As Alberta’s finances worsen, Ontario’s and Quebec’s are poised to only get better, underscoring the changing fortunes and increasing tensions in the Canadian federation.
Finance Minister Rod Phillips is expected to announce later on Wednesday that Ontario will post a smaller than previously estimated budget deficit for the fiscal year ending 2020. The next day, his Quebec counterpart Eric Girard will raise the province’s economic growth forecasts and announce plans for a sixth straight year of balanced books.
The country’s two largest provincial economies are updating their budget outlooks one week after Alberta said it would cut spending and increase taxes in an effort to wrestle down a budget deficit ravaged by a slump in oil prices. Premier Jason Kenney has floated the idea of re-negotiating equalization payments that funnel tax revenue between the provinces via the federal government to help Alberta cope.
“It plays in some way into the frustration” in Alberta, said Charles St-Arnaud, chief economist at Credit Union Central Alberta in Calgary. “The current economic situation seems to be forgotten by the rest of the country.”
Tax collections in the two provinces, which account for about 57 per cent of the country’s economy, have been supported by booming job markets which have driven Ontario’s unemployment rate down to 5.3 per cent and Quebec’s to 4.8 per cent. In contrast, Alberta’s jobless rate runs at 6.6 per cent and Kenney plans to cut the government’s operating expenditures by 2.8 per cent and its public sector workforce by 7.7 per cent. to reduce the budget deficit to $5.9 billion next fiscal year from $8.7 billion this year.
Ontario’s budget shortfall for the year ending March 31 will be smaller than the $10.3 billion projected, said Phillips in October. Quebec will boost its 1.8 per cent growth forecast for this year, Girard said at a Bloomberg conference in October. Economists at Toronto-Dominion Bank see growth of 2.5 per cent for Quebec.
The extra yield investors demand to hold Alberta’s 10-year bonds instead of Ontario’s widened to around 11 basis points on Tuesday compared with a recent low of 6 basis points on May 17, according to Bloomberg Valuation prices. Quebec yields are lower by around 2 basis points along the curve for any duration shorter than 15 years.
Even as Quebec and Ontario have consistently outperformed Alberta’s economy during the last four years, Alberta hasn’t received anything under the equalization system, because its traditionally had higher income per capita. Quebec has received almost $46 billion in the last four years, and Ontario received about $4.7 billion, according to government data.
The equalization boost is helping Quebec to balance its books and even set aside some cash under its so-called Generations Fund to help repay existing debt. It also helped Ontario - though to a lesser extent, to deal with its deficits.
The situation is fueling resentment in Alberta which has seen thousands of job losses, and an exit of foreign capital during the oil slump.
“Equalization payments are a big part of what keeps Quebec on balance,” said Randall Malcolm, senior managing director of fixed income at Sun Life Investment Management. “When you think about equalization payments coming over and Quebec running a generations fund, which part of it is essentially run as a hedge fund, it does seems a little strange.”