In examining the trends up to the round of federal provincial budgets released in spring of 2021, former federal deputy minister Louis Lévesque finds that, even prior to the pandemic, provincial debt levels in Canada have hit historic heights.
He highlights, in this Intelligence Memo for C.D. Howe Institute, that provincial and federal debt levels have radically diverged since the financial crisis of 2008.
While automatic stabilizers and the federal macroeconomic response plan implemented in 2009 resulted in a temporary upward tick to the federal debt as a percentage of GDP, the downward trend resumed soon after.
On the other hand, provincial debt levels have consistently spiked upward since 2007, reaching historically high levels at the end of 2019. These levels were in fact closing in on the federal debt level — a situation with no precedent since 1945, he observes.
The reasons for this rise? Rapidly growing provincial territorial health expenditures is the largest factor, but lower oil prices since 2014 have also played a major role, in Alberta and Newfoundland and Labrador especially.
Another less understood but significant contributor, he writes, is the important reinvestment in public infrastructure that started after 2000 following years of neglect, as this has largely been debt financed by the provinces.
Lévesque ends with a warning:
“With the exception of the oil-price rebound, there is no reason to expect that pressures on provincial debt associated with healthcare spending and infrastructure will subside anytime soon. In addition, the pandemic fiscal shock and its aftermath will only serve to push provincial debt levels higher.”
