Ontario's Finance Minister Dwight Duncan speaks during a pre-budget news conference at his office in Toronto, March 26, 2012.
Credits: REUTERS/Mike Cassese
Newfoundland and Labrador's latest budget makes it official. Only Saskatchewan is not dripping red ink.
Every other province -- and the feds -- are bathing or at least washing their feet in the stuff. And yes, you should be worried.
People, including the federal finance minister, insist that Canada is in comparatively good financial health.
All that means, as C.D. Howe Institute president William Robson said two years ago, is "We're the least ugly contestant in the beauty contest." And all this rouge isn't making us any prettier.
True, formally Ottawa is "only" in hock to the tune of a third of our economy. But even that saddles the feds with $30 billion a year in interest payments and rising.
And unlike Britain, Greece or even the U.S., Canada has a major problem with provincial debt.
A recent TD Economics publication showed total projected net provincial/territorial debt at just over $518 billion in 2012 -- up $60 billion from last year and $200 billion since 2007. Add that to the feds' $662 billion, itself up $150 billion in five years, and you get a debt mountain well over a trillion dollars high and rising $70 billion a year. It cannot continue ... and cannot be stopped.
Here, Saskatchewan's story is troubling, not encouraging. In its 2011 ranking of Canada's premiers on budgets, the Fraser Institute put Brad Wall fourth, with a perfect score on deficits and debt, an average one on taxes and failure on spending control. Wall has hiked program spending nearly 10% a year as premier; only the fact that his province has money pouring in the windows (partly his good policies) has kept them in the black.
Even with revenue up by a third since Wall took office five years ago and 80% in a decade, health swallows 41.8% of total spending. An aging population will only make it worse, there and everywhere else. And if revenue slumps, Saskatchewan's in big trouble too.
This piling up of debt (or, in Alberta, whittling away at assets) is worrying for three reasons.
First, spending is not under control. Since the welfare state was created to relieve misery and want, you'd think it would become easier to afford as society got richer. The reverse has happened and no provincial administration knows why or would dare tell us if it did.
Second, what if a province goes over the edge and clutches at the feds as it falls? While "the provinces" collectively owe $518 billion, individual provinces owe proportionately more (Quebec's $178.5 billion debt equals 51.5% of provincial GDP), are sinking faster ($15 billion a year in just-downgraded Ontario), or have less solid credit (Atlantic provinces). And the danger is that they will go over like dominoes, starting with a weak one.
Imagine that one province finds itself up against the wall for the first time since Alberta in the mid-1930s.
Do the feds let it fail, with potentially catastrophic consequences for the credit rating and interest payments of every government? Or bail it out and hand every provincial treasurer a blank cheque, with the catastrophic consequences that might have for debt ratings? It could happen, and suddenly.
Governments including our own are frantically pushing interest rates down, partly to "stimulate" the economy and partly because they are desperately dependent on cheap money to service debt. But if cheap money brings the usual inflation and rising interest rates, a mere doubling of today's low debt-servicing costs would add $30 billion a year to federal spending and deficits, $10 billion in Ontario and $8 billion in Quebec. And rising deficits mean rising debt, rising interest payments and rising deficits in precisely the sort of vicious circle we all pretended to swear off a quarter century ago.
Third, therefore, the current mess proves all those painful lessons about deficits supposedly learned in the 1980s by politicians and voters alike weren't. So we probably also haven't learned from Europe's debt crisis that when trouble comes, it comes quickly. Not just obvious weaklings like Greece; on the weekend it was the Netherlands' turn to peer into the financial abyss.
So yes, red ink is as bad as you think. And our governments' splashing it casually around is worse.