A report published last week by the Canadian Centre for Policy Alternatives finds that despite the impact of the COVID-19 pandemic, provincial finances are expected to recover from deficits quicker than initially predicted.

According to the report, this means provincial governments are in good shape to invest in strengthening key social services, like the public healthcare system and long-term care.

The report, authored by CCPA senior economist David Macdonald, finds that most provinces are already in a fiscal surplus or are expected to be in the next year as the economy recovers.

Provincial governments, the report explains, overestimated the negative impact of the pandemic on sources of revenue and the amount that would be required to spend on emergency support programs. Ontario, for example, initially estimated a deficit of $32.1 billion, a figure that was slashed by more than half to $12.1 billion.

Alberta’s projected deficit fell from $18.2 billion to just $3.2 billion, and British Columbia “completely erased” its $8.2 billion deficit with a projected surplus this year.

Graphic: CCPA.

The report explains that the main reason behind the smaller-than-expected deficits is that governments overestimated how much tax revenue would be lost when the pandemic started:

Typically during recessions tax revenue declines as individuals and businesses make less and, therefore, pay less in taxes. However, the [pandemic-caused] economic contraction had ended by 2021, during which nominal GDP grew by 12.5%, followed by 6.6% growth in 2022. The result: own-source tax revenue was $59 billion higher than expected in 2021–22.

The report also finds that pandemic tax cuts were “counterproductive.”

Ontario Premier Doug Ford has introduced a dozen tax cuts since the beginning of the pandemic, which will cost the provincial government $1.35 billion in lost revenue this year, according to the report.

Similarly, Saskatchewan Premier Scott Moe introduced policies that reduced government revenue, costing the province $591 million, or 22 per cent of its budget deficit. Lost revenue caused by deliberate policy decisions, not pandemic expenditures, are the cause of prolonged provincial deficits, the report finds.

Provinces may have also underestimated how much support they were to receive from the federal government, the report notes.

In any case, the better-than-projected provincial finances mean governments are in a good position to invest in key social services. Macdonald told Global News Radio in an interview last week:

Often [in response to questions about] why can’t we have better healthcare, better long-term care, the provinces often say ‘well look, the cupboard’s bare, there’s nothing here.’"

However, Macdonald continued:

"That’s not the problem now; the cupboard now is stocked with cash, and the question is what are the policy priorities now? Do we use that extra money, those surpluses, on the lessons that COVID taught us, like making our healthcare system more resilient, bolstering our long-term care system that had some of the worst death rates in the developed world, or do we spend it on tax cuts?

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