Paying the piper

Posted on February 23, 2012 | Atlantic Business Magazine | 0 Comments

Atlantic Canada’s provincial governments are drowning in debt — some more rapidly than others. These obligations are curbing efforts to build more prosperous economies and undermining expectations about what the public sector will, and will not, be able to deliver in the future. There are options, but none of them are pretty.

Economic guru Donald Savoie doesn’t mean to parrot an episode of reality TV’s “Till Debt Do Us Part,” whose annoying host invariably lands like a cop on the doorstep of prof ligate marrieds to tell them to turn off the music because the party’s over.

It’s just that for three years, the Université de Moncton’s Canada Research Chair in Public Administration and Governance has been struggling to persuade Joe and Jane Maritimer that the wretched condition of public finances is every bit as real and urgent as their own (which are, according to the Conference Board of Canada, historically compromised by runaway consumer spending). “Put it this way,” he says. “Your house is mortgaged, you have no cash, so you buy your groceries with your credit card . . . That’s where some of our governments are right now. And it can’t last.”

The problem is that people rarely make such connections until they’re denied some of their privileges of citizenship. Then, suddenly, affordable health care and state-funded education — indeed, all the things we think our taxes purchase for us in perpetuity — become as ardently missed as a repossessed plasma TV or a seized leather sectional. Just ask the hapless, rioting people of Greece, whose government — its debt grown so large that bond markets have, on occasion, refused to float even its quotidian expenses — has savagely curtailed pensions and tax breaks.

Of course, Atlantic Canada is not Hellas. Not yet, at any rate.

“We can continue to go blindly down the road and keep spending, keep raising our debt levels and keep thinking all will be well,” says Savoie, who is writing a book on the subject. “The fact is, though, all will not be well. Increasingly, we are looking at a bad case scenario. Financial markets will be the iron curtain that comes down. When they start telling us what we can and can’t afford, then we’re in real trouble . . . It would be like having an outsider show up at your house to give you an allowance.”

Exactly how bad is it? The Atlantic Provinces Economic Council (APEC) paints a grim picture. Nova Scotia’s longterm debt now stands at nearly $14 billion. Newfoundland and Labrador’s is $7.8 billion. Prince Edward Island’s is $1.9 billion. New Brunswick’s is clocking in at $10.2 billion. This gives the region of some 2.4-million souls a combined fiscal burden of $33.6 billion, one of the deepest per capita holes of any jurisdiction or region, with a comparable population, in North America.

Just as troubling are the provinces’ rolling, annual deficits, caused in no small part by their debt servicing obligations. Nova Scotia’s is currently $365 million; Prince Edward Island’s is $73.4 million; and New Brunswick’s is topping $550 million. Revised estimates from Newfoundland and Labrador’s Department of Finance suggest the province will post a surplus by the end of the fiscal 2011-12 (as much as $59 million), before falling back into the red (by $495 million) the following year.

Still, the situation is not uniformly bleak in all corners of the region. Newfoundland and Labrador will continue to benefit from its massive oil and gas resources, which will bolster the province’s finances for years to come. Nova Scotia, meanwhile, will benefit from a $25-billion Royal Canadian Navy shipbuilding contract, which is expected to increase provincial GDP by $661 million a year and employ as many as 11,000 skilled workers over the next three decades.

Atlantic Canada’s real problem children are P.E.I. and New Brunswick. Especially New Brunswick.

“I would have to rank public debt as the most serious issue that province faces,” says APEC president Elizabeth Beale. “Its debt and deficit position (have) been growing over the past few years in part because of the decisions governments have taken. At the same time, the slowdown in the U.S. economy endangers New Brunswick most of all because it is, among all provinces in the region, linked to American manufacturing and related export markets.”

In other words, unlike Nova Scotia and Newfoundland and Labrador, New Brunswick cannot count on hot commodities, such as oil and gas, or major capital projects, such as shipbuilding, to rescue its bottom line. And so it is peering directly into the eye of what Savoie grimly dubs a perfect fiscal storm, albeit a manmade one.

“The major commitments made by both parties in government over the past several years — first the Liberals and now the Tories — were completely irresponsible,” she says. “They did not take into consideration the nature of the province’s economy, or the demographic challenges of an aging and dwindling population base. They just told people what they wanted to hear.”

