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Weekly Commentary

‘Tis the Season for Provincial Budgets

February 16, 2024
Marc Desormeaux
Principal Economist

Budget season 2024 officially kicks off next Thursday with the release of British Columbia’s (BC) fiscal year 2024–25 (FY2025) plan. Easing price pressures mean we probably won’t see as many revenue windfalls or high-profile affordability relief measures as in the last two years. But spring 2024 plans will still tell us a lot about risks to inflation, the economic outlook and the kind of public services Canadians can expect in the years ahead. What should taxpayers and investors be watching for this year?


Amid ongoing concerns about an economic slowdown, the revenue outlook is mixed. In Quebec and Ontario, nominal GDP growth is tracking stronger than forecast at mid-year, supporting income and consumption tax receipts. But corporate tax revenues have been revised lower. In Ontario’s case, that reflected another federal government adjustment to the tax base in prior years. This effect hammered the province’s financial position in November External link. and remains a risk for many provinces this year. In Alberta, weaker-than-anticipated oil prices won’t undo the hefty surpluses forecast last year, but historic and rising sensitivity to crude values means that even small oil price movements will have big fiscal impacts going forward. More optimistically, despite a softer outlook for American natural gas prices, BC should benefit from new export capacity in Kitimat External link. this year. The province has also built a significant cushion into natural gas price forecasts External link..


The four largest provinces already increased their population projections at mid-year, but further upward revisions are possible given how much headcounts have gone up since. This could certainly boost the expansion External link., but also put new pressure on public services at a time when some governments are projecting per-person spending cuts External link.. This interplay will be particularly important in smaller provinces that have not updated their longer-term projections since the 2023 budget season—especially provinces whose infrastructure plans have increased and bottom lines have deteriorated.


On infrastructure, the last several budget seasons have often seen rising ambitions run headlong into major project delays. Those delays primarily reflect the labour shortages in the construction sector, which will likely remain a concern in the years ahead External link.. Restarting project activity could put upward pressure on debt and borrowing in FY2025 and beyond.


We’ve argued for more than a year that the high cost of living would eventually put upward pressure on the wages of public sector employees, the costs of which will be borne by provincial governments. This is arguably the key fiscal risk in 2024 and could also further stimulate inflation. Indeed, public sector wage negotiations are ongoing in several provinces. This follows earlier strikes in Quebec and at the federal level. Relatedly, Ontario’s third-quarter fiscal update released this week unveiled an additional $1.7B in healthcare spending “primarily to address pressures related to compensation costs.”


The good news is that some (but not all) provinces still have significant financial buffers to help them absorb unexpected shocks. Ontario covered new costs using its contingency fund, of which $3.3B remained at Q3. Alberta set aside a $1.5B forecast reserve in every year of its mid-year forecast horizon. BC is perhaps the most prudent of all, with planned contingencies exceeding forecast deficits through FY2026, of which $7.5B was earmarked for public sector raises beyond the budgeted baseline increase.


Climate change is a final theme to watch. Just in the past year, we’ve seen extreme weather events weaken Quebec energy exports, reduce Manitoba Hydro revenues, pressure Saskatchewan agricultural insurance payments and cause Alberta disaster assistance spending to spike.


There’s no shortage of issues to watch and discuss as we begin budget season 2024. When it comes to our public finances, the most dramatic effects of the pandemic and the excitement of new affordability measures may be behind us. But this year will tell us a lot about how Canada’s provincial governments envision the years ahead. It will also lay the groundwork for what’s possible going forward.

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NOTE TO READERS: The letters k, M and B are used in texts, graphs and tables to refer to thousands, millions and billions respectively. IMPORTANT: This document is based on public information and may under no circumstances be used or construed as a commitment by Desjardins Group. While the information provided has been determined on the basis of data obtained from sources that are deemed to be reliable, Desjardins Group in no way warrants that the information is accurate or complete. The document is provided solely for information purposes and does not constitute an offer or solicitation for purchase or sale. Desjardins Group takes no responsibility for the consequences of any decision whatsoever made on the basis of the data contained herein and does not hereby undertake to provide any advice, notably in the area of investment services. Data on prices and margins is provided for information purposes and may be modified at any time based on such factors as market conditions. The past performances and projections expressed herein are no guarantee of future performance. Unless otherwise indicated, the opinions and forecasts contained herein are those of the document’s authors and do not represent the opinions of any other person or the official position of Desjardins Group.