The 2018 budget season, now winding up, underscores a stunning reversal in the fiscal fortunes of Canada\u2019s provinces. Five years ago, who would have guessed that in 2018 Quebec would be leading Canada in fiscal prudence and Alberta and Newfoundland and Labrador would be the provinces speedily racking up debt?<\/p>\n
Resource-based provinces have been in a rut since the oil price downturn in late 2014, and the prospects of oil prices rebounding to save them from their fiscal mess are dim. Alberta and Newfoundland and Labrador are both highly dependent on resource revenues, rapidly issuing debt to pay for public services and deferring the hard decisions necessary to balance their budgets in future years.<\/p>\n
However, if we look at them more closely, the prospects for the two provinces to get their fiscal mess in order are starkly different. Newfoundland and Labrador, unlike Alberta, is in a real pickle, facing thorny dilemmas that, unless addressed soon, risk dragging the province toward a crisis and prompting a rethink of federal fiscal transfers.<\/p>\n
Over the past 15 years, both Alberta<\/a> and Newfoundland and Labrador<\/a> have relied on resource revenues to make up, on average, about 25 percent of annual own-source revenues (provincial revenues before federal transfers). Although the recent drop in oil prices has lowered the resource share, both provinces\u2019 fiscal plans are still very exposed to swings in resource prices. This dependency \u2014 combined with the inability of both provinces to resist the temptation to spend windfall resource revenues as they came in \u2014 has forced the two provinces\u2019 finances deep into the red.<\/p>\n The pace of overall debt accumulation in the past few years has been striking in comparison with the debt of other provinces (figure 1). Additions to net debt for each Newfoundlander and Labradorian peaked at over $4,000 per person in 2015, yet expansions in debt remain stubbornly high at around $2,000 per person in recent years. Yearly additions to net debt, per Albertan, have been above $2,000 per year since 2015 with minimal downward movement.<\/p>\n