Canada’s total government spending is now on an unsustainable path, according to an independent watchdog.
The Parliamentary Budget Officer said Tuesday that Prime Minister Justin Trudeau has used up some of the federal government’s room for new spending and tax cuts that could be managed while maintaining the current debt-to-GDP ratio.
Canada’s provinces and other sub-national governments, however, are struggling. A commodities slump and rising health-care spending has worsened their outlook, which was already on an unsustainable path.
Total government sustainability has swung from net even last year to negative 0.6 percent of gross domestic product -- or roughly C$11 billion ($8.4 billion) in unsustainable spending annually. Trudeau’s push into deficit financing and reversal of a planned cut to seniors’ benefits are eating up room that balanced out the dour sub-national outlook.
The budget officer’s fiscal sustainability report Tuesday found the federal government still has room for new spending or tax cuts totaling 0.9 percent of GDP, after Trudeau delivered a budget that includes C$118.6 billion in cumulative deficits over six years. That’s down from 1.4 percent of GDP in 2015 and amounts to room for C$19.2 billion in new spending or tax cuts.
Canada’s sub-national governments need a combination of new revenue or spending cuts totaling 1.5 percent of GDP to put themselves on a sustainable path, up from 1.4 percent last year -- what the PBO called a “modest deterioration.” That would require a combined C$30.2 billion in spending cuts or tax increases from provinces, territories, local and indigenous governments.
In 2015, the federal fiscal room and the sub-national liability were even and effectively canceled each other out. The biggest federal measure that sapped that wiggle room was Trudeau’s decision to reverse plans to raise the eligibility age for Old Age Security benefits, the PBO said.
Provincial health spending in particular outpaced nominal GDP growth in 2015, the PBO said, and is on pace to rise steadily in coming decades as Canada’s population ages.
The oil-price shock has worsened the outlook for energy-producing provinces, with Moody’s downgrading Alberta’s credit rating in April and switching to a negative outlook for Newfoundland and Labrador in January. The agency also upgraded the outlook this year to stable from negative for Ontario, Canada’s most populous province and the world’s largest sub-sovereign borrower by total debt.