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Star Forum: Budget challenges loom large

Dear editor: An ill wind is blowing through provincial public finances, and the toughest weather is in New Brunswick and Newfoundland and Labrador.

First responders were in New Brunswick, whose government presented a new budget on Groundhog Day, Feb. 2. On the surface, at least, there are big changes. The budget laid out rough plans for public service reorganization, with a continuing rationalization of senior and middle management and consolidation of some service delivery locations.

The big program spending category, health, is left mostly as a project for the future. The most promising words indicated willingness to work with private sector partners to do a smarter job of delivering community primary care. Meanwhile, spending is up.

So too with education. Post-secondary operating grants are frozen. As to primary and secondary, the budget ducked a recommendation from the recent Strategic Program Review that would see average class sizes returned to their recent norm, or four students more. A missed opportunity to shift resources while sustaining or improving education effectiveness. Meanwhile, spending is up.

There are brave decisions on tax, including a well-seized opportunity to drop the province’s uniquely high top income tax rate, citing the concurrent federal top rate increase. A two per cent simultaneous rise in the provincial general corporate income tax rate seems to be a tradeoff; given upcoming federal rate decreases for small business, New Brunswick might have been wise to raise its small business rate as well, or instead.

The big news is a two per cent Harmonized Sales Tax rate increase. As tax bases go, the HST is a good one for provinces, and on a lifetime basis it is more or less fair to households of all income levels.

Concern over low-income households, however, prompted the government to introduce an offsetting credit, roughly matching the form of the federal HST credit, but more generous. The net impact is that households with under about $45,000 in net income come out on average about neutral, or ahead, financially.

New Brunswick’s net debt continues to rise over time, but the budget presents a perhaps plausible medium term path to fiscal balance.

Not so in Newfoundland and Labrador, where the ill wind is an oil-price induced gale.

The buffeting there is not so severe as in developing nations, where oil revenues account for almost all government revenue. Nonetheless, oil royalties are down by more than two-thirds from their peak, when they accounted for a third of provincial revenue.

At the end of January, Standard and Poor’s downgraded Newfoundland and Labrador’s credit rating from A+ to A, with a negative outlook; the other two main agencies also revised their outlooks to negative.

These are only symptoms, and the oil price only the trigger of them; the underlying pathology is the unsustainable spending path the province has followed for the past decade — during which time program spending rose by 62 per cent. And the province’s debt will continue to rise.

From now to 2020-21, we likely will see net provincial debt doubled, and on that the provincial auditor general’s recent report is remarkably blunt.

“This level of net debt and borrowing is not affordable for the people of the province and is not sustainable. It is uncertain, even, whether the capital markets would support this level of borrowing by Newfoundland and Labrador, given the current financial outlook.”

Auditors general do not often write such language.

Calm may be on the horizon at the end of this decade — if oil prices recover and output picks up. Between now and then, Newfoundland and Labrador will have to seriously rework public service delivery, and work harder than other provinces, so that a sustainable budget becomes plausible.

And by then, Finance Minister Cathy Bennett will need to have worked through a fiscal framework that is structurally isolated, as much as it can be, from the vagaries of resource markets, so that future storms are more easily weathered. A tall task, but achievable, even when winds blow hard.

Finn Poschmann is the president and CEO of the Atlantic Provinces Economic Council. He writes from Halifax.

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