P.E.I. government must change course to restore fiscal sustainability

The King government recently received some fiscal news, and it’s not good.

According to the latest Parliamentary Budget Officer (PBO) annual assessment of the fiscal sustainability of governments across Canada, Prince Edward Island’s government debt will grow at an unsustainable pace unless the province changes course. In fact, P.E.I.’s government finances rank second-worst in terms of sustainability (trailing only Manitoba).

While concerning, the news should not come as a great surprise. A recent study published by the Fraser Institute showed that, in 2021 (the most recent year of comparable data), the King government raised program spending to the highest level on record since 1965 (even after adjusting for inflation, population and removing COVID-specific spending). Since that time, the government has left the spending taps wide open, increasing program spending by 11.5 per cent in 2022/23 and a projected 6.1 per cent in 2023/24 (both in excess of revenue growth).

The result? The province expects to run its fourth consecutive budget deficit this year with no plan to return to budget balance, adding to the Island’s debt burden. Provincial net debt (total debt minus financial assets), which equalled 27.6 per cent of the provincial economy in 2022/23, will reach a projected 28.8 per cent this year and 29.5 per cent next year. According to the PBO, provincial finances are considered “unsustainable” when net debt grows faster than the economy, which is happening in P.E.I.

The King government should have seen the warning signs. Following this year’s provincial budget, the risks of the government’s big-spending, deficit-financed, debt-fuelled fiscal approach were crystal clear. And P.E.I.’s auditor general (AG) rang the alarm bell, stating that the province’s net government debt (on a per-person basis) has been following a “negative and concerning trend.” Since then, net debt per person fell briefly but is now projected to increase in each of the next three years.

But there’s good news. The solutions are simple. In fact, the King government need look no further than New Brunswick for an example of a solid approach to provincial finances. With spending restraint, New Brunswick has maintained a policy of balanced budgets and will deliver its seventh consecutive surplus this year. After several years of being deemed “unsustainable” by the PBO, New Brunswick was rated “sustainable” this year, with the province’s net debt burden moving in the right direction.

But to emulate this approach, the King government must restrain spending. Economists refer to the “fiscal gap” as the difference between current fiscal policy (government spending and taxes) and fiscal policy that’s sustainable over the long term. P.E.I.’s long-term fiscal gap currently stands at 2.3 per cent to 2.4 per cent of the provincial economy, according to two different estimates. Subsequently, to bring provincial finances to sustainability this year, the government must reduce spending by approximately $223.5 million, or 7.6 per cent of program spending.

The government could also pursue a more gradual approach and simply freeze spending levels this year, which would help reduce or eliminate the deficit and return to budget balance.

Unfortunately, in its first four years, the King government has spent freely, ran deficits and racked up debt. The evidence clearly shows this approach is unsustainable. With a new mandate in hand, now is the optimal time for the government to restrain spending and return the Island’s finances to a sustainable position.