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Let the provinces’ fiscal squawking begin

Happy will be the federal governments of tomorrow, regardless of which party governs. Unhappy will be most provincial governments of tomorrow, regardless of which party governs.

This happy/unhappy state of affairs will arise from money. Ottawa will have plenty of it and most provinces will not, the Parliamentary Budget Office has just found in its annual fiscal sustainability report.

The result of this – bet on it – will be provincial demands for greater transfers of federal cash. The demands have already started from Ontario, and other provinces will be sure to join. After all, it's easier to badger Ottawa than to raise taxes and/or cut spending, which is what the PBO says must happen if most provinces are to avoid sliding down a deep hole of debt.

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The PBO reckons that Ottawa is in such a healthy fiscal situation that it "could introduce new programs, expand existing programs or reduce taxes by 1.4 per cent of GDP ($28.2-billion in 2014) while maintaining sustainable debt." Which federal political party wouldn't love that news?

How did Ottawa manage this trick? Largely by reducing the indexing of federal transfers for health care from 6 per cent to the inflation rate adjusted for nominal economic growth – perhaps 3.5 per cent. That change doesn't sound like much, but it amounts to a reduction of multiple billions of dollars.

For the past two years, health care across Canada has grown by an average of only about 2.5 per cent – way down from the 7 per cent yearly from 2000 to 2010. Alas, the PBO doesn't think this state of affairs can last. It projects that long-term health-care spending increases will average 4.8 per cent a year, with the fiscal weight falling on provincial governments.

"The fiscal gap is driven mostly by the projected rise in health-care costs as a result of population aging and excess cost growth (cost increases in excess of income growth and demographic factors)," the report says.

Here's the nub of the challenge, according to the PBO: "Subnational governments must increase revenues, receive higher federal transfers or find savings in health care or other programs amounting to an immediate and permanent improvement in their aggregate budgetary balance of 1.7 per cent of GDP ($34.1-billion in 2014)."

Which options do you think provinces would choose? Higher taxes? Bigger spending cuts? Or seeking larger transfers of money from Ottawa? You don't have to follow public affairs closely to know that raising a stink to get more money from Ottawa is the easiest political path. Let the squawking begin.

Putting both levels of government together produces a fiscal deficit for the total general government sector that the PBO warns is "not sustainable." The provinces would be put on a better footing, the report says, if Ottawa increased transfers for health care and provinces showed "modest spending restraint" and increased taxes.

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Provincial governments are going to be hit with a double whammy. Immigration notwithstanding, the country's population is aging fast. In 1973, there were 7.8 people of working age for every individual over 65 years of age. By 2013, that ratio had fallen to 4.5. It is projected to be 3.2 in 2023 and 2.6 in 2033. This drastically changed ratio will slow any increase in economic growth and government revenues – and increase spending obligations.

Here's a PBO projection that every citizen should bear in mind when they hear politicians promising the moon: Real GDP growth in the Canadian economy is expected to fall from 2.6 per cent a year between 1983 and 2013 to 1.5 per cent a year over the next two decades. Personal per capita income growth is also going to be less in the next three decades than it was in the past three.

Alberta and Saskatchewan, fossil-fuel producers, might escape the forthcoming pressures – but only if prices stay high. Newfoundland has offshore oil, but a large provincial debt.

B.C. has a balanced budget, but hopes for a liquefied natural gas bonanza to solve future fiscal problems is iffy. The recent Supreme Court ruling on aboriginal title is already throwing a soaking blanket over resources and pipeline plans.

The Maritimes will be in the soup. Quebec, with its high debt level, will struggle. So will Ontario.

Maybe the PBO projections are off. But chances are they're not off by much – in which case, Canadians should get ready for a different tomorrow.

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