New Brunswick government should reduce spending to solidify provincial finances

Recently, Canada’s Parliamentary Budget Officer (PBO) published its annual report on the health of public finances across Canada. Despite the balanced budgets of recent years, the Higgs government still has work to do to strengthen New Brunswick’s finances and make them more resilient to risks on the horizon.

The purpose of the PBO’s annual report is to assess the sustainability of government finances using a technical definition of the term. Under the PBO’s definition, a government’s finances are unsustainable if, under current policies and reasonable economic assumptions, government debt is on track to grow faster than the overall economy over the long-term.

Simply put, the report finds that New Brunswick’s finances are unsustainable. This means if the provincial government fails to take any policy action, the province’s net debt-to-GDP ratio, a key indicator of the sustainability of debt levels, will rise over time.

The PBO is not alone in this key finding. Leading experts at the Finances of the Nation project concur with this basic assessment. Their calculations suggest that New Brunswick requires significant spending reductions to make the province’s finances sustainable without tax increases. To achieve sustainability in one year, their analysis suggests the government must reduce program spending (all spending other than debt interest costs) by $1.04 billion or approximately 9.7 per cent.

Of course, the government could take a more gradual approach to reducing spending but there are meaningful advantages to moving quickly, including reducing the likelihood of budget deficits in the years ahead, which would mean more debt and (all else equal) higher interest costs borne by taxpayers.

More broadly, government finances in the region are subject to a number of region-specific risks that could make the fiscal situation precarious including the region’s heavy dependence on transfer payments from Ottawa to fund provincial activities. The Maritime provinces specifically receive a larger share of their revenue from federal transfers than any other province in Canada. This makes the region uniquely vulnerable to changes in federal transfer policy. Bringing spending closer in line with own-source revenues (revenue generated within the province) would help mitigate this risk.

Of course, there’s also the possible future effects of interest rates on government debt. Partly due to lower credit ratings, the Maritime governments generally pay higher interest rates than many other provinces. And a recent report showed that in 2021 the four Atlantic provinces were among the five highest in Canada for the amount of money spent on debt interest payments relative to own-source revenue.

With interest rates rising, these factors make it all the more important for New Brunswick’s government to manage money frugally to prevent the province from starting to accumulate debt that’s more expensive than it has been in years, which could contribute to long-run sustainability challenges.

In recent years, New Brunswick has avoided deficit-spending and meaningfully reduced provincial debt (on a per-person basis). These are important accomplishments. However, the recent PBO report shows that the fiscal work is not yet done. The government must continue with continued spending restraint to bring sustainability to provincial finances and help make the province more resilient in the face of future fiscal risks.