Newfoundland and Labrador Dwight Ball was the first Prime Minister to launch a financial distress rocket. He probably won’t be the last.
Ball wrote an urgent letter last month to warn the Prime Minister that his province had “run out of time”, could not borrow money and would soon not be able to pay its healthcare workers amid a pandemic.
And while the Bank of Canada has given Newfoundland and Labrador a lifeline by agreeing to buy short-term bonds, many academics and economic think-tanks are starting to argue that the federal government and the bank central may have to consider unprecedented options to save provincial balance sheets. .
The short-term steps that helped Ball make his pay are just that – short-term. And there is a feeling that a fundamental restructuring of financial relationships between levels of government may be necessary when the pandemic is over.
“These are unprecedented times,” said Marc-André Pigeon, assistant professor at the Johnson Shoyama Graduate School of Public Policy at the University of Saskatchewan.
Pigeon is a co-author – with colleagues Murray Fulton and Michael Atkinson – of a policy paper calling on Ottawa to “put the Bank of Canada to work” to help.
“The provinces are in great difficulty,” begins their newspaper.
They offer several options: loans to the provinces, the transfer of funds without net costs as part of a sort of COVID-19 grant, or the issuance of an explicit general guarantee for all the provincial debt in order to reduce returns at the federal level.
In an interview with CBC News, Pigeon said he understands that there is a political reluctance to go there, as this could encourage the provinces to take more risks with their finances.
“It’s kind of a moral hazard, if you support the provinces, they could let go of their spending chains and get a little crazy and we don’t want that,” said Pigeon.
“But at the same time, I think this is one of those cases where there is a reasonable argument to be made that we have to give them the power they need to deal with this crisis. “
The problem is more acute for resource-dependent provinces.
“There will be higher costs that the provinces will pay for this, and for a province like Newfoundland and Labrador, these higher costs are nothing,” said Pigeon.
“They are something important, because the province has already been challenged to enter this affair. So I think what you want to avoid is making it worse after the end. And I think this is where something more like a stronger commitment from the federal government through the Bank of Canada could help. ”
On March 25, the Bank of Canada launched a program to help consolidate provincial short-term borrowing.
On Wednesday, the Bank of Canada provided nearly $ 2 billion in support to the provinces by supporting short-term provincial debt.
But experts say the bank may need to consider longer-term, broader assistance.
In a statement released this week, the C.D. The Howe Institute said it believed the Bank of Canada would likely have to buy long-term, long-term provincial debt.
The Toronto think tank convened a crisis task force to review monetary and financial measures, co-chaired by David Dodge, former Governor of the Bank of Canada.
The group noted that provinces – particularly resource-based ones – are worse off than the 2008 financial crisis.
The magnitude of the fiscal challenges for provincial balance sheets was made clear when Alberta Premier Jason Kenney told his province to expect 25% unemployment and a tripling of the provincial deficit. .
“We will face a big fiscal toll in the future,” Kenney said in a television speech on Tuesday.
Kenney was already leading the premiers with a unanimous call to reform the financial stabilization program to help resource-dependent provinces that do not receive equalization agreements.
But even at the upper end, stabilization program reforms were to bring only a few billion dollars to provinces in need. This level of support is overshadowed by the flattening of their incomes due to the combination of COVID-19 and the oil price war between Saudi Arabia and Russia.
All provinces are accumulating debt to cope with the pandemic, but the uncertain pace of economic and financial recovery in the oil-producing provinces is particularly worrying.
Manitoba Premier Brian Pallister last month launched the idea that the federal government create an emergency credit agency to help struggling provinces. Earlier this week, Pallister renewed that call, stating in a letter to the Prime Minister that the concept has since been supported by all prime ministers.
In an editorial published in the Financial Post on Thursday, Queen’s University assistant professor Kyle Hanniman said the idea was worth considering.
But he said a faster, less controversial solution was available: the federal government could follow the example of the Reserve Bank of Australia and the European Central Bank by expanding a quantitative easing program to buy subnational bonds or provincial.
“The central problem is that we need to find ways to ensure that the provinces can borrow long-term debt at low rates and with little disruption,” Hanniman told CBC News.
He said quantitative easing is one way to do it, although it is not necessarily the only one.
The Bank of Canada could step in to buy longer-term provincial bonds, helping to smooth the rough waters of volatile debt markets.
Hanniman said the provinces play an important role in the flow of credit and money.
“So if one of them breaks down, and they don’t have the cash they need, then it will compromise our ability to fight the crisis, to eliminate it, to put people back healthy and revive the economy. operational again, “he said.
“So I would say that the stakes are very high. “
In an email statement to CBC News earlier this month, the federal finance department acknowledged “the serious economic impact on provincial economic growth, particularly in provinces where the resource sector is an important part of the economy.” ‘economy like Newfoundland and Labrador’.
The department said it is working with partners, including the Bank of Canada, to support the economy, and highlighted a recently launched program to help provinces borrow short term.
“We will continue to use all the tools necessary to ensure the resilience of the Canadian economy in the face of extraordinary circumstances and will continue to work with the provinces and territories to support them in this important but temporary crisis,” said the spokesperson. finance, Pierre-Dit Olivier Herbert.
The Prime Minister held talks with the Premier of Newfoundland and Labrador on Thursday.
Among the topics for discussion – the province’s financial and economic situation and the measures taken to date by the federal government and the Bank of Canada to support Canada’s financial markets.
In a statement, the Prime Minister’s Office said that the federal government “is working around the clock and will continue to support the provinces and territories to ensure that all governments can respond to the COVID-19 crisis.”