'Unprecedented times' could mean unprecedented options on the table to aid provinces
Academics, think-tanks believe federal government may need to do more
This story is part of The COVID Economy, a CBC News series looking at how the uncertainty of the coronavirus pandemic is affecting jobs, manufacturing and business in regions across Canada.
Newfoundland and Labrador's Dwight Ball was the first premier to fire a financial distress flare. He likely won't be the last.
Ball wrote an urgent letter last month warning the prime minister that his province had "run out of time," couldn't borrow money and soon wouldn't even be able to pay its health care workers in the middle of a pandemic.
And while the Bank of Canada threw 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 central bank may need to consider unprecedented options to save provincial balance sheets.
The short-term measures that helped Ball make his payroll are just that — short-term. And there is a sense that a fundamental restructuring of financial relationships between levels of government may be required when the pandemic is over.
"These are unprecedented times," said Marc-Andre Pigeon, an assistant professor in the Johnson Shoyama Graduate School of Public Policy at the University of Saskatchewan.
Pigeon is co-author — with colleagues Murray Fulton and Michael Atkinson — of a policy brief calling on Ottawa to "put the Bank of Canada to work" to help out.
"The provinces are in big trouble," their paper begins.
They float a few options: loans to the provinces, transferring funds to them at no net cost as part of a kind of COVID-19 grant, or issuing an explicit blanket guarantee for all provincial debt to drive yields down to federal levels.
In an interview with CBC News, Pigeon said he understands there is a policy reluctance to go there because it could provide incentives to the provinces to take more risks with their finances.
"It's kind of a moral hazard idea, that if you're backstopping the provinces, they might let go of their spending strings and kind of go a little crazy and we don't want that," Pigeon said.
"But at the same time, I think this is one of those cases where there's a reasonable argument to be made that we need to give them the power they need to address this crisis."
The problem is more acute for resource-dependent provinces.
"There are higher costs that the provinces are going to have to pay out of this, and for a province like Newfoundland and Labrador, those higher costs are not nothing," Pigeon said.
"They are something significant, because the province was already challenged going into this. So I think what you want to avoid is making that problem worse after this is over. And I think that's where something more like a stronger commitment from the federal government via the Bank of Canada could be useful."
On March 25, the Bank of Canada launched a program to help shore up short-term provincial borrowing.
As of Wednesday, the Bank of Canada had provided nearly $2 billion worth of support to provinces by backstopping short-term provincial debt.
But experts say the bank may need to look at longer-term and broader help.
In a communiqué issued this week, the C.D. Howe Institute said it believes the Bank of Canada likely will need to purchase longer-term provincial debt over the long haul.
The Toronto-based think-tank has assembled a crisis working group to look at monetary and financial measures which is co-chaired by David Dodge, a former governor of the Bank of Canada.
The group noted that provinces — especially resource-based ones — are in worse shape now than they were going into the 2008 financial crisis.
The scale of the fiscal challenges for provincial balance sheets was made clear when Alberta Premier Jason Kenney told his province to brace for 25 per cent unemployment and a tripling of the provincial deficit.
"We will face a great fiscal reckoning in the future," Kenney said in a televised speech on Tuesday.
Kenney already had been leading the premiers in a unanimous call to reform the Fiscal Stabilization Program to help resource-dependent provinces that don't receive benefits from equalization deals.
But even at the high end, the stabilization program reforms were expected only to deliver a few billion dollars to needy provinces. That level of support is dwarfed by the flattening of their revenues due to the combination of COVID-19 and the oil price war between Saudi Arabia and Russia.
All provinces are piling up debt to deal with the pandemic, but the uncertain pace of economic and financial recovery in the oil-producing provinces is particularly worrisome.
Last month, Manitoba Premier Brian Pallister floated the idea of the federal government creating an emergency credit agency to aid struggling provinces. Earlier this week, Pallister renewed that call, saying in a letter to the prime minister that the concept has since been supported by all premiers.
- Pallister repeats call for Ottawa to borrow on behalf of provinces
- With rainy-day fund expected to dry up, Manitoba premier calls for emergency federal credit agency
In an op-ed published in the Financial Post on Thursday, Queen's University assistant professor Kyle Hanniman said it's an idea worth considering.
But he said a quicker and less controversial solution is available: the federal government could follow the lead of the Reserve Bank of Australia and the European Central Bank by expanding a quantitative easing program to buy up subnational, or provincial, bonds.
"The central issue is that we need to find ways to ensure provinces can borrow long-term debt at low rates and with few disruptions," Hanniman told CBC News.
He said quantitative easing is one way to do this, though it's not necessarily the only one.
The Bank of Canada could jump in to buy longer-term provincial bonds, helping to smooth the choppy waters in volatile borrowing markets.
Hanniman said provinces play an important role in keeping credit and cash circulating.
"So if one of them goes down, and if they don't have the cash they need, then that's going to compromise our ability to fight the crisis, to get this out of the way, to get people healthy and get the economy back up and running again," he said.
"So I would argue that the stakes are very high."
In an emailed statement to CBC News earlier this month, the federal Department of Finance acknowledged the "serious economic impacts on provincial economic growth, especially in provinces where the resource sector is an important part of the economy, such as Newfoundland and Labrador."
The department stressed that it is working with its partners, including the Bank of Canada, to support the economy, and pointed to a recently launched program helping provinces out with short-term borrowing.
"We are going to continue to use every tool necessary to make sure Canada's economy remains resilient in the face of extraordinary circumstances and will continue to work with provinces and territories to support them through this important, but temporary, crisis," finance spokesman Pierre-Olivier Herbert said.
On Thursday, the prime minister spoke with Newfoundland and Labrador's premier.
Among the topics of discussion: the province's fiscal and economic status, and actions taken to date by the federal government and the Bank of Canada to support Canadian financial markets.
In a statement, the Prime Minister's Office said the federal government "is working around the clock on the situation and will continue to support provinces and territories to ensure that all governments can respond to the COVID-19 crisis."