Critics quick to ignore the revenue side of Manitoba’s deficit situation

Whenever government reports a deficit larger than it forecast, there will be howls of concern and condemnation. That was certainly the case when Finance Minister Adrien Sala recently confirmed Manitoba is facing a $1.6-billion deficit, more than twice what it forecast just three months ago.

Premier Wab Kinew’s NDP government should have to face criticism for a performance like that. But criticism for what, exactly?

A deficit is the product of negative forces on both the expenditure and revenue side of any budget. When expenditures go up and revenues stall or go down, the picture gets bleak in fast fashion.

However, traditional budget criticism tends to focus more on what government is spending and less on the revenue side. The great crime in that approach is that it suggests deficits are caused or solved only by controls on spending. The reality is far more complex than that.

Let’s look at the two main criticisms of the NDP’s $1.6-billion deficit hole, both of which focus on the expenditure side: that government has not shown enough general restraint; and did not competently anticipate the impacts of drought and wildfires.

On the first point, there is little doubt that faced with increasing, unbudgeted costs and declining revenues, the NDP government hasn’t shown any interest in tightening its belt. However, mitigating that criticism is the fact that Kinew is focusing his aggressive spending on things such as health care and social problems, including homelessness, mental health and addictions.

If the options are keep spending or austerity, there is an argument that deferring expenditures on these problems — the hallmark of the previous government — would only make the problems bigger and more expensive to solve in the future. The NDP could curb spending in less important areas of government, but those cuts wouldn’t add up to much in the way of savings.

That brings us to the second criticism: Kinew and Sala should have been better at anticipating wildfire costs and declining Hydro revenues, the two biggest drivers of this upsized deficit.

On this point as well, there is fundamental truth. Drought has become the new normal in Western Canada and there is little value in optimistic forecasting. That said, it’s not entirely clear that this is a case of ignoring clear signs of impending natural disaster.

Manitoba suffered through a one-in-40-year drought event this year, leading to a historic number and severity of wildfires and a drop in Hydro revenues from lower water levels. In short, Manitoba saw the worst possible combination of outcomes manifest from this year’s drought, a problem that may not have been entirely predictable.

What is largely ignored in both of these criticisms is, however, the revenue side of the budget equation.

Again, the quarterly update shows that Manitoba overestimated own-source revenue by more than $500 million. Was this a result of incompetence by the government? Possibly, but not necessarily so.

A post-budget renegotiation of a federal-provincial child care program stripped $137 million from federal transfer payments. More than $100 million in federal infrastructure funding was lost because of delays in starting projects due to wildfires and other weather-related complications in northern Manitoba.

The NDP also overestimated individual income tax revenues by $270 million due to lower-than-expected 2024 assessments. In the aggregate, this has been a problem for most Canadian provinces this year, with Alberta and British Columbia, in particular, also expecting to see hundreds of millions of dollars less in income tax revenues for the current year than budgeted.

Bottom line? Although the NDP government completely owns the political fallout from managing or mismanaging its deficit, this is starting to look a lot more like a perfect storm of negative forces that are impacting the entire country.

Every province in Canada will finish the year with a deficit and those deficits have, in most provinces, grown as the year has gone on. Although pressures on expenditures for things such as health care and infrastructure are playing a role, lower-than-expected economic growth is a bigger factor that has inflicted pain on provincial treasuries from coast to coast.

Why are revenues more important going forward? Because revenue growth is the only practical way of dealing with the current national deficit crisis.

Consider the $800-million growth in Manitoba’s budget deficit. Could any provincial government address this huge increase in the deficit by carving $800 million out of other areas of spending? Not without gutting the most important services that government provides, with health care at the top of the list.

Should government show at least some restraint? Yes, of course. But it’s important to remember that those gestures of restraint are likely to be measured in the tens of millions of dollars while the problem is growing by hundreds of millions.

Although a lot of critics suggest that spending restraint is the key to managing a deficit, most deficits are erased by growth, not by austerity. And right now, the prospects for growth are limited.

The Kinew government is 100 per cent responsible for the current deficit. But the only way it will find salvation is in an economic recovery. Until then, deficits will be the rule, not the exception.

dan.lett@freepress.mb.ca