P.E.I.’s massive budget deficit could grow much larger

The King government tabled its 2020 budget last month, amid a turbulent year for provincial finances in the wake of COVID-19. Highlights of the budget include increased government spending, a historic deficit and a spike in provincial debt.

The province projects a $172.7 million deficit, which would be the largest nominal deficit in Prince Edward Island history—although this estimate may actually be optimistic. There’s further evidence in the budget to suggest that is the case. For example, the province projects most government revenue sources to remain essentially flat from last year to this year. It also projects an increase in corporate income tax revenues of over $9 million.

Given the lack of activity in large sectors of the economy, particularly tourism, and significant projected declines in GDP, the 2020/21 deficit may in fact end up much higher than forecasted. Our previous analysis demonstrated how P.E.I.’s deficit could reach $320 million, based on national estimates from the Parliamentary Budget Officer.

Budget 2020 reveals that the deficit situation is driven not only by flat or declining revenues, but by large increases in government spending as well. Program spending will increase by 12.8 per cent to reach nearly $2.2 billion. Government spending per person (inflation-adjusted), which has consistently increased the past few years, is taking a large jump from $13,882 last year to $15,201 this year. While some of the increase is due to spending tied to the COVID outbreak, restraint will be important in the coming years for the province to eliminate the deficit and quickly slow the accumulation of debt.

The province’s debt is also projected to significantly rise. Specifically, P.E.I.’s net debt-to-GDP ratio (which measures the province’s debt in relation to the size of the economy) will spike from 30.7 per cent last year to 35.0 per cent his year. Put differently, the budget plan shows the province is taking on a significant amount of new debt—at least $286 million.

This is important because debt accumulation means more money spent on paying interest on government debt instead of things such as education, health care and tax relief. Prince Edward Islanders will pay approximately $809 per person in provincial debt interest costs this year. As the economy recovers, the rising cost of debt will be a challenge, both in terms of what has been accumulated during COVID and what was accumulated before the outbreak.

Other highlights of the budget include an additional $185 million in transfers from Ottawa, and a reduction to the small business tax rate. While tax relief is an important long-term goal, this small tweak does little to improve P.E.I.’s overall tax competitiveness, where the province ranks poorly.

Despite progress in recent years with consecutive balanced budgets, P.E.I. faces long-term economic challenges that have been exacerbated by the COVID outbreak. Even before the outbreak and associated recession, the PBO was projecting P.E.I. as one of several provinces with unsustainable finances in the long-term.

Structural issues also remain, such as escalating health-care costs, rising debt and tax competitiveness. Reining in the size of government in coming years will be an important aspect of dealing with those challenges.

Like all governments across Canada, the King government has increased spending and faces flat or declining government revenue this year as a result of COVID-19. P.E.I. now faces a large fiscal challenge, which Budget 2020 may actually underestimate. In the medium term, spending restraint and careful management of the province’s increased debt will be crucial to the province’s economic recovery.