Fiscal ideology

It's not surprising that in a country as large and diverse as Canada, economic performance can vary significantly between regions. This has at times led to calls for monetary policy to be applied differently in different parts of the country, which is all but impossible. Fiscal policy is another matter: Canada is the home of so-called "fiscal federalism", by which the Ottawa government tries to ensure relatively equal provision of key services (such as education and health) from cost to coast.

A key element of fiscal federalism is the equalization programme, through which wealthier provinces provide financial assistance to poorer ones. As economic cycles unfold, Provinces can move between being "have" jurisdictions, which contribute to equalization, and "have nots", which receive it. The way resource taxes are structured means that Alberta is always likely to be classified as a "have" Province, while the Atlantic Provinces and, more controversially, Quebec are usually "have nots".

Aside from equalization, each Province manages a large taxation and spending budget of its own, which gives it some power to influence the state of its own economy.  Right now it's interesting to look at how Alberta and Ontario are managing their finances.  It's usually the case that when Alberta is doing particularly well economically, Ontario tends to lag.  High oil prices are great for Alberta, for obvious reasons.  They're not so good for Ontario, which has next to no oil and gas of its own and still depends heavily on auto manufacturing.

For the last couple of years, the Alberta economy has been suffering from low oil prices and a lack of  infrastructure for getting its oil to market. In contrast Ontario has benefited from cheaper energy, not least from the boost provided to household spending power. As a simple illustration, consider that in the twelve months to September Ontario, with a population of just over 12 million, added over 250,000 jobs; Alberta, population 3.5 million, added fewer than 11,000. 

Both Alberta and Ontario currently have right-of-centre Conservative governments, under Jason Kenny in Edmonton and Doug Ford in Toronto.  Let's start with Alberta.  Having failed to introduce a 2019-20 budget for the first half of the fiscal year, Alberta finally tabled one just days after the recent federal election. After noting that the Province contributed $22 billion in equalization payments last year, the Government announced a severe austerity package aimed at converting a budget deficit of   $ 8.7 billion this year to a small surplus by 2022/23. Here is a good summary of what that entails. 

This is the wrong budget at the wrong time.  The Alberta economy is sputtering, for reasons that are largely not the Province's fault.  Spending cuts will only slow the economy further.  As the linked summary notes, Alberta has a low debt burden and the lowest taxation rates in Canada -- it is the only Province with no sales tax of its own.  There was a clear alternative to austerity here: carefully targeted spending to help the economy ride out the current rough patch.  The Kenney government has instead chosen a path that can only make things worse, and when that happens, it will no doubt blame the government in Ottawa, rather than admitting to its own bad judgement.

On Wednesday the Doug Ford government in Ontario tabled its Fall fiscal update.  Ford's bull in a china shop approach to his job has not gone down well with voters.  The Government has already had to backtrack on any number of half-baked ideas, and the budget it tabled back in the Spring was so badly received that Finance Minister Vic Fedeli lost his job.

New Finance Minister Rod Phillips announced that the deficit for the current fiscal year is now projected at $9.0 billion, compared to $10.3 billion forecast by the luckless Fedeli.  Phillips portrayed this as proof that the deficit reduction strategy is working, even though the revised projection is higher than the final figure of $7.4 billion for the last fiscal year. 

The real story here is that despite the Government's strident commitment to spending restraint, it is actually spending more than the previous Liberal government was planning. Any progress in deficit reduction is all thanks to outperformance on the revenue side, attributable to the solid performance of the Provincial economy.  Truth to tell, eighteen months into its mandate the Ford government looks very much like the old-style tax-and-spend Liberal regimes that Ford supposedly despises.   

The Ford government is still planning to eliminate the budget deficit by 2023.  In contrast to Alberta, this does seem to be the right goal for Ontario at this time. The Province has the largest public debt of any non-sovereign jurisdiction in the world, a poisoned chalice that it usurped from California during the term of the previous Liberal government.  The economy is moving ahead steadily, as the employment data quoted above demonstrate, so a cautious move back toward fiscal balance is justified.  It remains to be seen whether Ford would pivot toward stimulus if the economy were to slip into recession. Based on what we see happening in Alberta, that might be too much to hope for.