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Posthaste: Canadians' inflation misery lifts provincial budgets from deficits to 'sizable' surpluses Back to video

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A growing number of Canadians are struggling to make ends meet as prices rise, yet many provincial governments are enjoying revenue windfalls and “sizable budget surpluses” due in no small part to record inflation, RBC Economics said in a note on Thursday.

Authors Robert Hogue and Rachel Battaglia said tax revenues and income from government business enterprises were fuelled by several factors aside from rising inflation, including a faster-than-expected economic rebound from the pandemic and strong markets for commodities such as oil and gas.

“These upside revenues have led to significant downward revisions of provincial deficit projections,” the economists said in the note. “And they’ve come as a surprise, given early fears that the pandemic would create deep budget holes that would take years to climb out of.”

Canada’s consumer price index currently sits at 6.9 per cent, well above the Bank of Canada’s target of two per cent. In June, it hit a four-decade high of 8.1 per cent.

Perhaps not surprisingly, Alberta had the most improved financial position. After reporting a $17-billion deficit in 2020-21, with more red ink expected to the tune of $18 billion in 2021-22, the province experienced a massive financial turnaround, recording a surplus last year of nearly $4 billion due to a 58.4 per cent increase in revenue.

Ontario and British Columbia were also big budgetary winners. Ontario in September reported a surplus — its first in 14 years — of $2.1 billion for the fiscal year ended March 31, 2022. The government had been expecting a deficit of $13.5 billion. B.C., meanwhile, posted a surplus of $1.3 billion instead of an expected deficit of almost $10 billion.

Other provincial surpluses included: Quebec, $2.8 billion (before deposits into the Generations Fund); New Brunswick, $777 million; Nova Scotia, $351 million; and Prince Edward Island, $84 million.

Beside commodity prices and inflation, the surpluses were also fuelled by an unexpected increase in corporate business and personal income taxes from a strong jobs market.

Rising wages also played their part. Nationally, the average hourly wages of working Canadians rose 5.6 per cent in October (up $1.68 to $31.94) compared with last year, Statistics Canada recently reported. It was the fifth month in a row that wages rose more than five per cent, the agency said.

“As solid consumer spending and rising inflation fuelled sales tax revenues, most provinces saw revenue growth outpace increases in expenditures by a factor of two to one,” the economists said.

Overflowing government coffers was a theme repeated at the federal level when the Liberals last week announced a $40-billion revenue increase in their fiscal update.

But can these good times keep rolling? Inflation helped fill government bank accounts, but RBC said it could soon eat away at some of that money since the cost of debt will continue to rise as interest rates increase.

For example, Newfoundland and Labrador, Ontario and Quebec have the highest debt-to-GDP ratios in the country at 43.8 per cent, 39.2 per cent and 38 per cent, respectively, the bank said. That will make them the most “sensitive” to the rising cost of borrowed money.

RBC also noted that higher spending for public employee salaries to combat the rising cost of living could chip into coveted surpluses.

Further, an increasingly expected recession means governments could start spending more on support for people who find themselves caught by any slowdown.

“The surprise provincial revenue gains that confounded early expectations will largely be sustained,” the economists said. “But these new headwinds are gaining force.”

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Canada recently announced it would raise its annual immigration targets, such that in 2025, it would welcome 500,000 new permanent residents to the country.

Immigration Minister Sean Fraser said the government’s plan would “help businesses find the workers they need (and) set Canada on a path that will contribute to our long-term success” while also allowing the country to help vulnerable people fleeing persecution, wars and unsafe places.

This week on Down to Business, host Gabriel Friedman talks with Mikal Skuterud, an economist at the University of Waterloo, about what the immigration plan means for the labour market and how we arrived at the current state of affairs. Listen here.

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The onset of COVID-19 lockdowns led shoppers online. In May 2019, only 19 per cent of Canadians bought groceries online. By May 2021, the number jumped to 49 per cent, according to a 2021 PayPal study. Canadians also flocked online to upgrade their electronics and snap up used gym equipment. Barry Choi of our content partner MoneyWise spells out how to avoid getting scammed when you are buying and selling online.

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Today’s Posthaste was written by Gigi Suhanic (@gsuhanic), with additional reporting from The Canadian Press, Thomson Reuters and Bloomberg.

Have a story idea, pitch, embargoed report, or a suggestion for this newsletter? Email us at posthaste@postmedia.com, or hit reply to send us a note.

Listen to Down to Business for in-depth discussions and insights into the latest in Canadian business, available wherever you get your podcasts. Check out the latest episode below: