Change Point: Caught between declining revenues and increased expenses, New Brunswick stays focused on growth

The COVID curveball of 2020 caught governments around the globe off guard, upending economies and the best of fiscal intentions. New Brunswick was not immune, but she recovered well.

New Brunswick was the first province in Canada to re-open for business. By August, businesses had received $528 million from the Canada Emergency Wage Subsidy, helping to support 12 per cent of the workforce. By fall, employment was down just 3.5 per cent compared to 2019, with 38,700 jobs recovered over the low point in April. This was the smallest employment gap among Canada’s regions.

An early re-opening meant retail sales rebounded quickly. By August, they had increased 37.8 per cent over April, and by the end of the third quarter, they were nearly 104 per cent of February’s levels. Third-quarter results also showed building permits up 29 per cent over February, while the real estate sector was hitting records, especially in urban housing starts, which were up 21 per cent, with strong gains in Moncton and Saint John.

This is not to say the provincial economy went unscathed. The government expects an overall contraction of 4.3 per cent for 2020 (although TD estimates it could be as low as three per cent). Manufacturing and exports were hit hard, mainly due to heavy exposure to petroleum products production. Third quarter results showed manufacturing sales down 18.2 per cent and a decrease in international exports of 23 per cent. Food services, which are expected to recover more slowly, were operating at just 87 per cent of 2019 levels in August.

The pandemic also soured the government’s fiscal forecast. The deficit is projected at $183.3 million this year, instead of the $92.4-million surplus Premier Higgs had been hoping for, and net debt is forecast at just over $14 billion, up from pre-COVID projections of $13.68 billion.

Still, as a percentage of GDP, the deficit is among the lowest in Canada, and while undoubtedly frustrating for a government über-focused on fiscal discipline, N.B. has fared better than many of its peers. In November, New Brunswick’s year-to-date trade balance with the rest of the world showed a surplus of $648.1 million, a 13.3 per cent increase over 2019. And, according to the Atlantic Provinces Economic Council, the province was in a relatively strong fiscal position heading into the new year.

Sadly, this is all the proverbial potatoes/potahtoes. While the New Brunswick economy may emerge from the pandemic less ravaged than others, it is in post-COVID growth projections where the real story is told. Its estimated COVID contraction is in line with global forecasts; its post-COVID rebound is not. In 2021, the province is expected to grow by just 2.8 per cent, while global growth is estimated at 5.2 per cent. Canada overall is expected to grow by four per cent next year. In the Atlantic region, N.B.’s estimated GDP rebound is in third place, only slightly ahead of N.L.

This means that while N.B. may have managed its pandemic responses and economies better than other places, it will not reap the same recovery rewards. If projections prove true, New Brunswick’s growth next year will be lower than that of the United States (estimated at 3.1 per cent), a country decimated by the pandemic.

This isn’t surprising, given New Brunswick’s economy is notoriously stubborn. Seemingly impervious to efforts to fan her flames, she has left many a previous government lying defeated at her feet. Now, it would seem, not even a global pandemic—the biggest economic shock since WWII, could really move her.

Growing pains
The Higgs’ administration has been hailed for its focus on balancing the province’s books, and rightly so. New Brunswick’s debt has nearly doubled over the last 10 years; from 2010-2017, the province regularly ran deficits. Targeting consistent surpluses and modest annual reductions in debt (as Premier Higgs’s team had planned pre-pandemic) is a solid strategy.

However, New Brunswick’s trail of deficits and mounting debt are issues shared across the nation. Between 2015 and 2019, Alberta, Saskatchewan, Manitoba, Ontario and Newfoundland and Labrador ran consistent year-over-year deficits, all before COVID-19 attacked humans and budgets alike. The consolidated Canadian general government, which combines federal, provincial, territorial and local governments, recorded a deficit of $25.3 billion in 2019-2020, the largest deficit seen since 2012.