Specifically, successive governments installed a non-progressive tax regime that capped revenues at levels too low to recapture funds earmarked for spending initiatives, such as economic development for the northern half of the province. The belief was that lower levies would attract new businesses and industries to compensate for the outlays. They didn’t. “There’s very limited evidence to suggest that of all the things that define competitiveness,” Beale says, “lower taxes are the ones that are really going to drive change at the supply side of the economy.”

They also failed to consider the potential impact of shifting federal attitudes towards provincial relations. (A matter of grave concern for transfer-dependent P.E.I., but hardly less cause for worry in New Brunswick). “It should be clear that this province, like everyone else in Canada, is going to be spending more, proportionally, on health care and social services at a time when Ottawa will be saying, ‘Enough is enough. That’s your problem.’”

In fact, neither Savoie nor Beale dispute that New Brunswick’s political establishment is aware of the yawning problems with which it must now contend. They just wonder how far it is willing to go. So, indeed, does the province’s auditor general, Kim MacPherson, who delivered a scathing review of the books in January. Though she declined to be interviewed directly for this article, she did express serious reservations about the momentum of New Brunswick’s woes which, she says, are “outpacing” those of other provinces. Her report is, to say the least, illuminating.

Of 12 financial indicators she examined, only two showed “favourable results”. And one of those measured the government’s vulnerability to currency fluctuations (something that is not within its power to control). Three others were “neutral”. Fully seven were “unfavourable”. The government “expense by function-to-total expenses” and “total expenses-to-GDP” gauges were especially revealing.

The former indicated that over the past two years, the cost of essentially running the province had nipped up to $725.5 million, the fourth-largest line item in the annual budget (nearly nine per cent of the total). The latter showed these and other expenses growing faster than the economy, itself.

Meanwhile, the cost of servicing the province’s long-term debt rose, over the past four years, from $577 million to $643 million, which amounted to roughly eight per cent of all spending, with no sign of abating in the foreseeable future.

What’s more, MacPherson reported, “The rapid growth in New Brunswick’s net debt reflects a declining fiscal situation that is outpacing that of comparable provinces. We compared our fiscal results to Nova Scotia, Manitoba and Saskatchewan. The numbers show our province has the highest percentage increase in net debt, highest percentage increase in net debt per capita and highest percentage increase in net debt per gross domestic product.”

All of which lead her to conclude: “This illustrates the immediate need for the province to develop a viable plan to improve the financial health of the province.”

Which is, of course, the $10-billion question. And not just for little, old, beleaguered New Brunswick.

Economic systems the world over are, increasingly, interconnected. What occurs in one sector of this ecosystem affects all others — not immediately, perhaps, but eventually, inexorably. Canada’s constitutional conventions may prevent any of its provincial partners from utterly failing. But the cost of an engineered bail-out (if that is even possible) of New Brunswick — through either temporarily larger transfer payments or outright emergency relief — would be measured in more than mere dollars: It would be ruinous to provincial relations and a humiliating setback of national prestige in global financial markets. More likely, as Savoie insists, international bond holders would simply roll into the province like a caravan of credit counsellors.

But if New Brunswick and P.E.I. (which faces nearly identical problems, if only on a smaller scale) represent dire abject lessons for the rest of this heavily indebted region, they could also become laboratories of prudence, exemplars of turnaround finesse. It wouldn’t be easy; still, it could be done.

“Look at Nova Scotia under Darrell Dexter,” Savoie says. “He got right after his province’s fiscal problems right after his election. Now, clearly, he still has work to do. But the point is he didn’t wait before he raised the provincial portion of the HST and started cutting . . . The fact is I don’t think New Brunswick can get out of this mess without raising taxes. I think the HST offers a lot of potential on this score. One of New Brunswick Premier David Alward’s commitments is that he won’t raise the provincial portion of this tax without first holding a referendum. But I can tell you that New Brunswickers already know how they feel about the issue. You don’t need a referendum to know that they don’t want a higher HST.”

In other words, the point seems to be: Too bad. The same applies to program spending. “I say you have to put everything on the table,” Savoie declares. “You have to say, ‘Look, we have some 30 hospitals serving a population of 750,000. Half of them are going to close.’ We have too many schools and not enough students. The numbers don’t justify this. We can have no sacred cows.”

This, of course, is what the economist means when he says there’s nothing ephemeral about unsustainable public debt. Sooner or later it hits consumers, regular folks like reality show participants, just as surely as do their private obligations.

Their only choice is who gets to turn off the music once the party’s over.

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