February 12, 2014

Break out the sunscreen! It’s the start of Canada’s public sector budget season

We’re approaching the time of year when many people become excited about baseball spring training.

If they’re living in Florida, or are lucky enough to be visiting there, they may take a break from frolicking on the beach to watch a couple of Grapefruit League games.

Economists are a different breed. We’re anticipating the start of public sector budget season.

That doesn’t mean we won’t need “shades” to the same degree. Finance ministers love to shine and polish their financial numbers to a high gloss.

Too often it’s a deliberate attempt to distract from the underlying truth. It’s part of their game plan, more cerebral than athletic, but just as engrossing.

In Canada, all levels of government — federal, provincial and municipal — have arranged their budget schedules around an April 1 to March 31 timetable.

In the U.S., it’s a half-twist of the calendar later. At the federal level, the fiscal year runs from Sept. 1 to Aug. 31.

I think our system is better. We try to put our financial calibrations behind us early so that we can have the summer to relax and “chill dude.”

I have to warn you that there’s a problem once you dive into these waters. There are at least three different definitions of government debt.

From smallest to largest, they are: 1) the accumulation of annual deficits minus surpluses; 2) net debt, which consists of short and long-term notes owing minus assets which include cash and cash equivalents (e.g., gold); and 3) gross debt, which bears more explanation.

The OECD, IMF and even the CIA focus on gross debt. It’s the number that’s most consistent from one country to another. It usually includes debt wrung up by public bodies at all levels (e.g., federal, provincial/state and local), plus Crown Corporations.

It often also includes unfunded liabilities for future social programs.

When you see a figure of 100% relative to gross domestic product (GDP) for both Canada and the U.S., what’s being talked about is gross debt.

It’s comparable to the 150%-plus figure for Greece when that country fell out of favor with the international banking community.

Japan’s gross debt is over 200% of GDP, but its net debt is judged closer to 100%.

Australia and South Korea have low debt ratios according to either measure.

But I’m straying off target. Let’s stick closer to home in the remainder of this article.

In what follows, I’ll concentrate mainly on net debt — because it’s comparable between Ottawa and the provinces and because there is an excellent series of tables available from TD Bank showing current levels and history.

The net debt of Canada’s federal government plus the provinces at this time is slightly over 60% of GDP, with a marginally bigger share taken by the former than the sum of the latter.

The comparable figure for Washington plus U.S. states is 90%. Notwithstanding the fact that California, Illinois and a couple of other states have flirted with financial crises, the U.S. federal government’s shortfall makes up most of the total. (Remember that the U.S. debt ceiling is approaching $17 trillion and congressional debate about whether or not to raise it is about to heat up once again.)

One of the saving graces for Canada during the recession was the favourable state — relative to many other countries — of our government finances.

They allowed for an infrastructure building push — actually, a bringing forward of projects — that helped maintain activity and employment levels in the construction industry.

During the last several years, “austerity” has been the principle adopted by almost all public bodies. Which among them have been able to keep this commitment?

Finance Minister Jim Flaherty will throw out the first pitch when he brings down the federal budget on Tuesday, Feb. 11.

He is expected to stick to his formerly-announced timeline, with a goal of eliminating the deficit not this year (2014-15), but in the following period, 2015-16.

It may seem hard to credit, but Ottawa operated with a surplus for 11 straight years from 1997-98 through 2007-09.

After a minor shortfall in 2008-09, a sizable deficit (-$55.0 billion) was wrung up in 2009-10 as a deliberate measure to combat the recession that had taken hold in the fourth quarter of 2008.

Since then, the Conservatives have kept a close watch on their “pennies” (except, of course, for banishing them from existence). The imbalance between expenditures and revenues has been steadily falling.

Among the provinces, the largest nominal net debt (as estimated by TD Bank) is in Ontario, -$270 billion for 2014-2015.

Second worst is Quebec, -$180 billion. There’s a big gap to next-in-line B.C.’s -$42 billion

Net debt is also somewhat of an issue in Manitoba, -$17 billion; Nova Scotia, -$14 billion; and New Brunswick, -$12 billion.

Ottawa has a Triple A (or equivalent) status from S&P, Moody’s and DBRS (Canada’s home-grown ratings firm).

The provinces with top-grade scores are Saskatchewan and Alberta, with B.C. almost in the same league, although Moody’s and DBRS aren’t quite as sure about the province as S&P.

Ontario isn’t regarded as positively as it once was and S&P has indicated it may further downgrade the province’s AA- rating. New Brunswick (A+) is under similar scrutiny.

With respect to net debt per GDP, Quebec tops the list at 49%, followed by Ontario, 39%, then three provinces in the Atlantic Region, P.E.I. (36%), N.S., (also 36%) and N.B. (35%).

Alberta’s net debt to GDP ratio (2%) is nearly zero, although that’s a come-down from a healthy surplus seven years ago. In 2006-07, the province’s energy or heritage fund build-up contributed to a +12.5% position versus provincial GDP.

Quebec also has the poorest record in net debt per capita, -$22,000, with Ontario not too far behind, -$20,000.

This is where Newfoundland and Labrador is mentioned for the first time, creeping into third spot with net debt per capita of -$17,000.

Finally, compare Alberta’s declining surplus with how Norway has been managing its affairs.

In that North Sea nation, the hoarding of government revenue from offshore energy riches has climbed to over a million kroner (the domestic currency) per citizen. (While fabulous, this isn’t quite the “grand slam” it sounds to be, since it takes 5.5 kroner to purchase one Canadian dollar.)

For more articles by Alex Carrick on the Canadian and U.S. economies, please see his market insights. Mr. Carrick also has an economics blog.

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