Provinces and cities racking up debt at unsustainable rate: PBO report

The debt and spending levels of Canada's provincial, territorial and local governments are unsustainable, and will need permanent increases in revenue or spending cuts to stabilize their balance sheets, says the parliamentary budget officer.

In his 2016 fiscal sustainability report, Jean-Denis Frechette said the subnational debt-to-gross domestic product ratio could balloon to 200 per cent over the next 75 years, unless there are significant changes. The longer governments wait to act, the worse the problem will get, the report says.

"Subnational debt is unsustainable," Frechette writes. "The consolidation does not need to be made immediately. However, the longer this adjustment is delayed, the greater the required adjustment. "

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The report assesses the fiscal sustainability of the total government sector in Canada — the federal government, subnational governments, the Canada Pension Plan and the Quebec Pension Plan.

The PBO analysis concludes that federal spending, the CPP and QPP are sustainable, despite some pressures caused by new spending and an aging population.

But it warns that provincial, territorial and local governments need a combination of revenue increases or spending cuts totalling $30 billion to keep the debt-to-GDP ratio at a more manageable level.

Frechette said this could be done through raising revenues, transferring more from the federal government, reducing program spending, or some combination of the three.

Ottawa does have the flexibility to help if the federal government chooses.

The PBO analysis concludes that federal government net debt is on a sustainable path and will be eliminated in 50 years. And because federal net debt-to-GDP is projected to fall over time, Ottawa has the fiscal room to boost spending or transfers, even after a big spending budget that included an enriched child benefit program and the decision to keep Old Age Security eligibility at 65.

It's a similar story for the country's public pension sector.

Frechette said the CPP and QPP will see a drop in cash flow over the long term because of an aging population. But he said the rate of return on the pension fund assets will generate enough income to keep the pensions healthy.

But Frechette cautions this analysis doesn't include the agreement Canada's finance ministers reached in Vancouver to expand and enrich the CPP. He said his office will assess those changes when more details are released.

Ottawa advised to be prudent

"Our government welcomes the work of the PBO in keeping parliamentarians and Canadians informed and we are pleased to see the PBO confirm that the federal government's fiscal situation, as well as the Canada Pension Plan, are sustainable over the long term," Finance Minister Bill Morneau's press secretary Annie Donolo said in an email. 

Conservative finance critic Lisa Raitt said the PBO analysis sends a message for the federal government to "stop spending. Be prudent."

The single biggest challenge for the provincial and territorial governments is rising health-care costs, which are growing at a rate that outpaces nominal GDP. Provinces are already agitating for an increase in federal health transfers and Raitt said Ottawa needs to maintain the financial wiggle room to deal with that pressure.

"The cash call will come to the federal government," Raitt said. "And if they don't have room for it, it's going to be higher taxes or less health care for Canadians."