Writing in the Financial Post, Macdonald-Laurier Institute Senior Fellow Philip Cross says don’t let the federal government’s impending balanced budget fool you – the provinces are still dealing with long-term fiscal problems and structural deficits.Philip Cross

By Philip Cross, April 15, 2015

The release of the jobs numbers last Friday confirmed that the economy is doing better than anyone forecast in the wake of slumping oil prices. The net result of the usual noisy monthly movements was that jobs grew by 63,000 in the first quarter, nearly twice their gain in the fourth quarter. The increase was no fluke, as the leading indicators show weakness in the economy largely confined to the oil sector. Excluding commodity prices, the leading index continues to increase steadily, as manufacturers slowly begin to respond to an improving U.S. economy.

All of this contradicts Bank of Canada Governor Steve Poloz’s characterization of the economy’s performance in the first quarter as “atrocious.” Since it is hard to believe the Bank is susceptible to panic, this reinforces the suspicion that January’s surprise cut in interest rates was designed to engineer more weakness in the Canadian dollar. Poloz’s denials about trying to manipulate the currency mean nothing: In an interview on Bloomberg radio last Friday, former Bank of England Monetary Policy Council member David Blanchflower admitted Council members regularly talked down the exchange rate, although “publicly we always denied” that was their strategy.

Recall when the November jobs report showed a decline driven by losses in Alberta’s oilpatch, the whole statistical media complex confidently assured Canadians that the world was unfolding as it should. The Conference Board quickly forecast Alberta already was in recession, and worries grew that Canada could follow. Once again, this demonstrates the futility of reading too much into volatile monthly data. Four months later, job growth has accelerated nationally, with even Alberta posting a small gain to start the year. Economists and journalists struggle to find a convincing narrative to fit these facts, throwing out bromides like jobs are a lagging indicator or we forgot how large was the share of services in total employment.

The broader implication is that the federal government will run a surplus for several reasons. The economy is performing better than expected, especially taking account of the record cold in Eastern North America and a dock strike in the U.S. The sale of General Motors stock is a windfall for the treasury. And you can be sure the Harper government takes great pleasure in disproving the forecast of Kevin Page, the first gadfly Parliamentary Budget Officer, that the deficit created by the recession in 2009 would prove structural. Adopting a balanced budget law reinforces its message that structural deficits did not return. However, the fact that the Ontario government currently borrows about $20 billion a year despite its own balanced budget law shows how easily such rules are flouted. The federal budget will remain balanced not because of this law, but because the government has capped its future liability for health care transfers and pension obligations and begun the long, arduous process of reining in the compensation of its employees.

Structural deficits exist in Canada, but at the provincial not the federal level. The provinces already are mired in large debts and deficits, even before the real tsunami hits from soaring health care spending for an aging population. The token restraint offered by Alberta and Quebec in their recent budgets shows that the provinces are not yet willing to tackle the fundamental reforms needed to how they deliver education and health care and the outrageous compensation their employees receive. The provinces’ desperate need for revenues is why none even bother pretending that the various carbon tax proposals currently circulating will be revenue neutral, as intended by their naïve academic proponents, leaving us with a more burdensome and not a more efficient tax regime.

The fiscal position of the provinces is a lot like Canada’s in the 1970s, when government debt first began to mount. The actual increase in the underlying structural deficit at that time was even worse, but was hidden by artificially low interest rates and high nominal growth. The full extent of the underlying deficit was revealed when interest rates soared and growth slowed in the early 1980s. The same is playing out now for the provinces; as bad as their fiscal position looks, their larger structural deficits are being masked by record low interest rates and steady growth in most of the country.

Philip Cross is a Senior Fellow at the Macdonald-Laurier Institute and the former Chief Economic Analyst at Statistics Canada

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