Strap in for financial turbulence if premier right about deficit

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This article was published 14/12/2023 (673 days ago), so information in it may no longer be current.

When Finance Minister Adrien Sala was asked last week whether Manitoba was facing a structural deficit — where revenues no longer align with base spending — he didn’t answer directly. He dodged the question.

It wasn’t until he was asked a second time at a Dec. 5 news conference that his boss, Premier Wab Kinew, jumped in to state unequivocally that the province is facing a structural shortfall.

“Yes, the PCs created a new structural deficit on their way out the door, leading into the 2023 election,” said Kinew.

That was a profound statement. Structural deficits are different than regular deficits, which are often driven by short-term events, such as a recession or a natural disaster. Governments can usually get out of them more easily as the economy grows.

Structural shortfalls are more permanent. They occur when existing taxation levels and transfer payments from Ottawa no longer cover basic government spending over the longer term.

Sala was reluctant to use the term “structural deficit” because it has a specific meaning for credit-rating agencies. It spooks them. Governments can’t tinker their way out of those types of shortfalls. They have to make significant and permanent changes to spending, revenues or both to get back into the black.

Failure to do so almost always attracts the attention of bond-rating agencies that will — if they don’t see progress on realigning spending with revenues — downgrade government’s credit rating.

That’s what happened under former NDP premier Greg Selinger in the years leading up to the 2016 provincial election. He created a structural deficit by substantially increasing spending. The bond-rating agencies responded by downgrading the province’s credit rating and the new Progressive Conservative government had to clean up the fiscal mess (which it did until the COVID-19 pandemic hit).

Is there truly a structural deficit now, as stated by Kinew?

That’s debatable. Politically, it makes sense for Kinew to describe the shortfall in the starkest terms possible to create the perception that the Tories grossly mismanaged the provincial treasury. That’s politics. But there are risks to doing so. The more dire the fiscal situation, as publicly expressed by a first minister, the more closely credit rating agencies will pay attention.

Sala and Kinew announced last week that the province’s deficit for 2023-24 has ballooned to $1.6 billion from $363 million. The main causes are steep declines in Manitoba Hydro revenue, owing largely to lower water levels, a significant drop in taxation revenues and overspending in health care.

Sala was supposed to outline this week what steps government plans to take to dig the province out of this hole. But instead of unveiling the kind of spending reforms needed to address a structural deficit, the finance minister announced Wednesday only small spending changes. He’s tinkering. That’s not enough to get out of a structural deficit. Government is still projecting a $1.6-billion shortfall for 2023-24.

There’s little doubt that number will fall by the time Sala introduces his first budget in the new year. The likely plan by the NDP was to inflate the size of the projected deficit as much as possible and to announce a lower one a few months later. It’s designed to give the impression that the new government is hard at work managing the public treasury.

But even if the deficit is cut in half, it’s still a significant shortfall. If it’s a structural deficit, as Kinew confidently claimed last week, it will take more than minor spending reductions to wrestle it to the ground.

Cancelling the PCs’ tax cuts — including income tax and education property tax reductions — would eliminate most of the shortfall virtually overnight. But so far, the Kinew government has rejected that idea.

Which means the NDP will have to do far more on the spending side to realign expenditures with revenues to reverse the alleged structural deficit. That’s problematic for a new government that has promised voters significant spending increases in health care, education and in areas such as fighting poverty, homelessness and addictions.

Government can’t have it both ways. It can’t run massive deficits, cut taxes and raise spending. That’s a slippery slope to insolvency, where successive credit downgrades and ballooning debt make it nearly impossible to borrow more money.

That has happened to provincial governments in the past, including Saskatchewan in the mid-1990s and more recently Newfoundland and Labrador during the pandemic. In both cases, government’s ability to borrow through the bond market essentially dried up.

If Kinew is right and the provincial government has created a structural deficit, far more drastic steps than those unveiled Wednesday will have to be taken to avoid a credit-rating downgrade. If there is no structural deficit and Kinew was exaggerating for political reasons, then he wasn’t being honest with Manitobans.

tom.brodbeck@freepress.mb.ca