It is Crunch Time for Atlantic Canada

Over fifty years, observers have become inured to troubling reports of Atlantic Canada's economic difficulties.

Even the most jaundiced observer would recognize, however, that data for the last two years describes something different. The regional economy is not experiencing continued slow decline: it is starting to implode.

In nine short months, the small surplus identified in Nova Scotia's spring budget has blossomed into a deficit of almost $500 million. Real GDP growth in the province is negative. Total employment has started to fall. Many more people are leaving the province than coming to it. The Globe and Mail notes that many fewer children start school every year in Nova Scotia. Manufacturing shipments are declining and the number of tourists coming to the province is falling off. All this is happening more than five years after the fall of Lehman brothers and after more than four years of recovery elsewhere.

Trends in New Brunswick are broadly similar. The deficit of $479 million projected in the budget has grown to $538 million in the province's December 5 outlook. Net interprovincial migration, balanced in 2009, is now sharply negative with 3,000 more people leaving the province each year than arriving. People are voting with their feet. Overall population is starting to decline and the remaining population is aging rapidly.

The situation in Newfoundland and Labrador differs substantially due to energy and mining revenues but shows many of the same disquieting trends. The deficit of $258 million planned in the 2012-13 provincial budget mushroomed to an astonishing $725 million in the 2012-13 fall update. EI remains one of Newfoundland's largest industries: citizens receive nearly four times as much from the program as they receive. Newfoundland's net benefit from EI is $637 million, about the same as the total value of the fishery to the province. Offshore oil production is declining after its peak in 2007. The number of non-resident visitors to the province is stagnant.

There have been warnings about the economic path Atlantic Canada has taken.

The Atlantic Institute for Market Studies has consistently and bravely expressed concern. The Chancellor of UNB referred to that province as a failing province because it is treated too generously by the federal government. The government of Newfoundland and Labrador has stated that fiscal patterns in that province are unsustainable.

Perhaps the most cogent expression of concern came from federal MP Scott Brison.

In early 2013, he reportedly observed that the region's future could be: fewer and older people….. forced to pay ever higher taxes and energy rates to sustain fixed capital costs, driving out the few remaining industries. Impatient taxpayers in other provinces refuse to bridge the gap through increased equalization payments. Spooked lenders start charging interest rates so high that the province (or provinces) cannot borrow and Ottawa has to intervene, imposing grinding austerity.

It is not likely that the federal government would impose grinding austerity. In fact, the likelihood, judging from its track record, is that it would find ways to divert more money from taxpayers elsewhere into the region and further cloud its future. But the rest of the scenario could unfold, and may be unfolding, exactly as Mr Brison outlined. Something similar happened in Saskatchewan in the early 1990's when that province faced similar circumstances and imposed its own austerity policies.

There are many reasons for this difficult situation. The major one is that the federal government enabled, through an extraordinary range of subsidy arrangements, a regional addiction to unaffordable and excessive public services and provincial civil services that in turn drove up taxes and led to wage rates the local economy could not support. In short, the federal government provided too much money: if money was the answer, Atlantic Canada would be the Dubai of the north by now.

The addiction has its roots in a political culture that is both ill informed and in some respects dishonest.

It is ill informed because neither the federal government nor any provincial government in the region has ever actually studied the economic impact of Canada's regional subsidy system on the region or any other region or Canada as a whole. Anyone who doubts this should simply ask their federal or provincial member for a copy of any such study.

The policy was dishonest in that citizens were repeatedly told, among other things, that equalization payments were required by the constitution. They are not. The equalization provision expresses an aspiration only. The fiction was repeated so often that it misinformed both policy and public opinion.

The consequences of uninformed policy can be found in three recent studies of the Fraser Institute. These are entitled Poor is the New Rich, Unseen Equalization and Economic Freedom in North America (2013).

In the first of these, the institute described the issues associated with the bloated public sectors and excessively generous programs in the Atlantic provinces.

The second study showed that subsidies provided to Atlantic Canada are incorporated in many ordinary federal programs as well as equalization, with the result that the scale of subsidy arrangements is much larger than it appears and not fully understood by either policy makers or the public.

The study on economic freedom showed that Nova Scotia and Prince Edward Island came second from last and last of all North American jurisdictions in the degree of economic freedom experienced by citizens.

The three studies, taken together, indicate that federal and provincial policies and approaches are among the region's most significant barriers to growth and prosperity.

In summary, the region is facing an economic emergency deeply rooted in public policy and an archaic political culture. What should be done?

• The four provinces should create a Public Services Corporation to deliver most provincial public services by contract to each province, an initiative that would permit drastic restructuring and downsizing of public services while still preserving provincial identities;
• Atlantic governments should adopt Mr. Brison's suggestion of a New East Partnership along the lines of the New West Partnership of British Columbia, Alberta and Saskatchewan to ensure there are no internal barriers within the region;
• The four provinces should indicate to the federal government that they want entirely new fiscal arrangements with the federal government so that efficiency and economic performance get more weight and consumption of public services much less;
• Each province should conduct an independent review of its operations along the lines of the Drummond Commission in Ontario;
• Major efforts should be made to inform and educate the public on the depth of regional problems and the consequences if they are not promptly addressed. Change of a fundamental nature is not possible without public understanding.

In summary, economies driven by outsized governments and dependency on others cannot survive in a market driven world that is increasingly intolerant of those seeking unwarranted financial support from others. The sooner this is recognized and acted upon, the easier the difficult journey ahead will be for Atlantic Canada.