The PBO analysis, like that of my own and others’, is straightforward: it forecasts the growth of government revenues and expenditures, monitoring how any imbalances affect debt and future interest costs. If public debt grows faster than the economy, it’s unsustainable—plain arithmetic, not politics. Debt cannot outpace economic growth indefinitely. The key takeaway from the PBO’s main result (see below) is clear: no order of government is projected to see its debt rise faster than GDP. (That is, none of the lines are going up.) That’s good!
Graphic credit: Janice Nelson.
Unfortunately, this optimistic view of provincial finances hinges on several key assumptions that deserve scrutiny. This isn’t to say the PBO’s analysis is flawed—it’s highly valuable. But even small shifts in assumptions can significantly impact future financial projections.
The devil is in the details
First, the PBO combines municipalities and provincial governments. While this makes sense for the sub-national sector overall, it’s crucial to note that most Canadian cities can’t run deficits and thus don’t contribute to sustainability issues. When municipalities increase spending, property taxes automatically rise to cover costs, as city councils typically vote on spending rather than tax rates.
More importantly, the PBO assumes that most provincial revenues will grow at the same rate as each province’s economy. This isn’t a given. Income and consumption taxes generally track economic growth, yes, but they make up less than half of provincial revenues (see below). A large portion comes from federal transfers, investment income, fees and fines, resource royalties, and so on, which may not keep up.
Graphic credit: Janice Nelson.
If you look at each of these revenue sources one by one (as I do, but the PBO does not), then you’d find that provincial revenues grow more slowly than the overall economy. The PBO is therefore implicitly assuming that provincial governments will gradually and consistently raise taxes and other revenue sources over time to ensure that revenues keep pace with growth.
Provinces might do that, of course, but it isn’t automatic. And this would be a difficult political decision for most governments, especially today, with affordability concerns high on voters’ priority lists, and likely remaining there for years to come.
These differences in assumptions have massive implications for future revenues. The PBO projects provincial own-source revenues fall by roughly 0.5 percent of GDP by 2050. But if current policy is held fixed, as in my analysis, the drop is roughly three times that!
Graphic credit: Janice Nelson.
Second, the PBO’s health-care spending projections may be overly optimistic, as they assume minimal cost pressures beyond those from an aging population. Historically, health-care costs have grown faster than inflation and population growth, even after accounting for demographic changes. This adds roughly one full percentage point per year to cost growth, which is higher than the PBO assumes.
Of course, in recent years, spending growth has been slower than this, but obvious challenges are mounting across the country from lengthening waiting lists, closed emergency rooms, and more. But that can’t continue.
Adding in some health-specific inflation of just one percent per year compounds to dramatically higher health-care spending in the future. The PBO suggests such spending will rise by the equivalent of one percent of GDP by 2050, while I anticipate more than double that.
Graphic credit: Janice Nelson.
These two simple assumptions have a significant impact on the provinces’ long-term fiscal health—and suggest they may be in far worse shape than they appear.
Big challenges ahead
Net provincial debt, I find, could rise from one-third of GDP today to nearly 100 percent by 2050. To avoid this, governments would need to raise taxes or cut spending by about 2.8 percent of GDP—equivalent to increasing the GST from 5 percent to 13 percent. That’s no small feat.
The PBO, meanwhile, projects provincial debt will fall over time. But it arrives at this conclusion by effectively assuming provinces will take the necessary steps to avoid future debt crises. I’m skeptical, but hopefully wrong.
Sustainable health-care costs require reform now, not later. It also calls for rethinking taxation to ensure revenue sustainability. This could mean shifting more towards consumption taxes, which retired individuals tend to pay more of than income taxes—a tough but necessary political choice.
Ultimately, provinces must confront these issues directly. Voters, especially in B.C., should demand clear and actionable plans for long-term financial health.
Without action soon, the consequences will only grow more severe.
Trevor Tombe is a professor of economics at the University of Calgary and a research fellow at The School of Public Policy.
