Heavy reliance on Ottawa puts Atlantic Canada’s finances at risk

All four provincial governments in Atlantic Canada face long-term fiscal challenges. The policy bundles in the region were unsustainable even before COVID. This means that under reasonable assumptions, absent policy changes, the debt-to-GDP ratio (a measure of a province’s ability to pay down its debt) in all four provinces should grow over time. The pandemic has, of course, further exacerbated these challenges by producing large budget deficits and, at least in the short-term, accelerating the pace of debt accumulation.

Atlantic Canada is hardly unique in some of these respects. All Canadian provinces face fiscal challenges of different type and degree. However, the Atlantic provinces feature a mix of high taxes, comparatively high borrowing costs, and an aging population.

A further source of risk is that the Atlantic provinces generally rely heavily (or will soon likely rely heavily) on transfers from the federal government.

As the chart below shows, all 10 provinces rely on transfers from Ottawa to help fund their services. In provinces that do not receive equalization payments, these transfers come almost entirely from the Canada Health Transfer and the Canada Social Transfer.

Moreover, “have-not” equalization-receiving provinces also rely on equalization for a significant additional source of revenue. In fact, the three Maritime provinces are the largest equalization recipients (per capita and as a share of GDP). As a result, these three provinces rely more heavily on federal transfers than any other province.

For example, “have” province Ontario receives 16.3 per cent of all its revenue from federal transfers compared to Nova Scotia (31.8 per cent), New Brunswick (35.4 per cent) and Prince Edward Island (37.2 per cent). These are the three highest levels of dependence in Canada.

At present, Newfoundland and Labrador does not heavily rely on federal transfers. In 2018/19 federal transfers comprised 15.1 per cent of provincial revenue, slightly less than in other “have” provinces. However, given the collapse of natural resource revenues and declines in other sources of revenue, the province will likely become an equalization recipient in the next few years. When this occurs, its dependence on federal transfers will quickly grow.

Heavy reliance on Ottawa is risky because it depends on the policy choices of another level of government where provincial governments exercise little control. If at some future point a federal government decides to significantly reduce transfers to provinces (as happened, for instance, in the 1990s) the fiscal challenges resulting from this change will likely be greater in provinces heavily reliant on federal transfers than provinces that are less reliant. And the Atlantic provinces could be affected by downturns in other provincial economies as that would likely reduce the funding available for programs such as equalization.

While all provincial governments face fiscal challenges, the Atlantic region has some unique sources of additional risk and uncertainty. One of these is, at least in the Maritimes, a heavy reliance on federal transfers to fund provincial government programs.