OTTAWA (Reuters) - A move by Canada's federal government to offload some healthcare costs onto the country's provinces will leave provincial governments facing ballooning debt unless they raise taxes or cut spending, the parliamentary budget office (PBO) says.
The federal government is in good fiscal health after it introduced broad spending cuts with the goal of eliminating its budget deficit by 2015, the PBO said in a report on Thursday on the long-term fiscal sustainability of Canada's various levels of government.
The PBO, which was set up by the Conservative government in 2006, has a mandate to provide independent analysis of Canada's finances to legislators.
"PBO's projection of net debt suggests federal debt is on track to achieve the government's G20 (Group of 20) commitment to a debt-to-gross domestic product ratio of 25 percent by 2021," the report said.
Prime Minister Stephen Harper announced the target at the Group of 20 summit in St. Petersburg, Russia, earlier this month. Canada ran 11 straight years of budget surpluses before the 2008-09 financial crisis, and Harper is eager to balance the books again before the next election, scheduled for October 2015.
Ottawa expects a deficit in the 2013-14 fiscal year of C$18.7 billion ($18.2 billion), or 1 percent of GDP.
But in a controversial move in 2011, the Conservatives announced a change to the way the federal government transfers funds to the provinces to cover the country's universal, publicly funded healthcare system.
Transfers have been growing by 6 percent a year and will continue to do so until 2016-17, but after that they will increase in line with average growth in nominal gross domestic product, which is expected to be lower.
The budget office said the change to the so-called Canada Health Transfer "has transferred the fiscal burden to provinces and territories".
"PBO estimates that the debt path of other levels of government is not sustainable and will continue to rise, reaching 359.9 percent of GDP by 2087," it said.
The PBO defines a government's debt as sustainable if the debt-to-GDP ratio is projected to return to its current level over a 75-year horizon, taking into account pressures from an aging population and other considerations.
The fiscal gap of other levels of government - lumping together provinces, territories, municipalities and aboriginal governments - is 1.9 percent of GDP, it estimated. That means these governments combined would have to increase revenues, reduce spending or a combination of both by C$36.2 billion this year to set their finances on the right track, the report said.
A spokeswoman for federal Finance Minister Jim Flaherty defended the transfer policy, saying Ottawa's payments would continue to increase every year to record levels.
"Our government has announced long-term, stable funding arrangements with the provinces that will see health transfers reach historic levels of C$40 billion by the end of the decade," spokeswoman Kathleen Perchaluk said.
The PBO report did not single out individual provinces. Ontario, the most populous provinces, is one of the most indebted. Other major economic players Quebec, Alberta and British Columbia have also been tackling deficits in recent years.
Ontario ran a deficit in the 2012-13 fiscal year of C$9.2 billion, according to the latest official figures. That is expected to widen to C$11.7 billion in 2013-14. Ontario's Liberal government has pledged to balance the budget by 2017-18.
Susie Heath, press secretary for Ontario Finance Minister Charles Sousa, said provincial finances are moving in the right direction and that total government spending decreased last year for the first time since 1996.
"And we have exceeded all deficit reduction targets for the last four years, the only jurisdiction in Canada to achieve this level of success," Heath said.
Editing by Jeffrey Hodgson; and Peter Galloway