Canadians feel like prices are higher these days. But this is not the case with provincial budgets. Coffers are filling up, and many provinces are reducing the size of their deficits or growing surpluses, leaving most of those governments in a much better position than they were earlier this year.
A red-hot economy is a common factor driving higher incomes, in addition to higher commodity prices. Even sky high inflation helps create extra money.
Still, experts warn that the windfall will be short-lived as the economy begins to slow and interest rates rise, among other challenges.
Alberta is experiencing the biggest swing in wealth as the original budget surplus of $511 million is now expected to reach $13.2 billion.
Since the provincial governments released their budgets last spring, only Nova Scotia is on track to run a bigger deficit. Prince Edward Island and Newfoundland and Labrador have yet to report an update for the first quarter.
“It was pretty broad,” said Robert Kavcic, senior economist at BMO Capital Markets.
“Most everyone was very conservative with their economic outlook, and the economy has just come back and is much stronger than anyone expected.” So that led to some very significant revenue surprises.
Figures in dollars could improve even more, says Kavčić, as the year progresses.
Rising commodity prices benefit not only Alberta, but also Saskatchewan, Newfoundland and Labrador as well as — this since the prices of oil, natural gas and fertilizers have increased since the Russian invasion of Ukraine.
In Manitoba, higher river levels and increased export electricity prices are the main reason why a budget deficit of $548 million is now down to $202 million.
“It’s been up to seven for the provinces lately,” said Ted Mallett, director of the economic forecasting team at the Conference Board of Canada.
“Just a happy coincidence of a number of factors.” [that] come together.”
Inflation has been a sore point for both people and businesses, however, higher prices also help boost government revenues as tax revenues rise. The inflation rate is much higher and persistent than experts initially expected.
“Inflation would have an impact on both the revenue and expenditure side of things, but it seems to have had more of an impact on the revenue side,” Mallett said.
British Columbia, Saskatchewan and Quebec originally planned for a deficit this year, but now expect a surplus. Ontario’s deficit has declined, but is still expected to be more than $18 billion.
Many provinces have announced new spending programs aimed at reducing energy and fuel costs in an attempt to fight inflation. Some provinces are using some of their windfall to pay off some of the debt that has accumulated in recent years.
The overall financial improvement of provincial governments has been “dramatic” and “rapid,” said Travis Shaw — senior vice president of DBRS Morningstar, a credit rating agency — especially given the amount of debt accumulated in 2020 and 2021 during the worst of the pandemic.
“Things seem to be showing quite a significant turnaround and that’s even from the earlier spring budget.”[s]. So, in just one quarter, we’ve seen a pretty significant increase in revenue in the provinces,” he said.
Still, his advice to provincial finance ministers is not to let the windfall go to their heads.
Instead, he urges caution, especially as the economy begins to slow and a recession could be around the corner.
“We need to keep more challenging times in mind as we look to next year and beyond,” Shaw said.
In particular, he points to the need to keep public sector compensation under control, given that these costs typically account for between half and two-thirds of government operating spending.
“In an inflationary environment, wage demands are much higher.” It might be affordable today, but … you might be stuck with higher costs at a time when your income might be softening,” he said.