In similar fashion, several provinces have had even more alarming rises in net debt over the past decade than New Brunswick. Alberta’s debt level, for example, rose by 204.5 per cent between 2007-2019. At 36.5 per cent, N.B.’s debt as a percentage of GDP is high, but not the highest in the country. Newfoundland and Labrador, Quebec and Ontario all have higher percentages, and at least four provinces are now registering higher debt per capita than N.B. (at $17,794).

But just because other provinces find themselves in the same boat, doesn’t mean it’s seaworthy, says University of New Brunswick’s Vaughan Chair in Regional Economics Dr. Herb Emery. “All the provinces have been borrowing and none of them are fiscally sustainable so to say that we’re doing the same as the other provinces doesn’t really address the problem that we are all in trouble. All that borrowing was happening in the context of a good economy, whereas typically you want governments to borrow less when times are good and use that borrowing power when times are rough, like during COVID.”

The bigger problem in New Brunswick, says Dr. Emery, is that the province is just not growing.
The N.B. economy expanded by 1.2 per cent in 2019, marking the tenth consecutive year its growth was at a rate below the national average. Over that decade, N.B. grew by 6.8 per cent, the only Canadian province not to reach double digits. In the same period, Canada grew by 24.5 per cent and neighbouring P.E.I. by a remarkable 25.2 per cent. In 2019 alone, P.E.I. grew four times faster than N.B.

Why is slow growth such a big deal? After all, N.B. is rural, uncrowded and picturesque. Why dip the toe in the frenzied waters of a hurried globalized economy? Why choose to be shackled to ambitious growth targets when the province appears to have already arrived at a greater destination? The answer lies in the GDP pie.

In ‘Is New Brunswick Heading over the Fiscal Cliff?’, a 2019 article for the Canadian Tax Journal, Dr. Emery and fellow economist Richard Saillant show how New Brunswick’s fiscal position eroded from 2008 to 2017. During this “lost decade,” N.B.’s successive governments performed poorly, both in absolute terms and relative to the other maritime provinces, say the authors, in adjusting to major shocks that seriously impaired revenue growth—namely, the 2008 financial crisis and its aftermath, the progressive exit of the baby boomers from the labour force and a sharp decline in federal transfers. While other Maritime provinces took action sooner to tackle these challenges (P.E.I. accelerated its immigration push and Nova Scotia raised taxes earlier, for example), New Brunswick chose instead to grow its economy through public services. That, says Dr. Emery, is a zero-sum game.

“The long-run trend has been moving from goods-producing sectors towards services. Where New Brunswick stands out is we haven’t grown our business service sector, and what we’ve done instead is we’ve allowed the public sector, including health, to basically drive most of the employment since 2010,” he says.

What happens when the government takes the lead in the economy? It is not growth, says Dr. Emery.
“Often we’ll hear what’s the big deal, healthcare is an industry like any other. If it’s bigger in GDP, it’s just like having more pulp and paper mills. That is patently false, because it’s not a wealth creating sector. It actually diverts funds from productive investment like education. We’ve run an experiment for 10 years in this region where we have used public sector spending and growth through transfers from other regions to grow the economy, and all that public spending is correlated with no growth in GDP. That is not a sustainable economy,” says the economist.

In 2019, public services made up 28.1 per cent of N.B.’s GDP.

Death and taxes
It’s a perfect storm. In ‘Fiscal Cliff’, Saillant and Emery point out that New Brunswick has barely seen the tip of the iceberg in terms of spending pressures induced by aging. The number of seniors aged 75 and over in the province is projected to more than double over the next two decades, from 65,000 in 2018 to 145,000 in 2038. Healthcare spending increases exponentially as seniors grow older, from roughly $6,000 per capita for those aged 65-69 to around $11,000 and $23,000, respectively, for those aged 75-79 and 85-89.

New Brunswick will have a hard time raising taxes to pay for this spending increase because, basically, New Brunswickers are already taxed out. New Brunswick has high personal, provincial sales and property tax rates, especially in relation to provinces to the west. In 2017, the ratio of provincial taxes to GDP stood at 14.1 per cent, a third higher than Ontario’s ratio and twice Alberta’s. Already, close to 34 per cent of N.B. households have incomes so low they cannot afford to pay their taxes.

