Provincial fiscal updates lower than expected

Many provinces have issued their fall fiscal updates and the same thing ails them as ails the federal government.

Flagging economic momentum, lower-than-expected commodity prices and lower-than-expected revenues are making it hard for the provinces to adhere to their spring budget projections and deficit-reduction plans. The Western provinces, particularly, are feeling the pinch.

“British Columbia, Alberta and Saskatchewan are now tracking a combined $2.3 billion or 0.4% of GDP (before GFSF transfers in Saskatchewan) below the original plan,” wrote Bank of Montreal economist Robert Kavic in a recent Focus.

There is no doubt economic growth is slowing in Canada and globally. The International Monetary Fund (IMF) recently revised its outlook for real GDP growth in the advanced economies downward to 1.3% in 2012 and 1.5% in 2013, noted the federal government’s Update of Economic and Fiscal Projections. As for Canada, Statistics Canada tells us real GDP rose 0.1% in the third quarter of 2012, slowing from the 0.4% growth in the second quarter — or 0.6% annualized vs an average gain of 1.9% in the prior three quarters.

Alberta is certainly seeing lower revenues. In its 2012-13 Second Quarter Fiscal Update and Economic Statement  the province noted that resource revenues for the first six months of the fiscal year ending March 31, 2013, were $1.4 billion lower than expected. Overall, revenues were $18.9 billion, $260 million lower than expected. That pushes the deficit higher — $553 million higher than expected — to $1.3 billion.

Yet, Alberta is holding to its forecast of a 2012-13 deficit in the range of $2.3 billion to $3 billion. TD Bank Group senior economist Sonya Gulati thinks the province will come in at the high end of the range, however. “The government forecasts that Alberta will grow at 3.7% in 2012, or roughly the same as what was last forecast in the 2012 budget. Relative to TD Economics’ forecasts, this outlook remains on the high side, as we are anticipating the province to come close to 3.0%.”

Saskatchewan, too, noted “less robust” commodity prices and a $51-million drop in total revenues from what was forecast in its spring budget. Growth in nominal GDP — a proxy for tax revenues, explains Gulati — is three percentage points lower than the 2012 budget estimate even though it is still a respectable 5.8%. And Saskatchewan has the distinction of being the only province to boast a budgetary surplus — $22.5 million for the current fiscal year.

The revenue story is repeated in British Columbia, but not the surplus story. In its second-quarter update, revenues of $42.2 billion were $579 million less than forecast in its spring budget. That has made for a deficit of $1.47 billion, $328 million more than expected. 

The Western provinces have generally led the Canadian economy and their struggles have implications for provincial deficits overall. “The combined provincial deficit is currently on pace to widen in fiscal 2012-13 to more than $19 billion (1.1% of GDP) from slightly less than $18 billion last fiscal year,” reported Kavic. “True, the majority of that shortfall falls in the lap of Ontario — $14.4 billion or almost 75% of it to be precise — but Ontario has actually been the one province to reduce its deficit forecast so far this year.”

Indeed, Ontario’s Economic Outlook and Fiscal Review puts the province’s 2012-13 deficit at $14.4 billion, a $400-million improvement, and the province says it is on track to meet 2013-14 and 2014-15 deficit targets. But the Review also says Ontario is in a period of restrained growth. “Moderate economic growth is expected to continue over the next three years,” it reported. “The provincial economy is projected to grow by 2% in 2012, 1.9% in 2013, 2.3% in 2014 and 2.4% in 2015.”