This was a busy week on the Canadian fiscal scene as not only did Ontario and New Brunswick deliver their latest budgets, but the federal government came forth with its as well. In terms of Canada's overall budgetary picture, investors have more or less become unfocused over the years, even though the country moved away from a string of surpluses to ongoing deficits a while ago.
The reason is simple. Compared to most other industrialized nations, Canada's fiscal performance through the recent recession and financial crisis looked exemplary. With Greece and other peripheral euro zone countries on the verge of debt implosion, Japan's deficit soaring above Mount Fuji and the U.S. at a stage where a one trillion dollar deficit would be seen as a successful budget, Canada's deficits appear minor.
The truth, however, is that Canada threatens to tumble down the same path as its peers if the budgetary predictions do not come to fruition because some of the risks it faces are exactly the same. These include an aging population (and commensurate reduction in the percentage of employment tax revenue relative to social service expenditures) and the stark reality that interest rates will eventually move higher, making the cost of servicing a still high debt load more painful.
It should be no surprise therefore that Ontario came up with a more austere budget plan this past week than was previously anticipated. We can laugh all we want about Ontario's forecast of a balanced budget by 2018, but the cuts needed to achieve even that meager result were fairly deep.
As for Ottawa, the 2012 budget was not really an exercise in austerity at all, with only $5.2 billion worth of cuts over the next three years (most of this coming from public sector job cuts). The fact feds can boast a balanced budget prediction a couple of years ahead of Ontario (one year better than what they were forecasting back in the fall), has more to do with the sharply lower deficit that has resulted this current fiscal year because of okay growth and higher inflation.
If both budget forecasts are true, then Canada and Ontario will remain head and shoulders above the U.S., most of Europe, and Japan in terms of deficit reduction/elimination. That's not to say all things will be rosy. This is not exactly a high growth environment the governments of the day are dealing with, and some analysts argue that adhering to a balanced budget doctrine will be counter-productive in terms of producing yet slower growth rates, and hence lower tax revenues.
Failure to do so, however, risks having one's credit rating chopped, like we saw in the U.S. last summer, to say nothing of the many Euro zone members who have had multiple cuts. Lower credit ratings, all things being equal, tend to push bond yields higher which add to the cost side of the government ledger. And, unlike the U.S. (which enjoys an international reserve currency status and safe-haven appeal to its bond market), Canada could face a different outcome if its ratings were brought into question.
This goes double for provinces like Ontario and, worse yet, Quebec. The latter already faces a budgetary hurdle that is being compared with Greece and Italy, even without a projection of higher interest rates. What all of this means is Ontario and Quebec residents will be living in austere times for a while longer; while Ottawa may have to step up its cost-cutting efforts if growth slips away.
We will retire (officially) later, collect our OAS payments a couple of years later, and see no further cuts to the taxes we pay until deficits are completely under control. Trust me that will be a very favourable outcome compared to some countries where taxes are literally guaranteed to go up, alongside sharply higher interest rates and anemic economic growth.