Consequently, N.B. is facing a future in which it may be unable to provide the quality of service consistent with the idea of a common social citizenship in Canada. “We can’t sustain the level of services that we have at the current tax levels and in a place like the Atlantic economies, there’s not a lot of room left to raise taxes. They’re already extremely high, and it’s driven out most of the top income earners, and it’s probably a big drag on business attraction,” adds Dr. Emery.

“The reason we have a growth imperative is the demands of the public sector aren’t sustainable unless we have growing GDP. If New Brunswickers really choose that they want an idyllic setting with no growth, which is a choice that they have a right to make, it’s just going to come down to sort of right-sizing the public sector, including health.”

As Dr. Emery sees it, New Brunswickers have two choices. The first, which he calls ‘Back to the Future’, builds on the strengths of traditional resource sectors, is business driven and less transfer dependent. The second is to ‘Stay the (New) Course.’ On this pathway, N.B. continues to pursue a public-sector driven economy, with an urban and transfer-dependent approach, and drives down traditional strengths to make way for new industries (as yet undecided).

What’s the best direction? That depends on what New Brunswickers believe makes them happy, says Dr. Emery.

Turning point
John F. Kennedy was fond of saying the Chinese word for crisis was made up of two characters, one representing danger and the other opportunity. This translation has since been contested by Victor Mair, a professor of Chinese at the University of Pennsylvania, who says the first character does indeed mean “dangerous,” but the second has a meaning more akin to “change point.”

Last fall during a European Central Bank panel discussion, U.S. Federal Reserve chairman Jerome Powell said that while the U.S. economy had started the long road to recovery, the economy Americans knew was probably a thing of the past. The pandemic had accelerated existing trends in the use of technology, telework and automation, and this would have a lasting effect on how people live and work. “We’re recovering, but to a different economy,” he said.

The New Brunswick economy is also at a change point. Premier Higgs’ government is well aware of the immensity of the challenges ahead—their Economic Recovery and Growth Action Plan released last year spoke not of the typical four-year term goals, but rather of changes to come about within a generation.

A result of consultation with the private sector and experts around the globe who were asked to identify hurdles to growth in the province, the plan aims to close the economic prosperity gap between N.B. and the rest of Canada over the next 10 to 20 years through five strategic priorities: increased private sector investment; increased productivity; diversification and growth of exports; increased immigration and repatriation; and, GDP growth. The end goal is to create the right infrastructure, tax and policy environment to make N.B. a magnet for investment, expand its tax base, reach one million in population size and lower the average age of the province’s people.

This may sound dry, but in fact, the plan involves a colourful kaleidoscope of responses that could work, especially in a post-pandemic world. Initiatives range from cutting red tape for business, increasing agri-food and seafood exports and launching a new Research and Productivity Council to supporting greater Indigenous participation in the economy and investing in small modular reactors.

There is an interconnectedness to these efforts. Plans to improve broadband connectivity will increase the attraction of rural areas for remote workers and businesses, but also facilitate government efforts to reinvent public service delivery through things like virtual health and online education. Initiatives aimed at boosting productivity through the uptake of new technologies like automation can also mitigate demographic and labour force challenges. A recent partnership with the Indo-Canadian Business Chamber aimed at growing N.B.’s presence in the Indian market will also serve to bring new Indian business and immigration to the province.

At the centre of all this activity is a woman named Arlene Dunn. Her appointment this fall as minister for Aboriginal Affairs, Economic Development and Small Business, Opportunities New Brunswick (ONB) and Immigration highlights the government’s interconnected response and places Dunn in the crosscurrents of change. She brings to the table a handy background in breaking through barriers. In 2019, she became the first female director of Canada’s Building Trades Unions, which made her the highest-ranking woman in the North American construction sector.

