The fiscal situations of Canadian governments have deteriorated substantially in a few short years, according to a new report from the Investment Dealers Association of Canada.

In its “Review of Public Finances”, which was released today, the IDA notes that record budget surpluses for both the federal and provincial governments chalked up four years ago are now a distant past as governments face more stringent financial conditions.

The IDA report points out that, while fiscal conditions are expected to improve somewhat in the near term, outlooks vary across the country. Quebec and British Columbia will move back to balance this year after 2-3 years of budget deficits. Improvements in Ontario and the Atlantic region, however, will mean deficits will continue but at lower levels than last year. As a region, the Prairie provinces will remain in surplus this year, although this will be well below previous results. Similarly, after recording substantial surpluses in earlier years, the federal budget will just balance in fiscal 2004/05.

Tighter financial conditions have led some provinces in their 2004 budgets to raise revenues by increasing business and other taxes, and by introducing higher fees and charges for various government services. The IDA believes that these types of adjustments should be avoided, as they undo progress made in recent years in enhancing tax competitiveness and lowering costs of doing business.

The improved near-term prospects notwithstanding, the IDA is concerned about provincial finances in the longer term. Reflecting relatively fast increases in health spending, program expenditures in all provinces and regions have risen steadily and beyond levels that can be sustained by growth in revenues.

The report points out that health spending already accounts for a large share of program spending and that, in view of Canada’s aging population, upward pressures will persist in future years. The current upward trajectory of health spending is not sustainable. The IDA analysis suggests that if current trends continue, health care spending will soon begin to crowd out other program spending if budgets are to stay in balance, or taxes will have to rise rapidly to finance health services, causing serious damage to Canadian economic growth and competitiveness in the process. Ultimately, long- term financial and economic stability will dictate reform in health care spending. The extent of the reforms required and the design of the eventual system will depend in part on how quickly governments are prepared to move in this area.