Pandemic to Spill Red Ink All over Provinces' BooksThe COVID-19 pandemic is setting provincial government deficits on course to surge more than six-fold this year to almost $63 billion. Every province will see a material deterioration in its fiscal position.... We generally do not foresee any major problems with the financing of heftier deficits in the near term. If anything, liquidity support from the Bank of Canada will ensure funding channels stay open and funding costs remain manageable. [It must be noted that RBC is one of the institutions of the financial oligarchy that will benefit greatly from government borrowing. RBC not only lends money to governments throughout the imperialist system of states but also profits from organizing sales of government securities. TML Ed.] The federal government's programs to directly support individuals and businesses in need total more than $230 billion (10 per cent of GDP). Provinces handling of the health emergency and rollout of their own financial support programs will run in the billions of dollars too. British Columbia ($5 billion), Alberta ($7.7 billion), Ontario ($17 billion) and Quebec ($18 billion), for example, put forward historic action plans. Clearly governments are seeing enormous spending pressures that will take a heavy toll on their fiscal position. [RBC estimates the total federal and provincial spending on financial support programs to be $315 billion and growing. To put this in perspective, total expenses in the 2018-19 federal budget were $347 billion. TML Ed.] Recession Delivers a Massive Blow to Government RevenueYet the expenditure toll could pale in comparison to the shock that's pummeling government revenues. The COVID-19 pandemic has triggered the most sudden and deepest recession we've ever seen. All but two provinces (British Columbia, and Newfoundland and Labrador) will experience their largest-ever single-year economic contraction, according to RBC Economics' latest Provincial Outlook update (see excerpts below). This will ravage household and business incomes, and severely affect governments' major revenue sources. We expect personal and corporate income taxes, and sales taxes to fall markedly in every province this year. The revenue decline could be in the order of $3 billion in British Columbia (-6% of own-revenue), $6.3 billion in Ontario (-4.8%) and $8 billion in Quebec (-8.6%) based on historical sensitivity to economic growth. Oil price collapse: a punch to oil-producing provinces' gut. Newfoundland and Labrador, Alberta and Saskatchewan face even more dramatic declines due to their dependence on oil royalties. We estimate the plunge in oil prices will slash those royalties by at least 40%. That's not even taking into account production cuts that are likely to occur in the face of a glut in global inventories. Including secondary effects on other parts of the economy, the energy sector tailspin could subtract more than $8 billion (or close to 20%) from revenue in Alberta this year. COVID-19 has completely changed the fiscal outlook for all provinces. There will be deficits everywhere in 2020-2021. Big ones in the case of a couple of oil-producing provinces. We see the shortfall reaching close to $2 billion (7.0% of GDP) in Newfoundland and Labrador, and $18 billion (6.4%) in Alberta or more than double the government's $6.8 billion projection in its February budget. Saskatchewan's lesser reliance on oil royalties will moderate its deficit to around $1.5 billion (2.1% of GDP). Ontario's relatively fresh $20.5 billion deficit projection (dated March 25) looks a little optimistic to us despite nearly $5 billion in contingencies built into the estimate. We believe it could exceed $21 billion (2.5% of GDP) .... We expect deficits of the order of $5 billion in BC (1.8% of GDP), $13 billion in Quebec (3.0%), $600 million in New Brunswick (1.8%) and $800 million in Nova Scotia (1.9%) .... Our $1.5 billion projected shortfall in Manitoba (2.1% of GDP) will completely deplete the province s rainy day fund. Provincial Debt Will Grow a Lot FasterFunding the big jump in deficits this year will require a substantial increase in debt issuance. That process is already underway with many provinces tapping the funding market repeatedly since the middle of March. We expect the increase in provincial net debt to more than triple overall this year.
We don't see higher debt loads impeding provincial governments' ability to fulfill their growing borrowing needs in any material way. In a precautionary move, the Bank of Canada recently announced it will purchase up to $50 billion in provincial bonds in the secondary market with remaining maturities of 10 years or less. This will be in addition to the provincial money market purchase program it launched earlier. These moves should ensure liquidity in provincial funding channels. All provinces can presently borrow at historically low interest rates which will help to contain the rise in debt service costs. COVID-19 Recession Deepens Fast from Coast to
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