Minister Dunn says the economic forces of the post-pandemic world can be harnessed in N.B. “We have a real opportunity to build back better. There is a renewed sense of optimism about our future here in New Brunswick, and we need to take advantage of that,” says the minister. “While much has changed because of the COVID-19 pandemic, our vision for a better economic future should not, and that’s why we need to stay focused on those five strategic priorities.”

Productivity gains alone could allow the province to meet its growth targets, says Dunn. According to government estimates, if N.B. matches the productivity levels of its Atlantic Canadian counterparts, it would be the equivalent of adding nearly $3 billion to the economy. “ONB’s mandate has increased productivity as one of its key pillars. We will continue to work with New Brunswick businesses as they invest in productivity, and that means supporting their automation projects involving innovations like artificial intelligence and robotics,” she says.

The post-pandemic world described by Jerome Powell is also present in ONB’s plans to boost digital connections for exporters. “COVID-19 has changed the way we all do business, even in a post-vaccine world. Connecting via virtual means will be more commonplace, even when we have managed to put the pandemic in our rear view. What ONB is doing is helping companies find new and innovative digital tools that are best suited for them and their B2B interactions, and we will facilitate those interactions as much as possible. We have a vested interest in making sure our companies are prepared to undertake sales in a digital manner.”

Paradoxically, the pandemic has also forced N.B. to look inward. Its Explore N.B. program encouraged New Brunswickers to vacation at home last summer, generating over $17 million. Its First Procurement strategy, announced in November, aims to boost the percentage of N.B. companies receiving government business.

“The pandemic has shown how important it is to foster a strong local supply chain. This means making sure that companies in the province know about the opportunities that exist to source their materials here at home, and that we reduce barriers to local businesses accessing public procurement opportunities,” says Minister Dunn.

For those N.B. workers displaced by the changes of the post-pandemic economy, Dunn says it is a matter of “looking ahead to what’s required in terms of the workforce of the future, and making sure employers have access to training opportunities to up-skill their workforce and that our education and vocational system is producing the skilled talent business and industry will need in the future.”

Part of this skilled talent will be drawn from N.B.’s Indigenous population. Existing programs like Future Ready Wabanaki aim to involve Indigenous youth in the labour market early on, while other programs work with Indigenous entrepreneurs and businesses across various sectors. Minister Dunn believes there is still more opportunity through a model that partners business with Indigenous communities. “Over time when the business knowledge is built and transferred, the Indigenous partner becomes the major or sole shareholder. We have seen this type of success in the McGraw seafood partnership with Elsipogtog First Nation,” she says.

And what about that choice facing New Brunswickers? While ONB has prioritized new sectors like cybersecurity, energy innovation and digital health, Dr. Emery says there is a strong case to be made for new investment in resource-based industries. He advocates a lighthouse strategy—identify which existing firms or sectors are the rising tide that can float other boats, those with developed domestic supply chains that have proven track records and the potential to raise productivity and GDP.

“The easier path is your resource-based secondary processing, which is the economy we inherited from previous generations with massive investments to get those industries viable,” he says. “The real issue is that we do not choose what industries we get but we can create conditions that discourage or encourage them to develop here. The big question for Canada is: without the resource-based industries that we have a comparative advantage in, what will we have to export to create our wealth?”

N.B. manufacturers are embracing new technologies. Waska Cedar Shingles has invested in building the world’s first fully-automated cedar shingle manufacturing facility. Aquaculture company Bouctouche Bay Industries worked with Dalhousie University during the pandemic to produce face shields. “Smaller manufacturers have a tougher time investing in productivity upgrades, and that’s where ONB can and will help,” adds Minister Dunn.

At the end of the day, N.B.’s return to growth is likely to be a patchwork of old and new, of slow and fast-paced, of spending and saving, of traditional sectors and cutting edge tech, of inward and outward, of green and not-so-green, and possibly of public and private. The one constant must be will. It is clear the Higgs government has chosen growth as it strives to lay the foundations for a ‘new’ New Brunswick, but getting the populace onboard is paramount.

New Brunswickers are no strangers to economic challenges, but there are changes ahead. The government’s ability to extend support and compassion will be critical, as well as its ability to remain flexible.