S&P; Canadian local & regional (LRG) debt to surpass C$1tln in 2019.
The venerable rating agency S&P Global, in a report dated February 28, 2019, estimate that debt for Canadian provinces and municipalities will for the first time top C$1 trillion in 2019. The vast majority of Canada’s LRG debt, > 90% is carried at the provincial level. Canadian provinces issue debt to fund operating deficits, for capital expenditure and to refinance existing debt. The federal government in Canada can’t impose fiscal frameworks on the provinces. The frameworks that the provinces impose on their municipalities, however, mandate balanced operating budgets and limit debt use to capital expenditures. A natural outcome has been that provincial debt has grown at a faster rate than municipal debt. S&P estimates Canada’s LRG debt to grow at 4% per annum going forward (higher than current GDP growth of 0.4%, it should be noted).
Versus the USA, where most debt is carried at the federal level, Canada is the reverse, with C$980 billion at the LRG level and $690 billion held at the Federal Government level. With Canadian GDP at $2.2 tln, this results in a combined debt to GDP at the federal level of 76%. Much of this difference, as far as where the debt is carried, can be traced to the provision of healthcare, which in Canada is a provincial responsibility. In the US, Medicare (>65 old or disabled) and Medicaid (very low income) are almost exclusively federally funded programs and it should be noted, stopping well short of Canada’s universal health care model in terms of coverage. In Canada each province has their own agency; in the Province of Ontario it is Ontario Health Insurance Plan (OHIP), in Nova Scotia it is the NS Health Authority which uses 40% of the annual NS provincial budget (also the largest employer at 23,000, 2.3% of the province’s 954,000 total population).
At the national level, the US spends 17% of GDP on healthcare. Canada is at 11.3% of GDP presently. Japan, with the oldest population in the developed world, spends a little under 10% on healthcare, also a universal system, presumably because they are less litigious than the US, same drugs (slight lag to FDA typically), and the same medical equipment.
Canada remains AAA rated with S&P. Ontario with $349bln in debt is rated AA and Nova Scotia with $16bln in debt is rated 1 notch lower at AA-. Ontario has a population of 14.2 million and NS has 954,000. Ontario’s per capita provincial debt is $24,580 versus $16,667 for Nova Scotia, the “have not” province of the two (5 provinces; Quebec, Manitoba, New Brunswick, Nova Scotia and Prince Edward Island, receive equalization payments totalling $19.6bln in 2019–2020). Adding in Ontario’s 37% of the federal debt of $690bln adds $255bln for a total Ontario debt of $604bln for a total per capita debt number of $42,565. Nova Scotia’s share of the federal debt is $17.25bln for a total debt tally of $33.15bln or $34,748 per capita. The NS number is 18% lower.
As is the case across the country, the debt held at the municipal level is low in relation to the debt held at the provincial level. The Halifax Regional Municipality has $256 million in debt outstanding, and a population of 403,000, for a per capita debt of $635. The Cape Breton Regional Municipality (CBRM) has debt outstanding of $73mm and 95,000 residents, for a per capita tally of $768.
Household debt is a separate matter of course. Household debt stands at $1.86 tln in Canada, a full 1.7x disposable income. 20 years ago this metric was at 1.0x, for reference. Per capita debt per household in Canada is $114,000 (direct obligations requiring servicing, not their share of combined federal and LRG debt). Nova Scotia has one of the highest debt service ratios in the country. In Toronto, the country’s largest municipality, the debt load is the highest at a record 2.1x disposable income.
Tax equalization is a thorny issue. The Canada Act of 1982, which amended the Canadian constitution, included the rights of the poorer provinces to equalization payments. Subsection 36(2) of the Constitution Act, 1982 states that “Parliament and the government of Canada are committed to the principle of making equalization payments to ensure that provincial governments have sufficient revenues to provide reasonably comparable levels of public services at reasonably comparable levels of taxation.”
Many inconsistencies with respect to the equitable allocation of federal transfer payments from provincial coffers to downstream municipalities exist. At the provincial level, the per capita transfer payments vary from $1,535 in Quebec to $2,757 for PEI. The per capita transfer payment in Nova Scotia is $2,112, yet the 2nd largest municipality, the Cape Breton Regional Municipality (CBRM) receives a paltry $158 per capita of the upstream transfer payment (7.5%). There are clearly cases where observable municipal public service levels are markedly lower, coupled with a much higher tax burden, a situation clearly at odds with both the spirit and the letter of the 1982 amendment to the Canadian constitution.
An effort clearly should be made to bring the relative clarity of the federal-provincial equalization formula, recently renewed through to 2024 (rolling 5 year renewals typical), to the provincial-municipal level.
#JCG
Note: The CBRM makes up approx. 72% of Cape Breton’s total population, Ingonish is just over 10% for reference.
