Global turbulence forces fiscal revisions in Canada

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A fresh round of turbulence in the global economy is forcing Canada's two largest governments to revise their plans for getting their fiscal houses in order.

Ottawa is pushing back its timeline for balancing the books. At the same time, while Ontario faces the monumental task of dramatically cutting the rate of growth in spending on health and education to meet its target to erase its deficit in six years.

The weakening economy will test the resolve of Ottawa and the provinces to rein in spending at a time of big increases in health-care costs. Ontario is being told that its already ambitious target of chopping spending increases to 1.7 per cent growth from 6 per cent is not going to do the job. Everything is on the table, including the possibility of letting the private sector deliver some health-care services.

The situation can also be expected to make for tense negotiations over health and education transfers between Ottawa and the provinces, which will face growing complaints from the public as health dollars are stretched thin.

With the persistently weak economy not rebounding as forecast, both Ottawa and Ontario must revise promises made only this year. Finance Minister Jim Flaherty will confirm that federal deficits will run longer than promised when he releases his government's fiscal update on Tuesday in Calgary.

Meanwhile, the Ontario government is being warned by one of its own economic advisers that it will have to keep increases in spending on health, education and other programs at one per cent a year for the next six years just to balance the books by 2018.

The grim reality for Ontario will ultimately affect its citizens. It also highlights the problems that most provinces – outside of resource-rich Alberta and Saskatchewan – will face in delivering health and education during what is expected to be a prolonged period of slow growth in most of the Canadian economy.

Ontario Premier Dalton McGuinty appointed former Toronto-Dominion Bank economist Don Drummond to examine government spending last March. Mr. Drummond began working in earnest on his review after the Oct. 6 provincial election.

Ontario will have to abandon its projections that program spending will grow 1.7 per cent a year – well below historic rates of 6 per cent – and implement more aggressive measures to put its fiscal house in order.

"That is the essence of the challenge," Ontario Finance Minister Dwight Duncan acknowledged in an interview on Monday.

Mr. Duncan also said that his federal colleague, Mr. Flaherty, will be announcing that Ottawa's 2014-15 target for erasing the federal deficit won't be met.

"We are in for a protracted period of restraint, which will be fairly long," Mr. Duncan said. "I understand [on Tuesday]Mr. Flaherty's going to be announcing that their period to balance is longer than they originally said. They are now starting to come up to our time frame."

Mr. Flaherty's government will soon have to confirm the Employment Insurance premium rates that will take effect Jan. 1, 2012. Rates are set to rise 10 cents per $100 of insurable earnings for workers every year for the next several years. The planned annual increase for employers is higher, at 14 cents.

The Canadian Federation of Independent Business, which has been pushing for a rate freeze or at least a continuation of a one-year hiring credit for employers, is hoping Mr. Flaherty will announce a change of plans on Tuesday.

Several economists who provide forecasts to Finance Canada say missing the federal deficit target is not economically significant provided the deficit is small and the government is on a clear track to balanced budgets.

"This is really being driven by global events," said Glen Hodgson, chief economist for the Conference Board of Canada. Mr. Hodgson said Ottawa needs to be careful not to "snuff out a recovery" by cutting too deeply in the short-term deficit fight. "They have to think hard whether now is actually the right time to actually do anything [on spending cuts]or whether they should wait until there's a bit stronger foundation for stronger growth."

NDP finance critic Peter Julian said he hopes last month's surprising job losses in Canada will lead Mr. Flaherty to "take the rose-coloured glasses off" and work toward boosting employment.

Mr. Julian noted that the Parliamentary Budget Officer and others have been warning for months that Ottawa's budget numbers wouldn't hold in the face of slower growth.

"That doesn't come as any surprise," he said. "Our concern is primarily what we've seen happen over the last few weeks in terms of job losses."