Fraser Forum

Provincial finances in trouble—spotlight Atlantic Canada

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The Parliamentary Budget Office (PBO) recently published its annual fiscal sustainability report, which provides long-term projections to assess the sustainability of public finances for the federal government and the provinces. In this context, sustainability simply means that a government’s debt load does not grow continuously as a share of the overall economy.

The projections for provincial governments are worrying and in many cases eye-popping. Canada’s population is aging. As more people retire and exit the workforce, health-care costs along with retirement benefits will likely increase while there will be proportionally fewer people working, putting downward pressure on tax revenue.

In no region of the country are these challenges more pronounced than in Atlantic Canada.

The PBO projects rising government debt relative to the size of their economies over time in all four Atlantic provinces, which are already saddled with significant debt burdens.

New Brunswick seems to be the most troubling case. The PBO estimates the province’s debt load will climb to 115 per cent of GDP over the next 25 years. Of course, this is a long-term forecast and thus inherently imprecise, but it shows that unless it changes course, New Brunswick is headed for serious trouble, made all the more challenging by a population older than the Canadian average and shrinking (rather than increasing, as in many provinces) over time.

In Newfoundland and Labrador, trouble isn’t just on the horizon, it’s already arrived. In the past four years, the province has run budget deficits ranging from $850 million to $2.2 billion. These are staggering numbers in a province of just over 500,000 residents. At 7.3 per cent of GDP, Newfoundland’s deficit in 2015/16 was the largest recorded by any provincial government in Canada in recent history. In fact, you must go back to the early 1990s, before the fiscal consolidation efforts of that decade, to find any provincial deficits of remotely comparable size anywhere in the country. Unsurprisingly, the PBO report shows even more trouble on the horizon.

Prince Edward Island and Nova Scotia also currently have substantial net debt stocks. Both provinces will have to exercise spending restraint to prevent those debt stocks (and resulting interest payments) from growing further and, at least as importantly, to create fiscal room for tax reductions badly needed for growth in those two high-tax provinces.

Clearly, provinces across Canada face real problems with government finances. Nowhere are those challenges more serious and urgent, however, than in Atlantic Canada. Hopefully the recent PBO report makes this reality clear to residents and policymakers in the region.


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