Commentary

Commentary: The Truth About New Brunswick’s Finances

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Huddle publishes commentaries from groups and individuals on important business issues facing the Maritimes. These commentaries do not necessarily reflect the opinion of Huddle.

By Richard Saillant, Director of the Donald J. Savoie Institute at the Université de Moncton.

Here is what you likely won’t hear from the government as it consults with New Brunswickers on our fiscal future.

The deficit is going up, not down

On the surface, the government has made progress in balancing the books since it came to power. Excluding the contingency reserve, the deficit should come in at $230 million, down approximately $150 million from fiscal year 2014-15.

But appearances can be deceiving; despite the headlines, New Brunswick’s fiscal dynamics remain much the same.

Let’s start with spending. Here, things are not better, they are significantly worse. Excluding a large special payment related to pension reform, the previous government kept operating spending growth to 1% annually over its mandate. To date, the current government has grown spending twice as fast.

The picture looks better on the revenue side. In 2015, tax receipts grew nearly 3% as the economy got a jolt from sharp declines in oil prices and the exchange rate. This year, tax receipts are set to grow more than 6%, thanks mainly to a two-point hike in the HST.

Unfortunately, this spike in revenues is temporary. After a robust gain of 2.3% in 2015, the economy is now growing far below 1%, reverting to the new norm since baby boomers began retiring toward the turn of the decade. As for the HST, its contribution to revenue growth will taper off next year. Beyond that, tax revenues are likely to grow at best in the 1.0 to 1.5% range barring another tax increase.

The problem is the government seems to need much more to make ends meet. This year, despite having told New Brunswickers everything was on the table to find savings, it is ramping up spending by 3.2% or $250 million. That’s because it chose to “protect” health care and education by freezing the status quo. The price tag for such an approach will likely not come down over time; in fact, with population aging, the pressures to spend more will only grow.

And looking to the Strategic Program Review exercise to save the day is futile. Even the government is saying that it only plans to find on average a paltry $15 million in new savings annually from next year until the turn of the decade. The coming carbon tax will not help the bottom line either since the premier has promised to spend it all on green initiatives.

In short, barring another major tax hike or a significant boost in federal transfers, the government cannot continue to spend as it does now without growing the deficit. Alchemy is not a possibility in budget-making.

The debt is vertiginously high

Having said this, creditors do not care much about the deficit; ultimately, they care about whether the government can pay back what it owes. Since it came to power, the current government has piled more than $1 billion to the debt, extending a decade-long trend of growing indebtedness. In 2006, net debt stood at $7 billion. By the end of this fiscal year, it will exceed $14 billion.

As worrisome as it may be, this last number does not fully reflect what the province owes. That’s because it excludes the amounts the government has borrowed on behalf of entities it owns, chief among which is NB Power. The utility owes close to $5 billion. Technically, this debt is to be paid back by ratepayers, not taxpayers. In reality, the two are largely one and the same. Of note, Standard&Poors, a credit rating agency, is of the view that heavily-indebted government entities such as NB Power are not financially self-sustaining. Translation: if they were standalone companies, they would likely be in deep distress, or bankrupt.

Credit rating agencies use the concept of “tax-supported debt” to measure the full scope of a government’s liabilities. Using this metric, New Brunswick’s debt stands at close to $20 billion.

Not included in this figure is the amount to be borrowed to secure the future of the Mactaquac dam, which remains highly uncertain and could go as high as $5 billion. At $20 billion, New Brunswick’s taxpayer-supported debt amounts to 61% of GDP. At $25 billion, it would amount to 76%, not far from the level of some Mediterranean countries when the crisis hit a few years ago.

What’s worse, we have not yet factored in the biggest liability of all, which is the spending required to maintain health and elderly care services to an aging population. Over the next two decades, such spending could well double if we are to maintain the status quo.

Standard&Poors considers New Brunswick has a “very high debt burden”. We should take their assessment seriously. The agency does not care how many hospitals or schools will need to be closed down for the province to continue to service its debt in the future. We should.

Richard Saillant is the director of the Donald J. Savoie Institute at the Université de Moncton. His latest book, A Tale of Two Countries: How the Great Demographic Imbalance is Pulling Canada Apart, was released last month.