The difficult recession has left most of Canada’s provincial balance sheets battered, as all but two provinces — Saskatchewan and Alberta — bled red ink during the fiscal year ended March 31.

All deficit provinces are concerned about getting back to balanced budgets. But, given that the economic recovery is in an early stage, most provinces have avoided tax increases this year — with two exceptions: Quebec and Nova Scotia. Both those provinces acknowledge that they won’t be able to balance their budgets without tax increases — even when healthy economic growth resumes. As a result, they have begun the unenviable task of raising taxes.

The remaining provinces say balancing their budgets is achievable by restraining expenditures. Analysts agree this will probably work for most, although the spending restraints some provinces are planning will be difficult to achieve.

So, the temptation to ease up on restraint and raise taxes will certainly be there in the future. Manitoba is guarding against this by proposing legislation to prevent major tax increases without a referendum.

The biggest question mark is Ontario. Analysts aren’t prepared to say that the province has a structural deficit just yet but admit it’s possible. Certainly, the fact that the province is looking at eight years to return to a balanced budget — a plan that could be torpedoed by another recession, as that is a long time to go without some form of economic downturn — suggests that there could be a structural deficit.

The double whammy that the manufacturing sector has taken from the high value of the Canadian dollar and the recession has eroded Ontario’s revenue base, says Robert Hogue, senior economist with Royal Bank of Canada’s economics department in Toronto. Thus, the province will need to replace this lost revenue or cut spending to compensate for lower tax inflows.

But now is not the time for Ontario to be raising taxes. It was hit very hard by the recession and needs to be sure the economy is healthy before taking such a measure.

The provinces are primarily relying on infrastructure spending to spur economic growth, but there is some stimulus from tax cuts.

Newfoundland and Labrador is the only province to cut taxes — the personal income tax rate of middle- and high-income earners, and the small-business tax rate — in its provincial budget this year. But British Columbia, Manitoba, Ontario and New Brunswick are going ahead with tax cuts that were announced in previous budgets.

There were also a couple of deferrals of previously announced tax cuts: a reduction of the education property tax rate in Saskatchewan and a drop in the corporate income tax rate in Manitoba.

Provincial deficits have hit a combined total of $30.1 billion for fiscal 2010, but most of it — $21.3 billion — was Ontario’s. Quebec’s and B.C.’s shortfalls of $4.3 billion and $2.8 billion, respectively, seem relatively small in comparison. Quebec’s accounts for 1.4% of GDP; B.C.’s, 1.5%; vs Ontario’s 3.8%. Among the smaller provinces, New Brunswick had a deficit equal to 2.7% of GDP; Prince Edward Island, 1.8%; Nova Scotia, 1.4%; Newfoundland, 1.3%;and Manitoba, 1.1%.

In contrast, Alberta reported a balanced budget and Saskatchewan was the only province in the black — to the tune of $20 million. However, both of these provinces have used transfers from their “rainy day” funds to produce these numbers.

Without those transfers, Alberta would have had a deficit of $3.6 billion, or 1.5% of GDP; Saskatchewan’s shortfall would have been $86 million, or 0.1% of GDP. Removing the transfers, Saskatchewan will be back to a surplus in 2012; Alberta, in 2013.

The expected dates of return to balanced budgets are staggered among the other provinces. Quebec, B.C. and Nova Scotia anticipate achieving balance in 2014; Manitoba and New Brunswick in 2015. Ontario, however, does not expect to achieve a balanced budget until 2018. Newfoundland doesn’t project a deficit beyond this year, but as it’s only expected to be 0.8% of GDP, the province will presumably get back to balance soon.

Quebec has the highest relative debt load, at 47.5% of its GDP. The province is introducing a “health contribution” tax, increasing fuel taxes this year and raising its sales tax in each of the next two years.