On the surface, the 2005 provincial budgets appear to be standard fare. The provinces welcomed the additional transfers from Ottawa for health-care spending and focused their initiatives on education and infrastructure, as well as health care.

However, once you delve a little deeper, there were changes worth reviewing. Some provinces significantly reduced taxes, while other provinces did some ominous back-tracking or foot-dragging on previously
promised cuts (see page 14).

Nor is there anything dull about provincial finances in general this year. Behind the scenes, Newfoundland, Nova Scotia, Ontario and Saskatchewan have negotiated separate deals with Ottawa that will bring more federal money to their jurisdictions.

This is unprecedented in federal/provincial relations. The federalist approach has always been one of applying a formula to divvying up a specified amount of money among the provinces. Now we have an expanding pie.

Whether the deals will survive a federal election is another issue. But even if there is an election, the Conservatives will probably be forced to promise the same deals if they are to have a reasonable chance of winning.

What will this do to the equalization program that’s the bedrock of Canadian federalism?
Once there is the precedent of one-off deals, the remaining provinces are likely to try for their own agreements. As the deals expand the size of the pie, the provinces are likely to recalculate the amount they deem their “fair share,” leading to demands for
renegotiating their earlier agreements.

The deals so far are of two kinds.
Newfoundland and Nova Scotia have agreements worth an estimated $2.6 billion and $1.1 billion, respectively, over eight years that allow them to keep 100% of their offshore energy royalties and exclude that revenue from the calculation of equalization.
Ontario and Saskatchewan got deals that respectively provide $5.75 billion and $300 million targeted toward specific initiatives.
Saskatchewan is trying to get an deal for energy revenue similar to those of Newfoundland and Nova Scotia.

With the additional health-care transfers, only Ontario, Prince Edward Island and Newfoundland expect to be in deficit this year (fiscal 2006), although Saskatchewan would be in the red were it not for a $145-million transfer from its fiscal stabilization fund. The rainy-day reserve uses money put aside in good years to balance the budget in years when revenue growth is weak or expenditures are unusually high.

Looking further forward, Ontario doesn’t expect to balance its budget until 2009.
Newfoundland will remain in the red for 2007 and 2008, the last year for which it provides a projection. P.E.I. is looking at another deficit in 2007, which is as far out as it forecasts.

In 2007, Quebec also expects a deficit, and both Saskatchewan and Manitoba will need fiscal stabilization fund transfers to keep out of the red.

Saskatchewan will also need fiscal stabilization transfers in 2008 to balance its budget. The province no longer qualifies for equalization because high resources prices have pushed up its resources royalty revenue; it received $582 million last year.
This year, “prior year adjustments” will give it $82 million, but then it will get nothing as long as it remains a “have” province.

On the spending side, many provinces were
quite restrained. Saskatchewan and P.E.I. are projecting expenditure increases of just 1.1% and 1.4%, respectively, for this year.
Manitoba, Quebec, New Brunswick and
Nova Scotia are looking at increases of 3.5%-4.1%, in line with inflation plus population growth.

Alberta’s expenditures, however, are to rise by 5.7%, Newfoundland’s by 5.5% and British Columbia’s by 4.7%. Ontario’s official projection is 4.2%, but if non-recurring spending from this past year is excluded, the increase is 6.3%.

No one is worried about Alberta — it is racking up very large surpluses due to high oil prices and it has no debt. The province is forecasting surpluses of less than $100 million for the next two years. That’s based on conservative energy price assumptions — US$42 a barrel in the fiscal year ending March 31, 2006, for oil, which was recently around US$48.

High prices for metals as well as energy are also benefiting B.C., Saskatchewan, Newfoundland and, to a lesser extent, Nova Scotia. Meanwhile, the rest of the country struggles not only to pay the higher prices but also to cope with the negative impact of the high Canadian dollar on manufacturing exports.