New Brunswick faces a significant public debt problem and the government must reduce spending to stabilize the province’s fiscal situation.
The most recent provincial budget projects the province’s net debt will reach $12.2 billion – 37.7 per cent of provincial GDP. Provincial debt per-capita is projected to reach $16,163 in 2014. In a relatively low-income province of just 750,000 inhabitants with an aging population and a stubbornly high unemployment rate, this debt load is problematic.
Immediately following the Great Recession, some politicians and analysts suggested that the province’s budget deficits were essentially cyclical, a temporary problem driven by a severe economic downturn. This line of thinking implied that once the crisis passed and growth returned, the deficit problem would largely resolve itself without a concerted effort to reduce expenditures. Several years later, it is now clear that the province’s fiscal challenges are structural, and its debt problem will worsen unless the government brings spending into line with revenues.
A paper released this week by the Atlantic Institute for Market Studies looks at the historical data, and shows how a few key trends are responsible for the current misalignment between provincial revenues and expenditures. Most importantly, revenues as a share of GDP have been declining in recent decades, largely as a result of gradual reductions in the size of transfers from the federal government relative to the size of the province’s economy. A key contributor to this trend has been economic weakness in Quebec and Ontario, which are now consuming a larger share of equalization payments than before–leaving less for other recipient provinces.
While revenues have declined as a result of these trends, provincial governments in New Brunswick have not reduced spending as a share of GDP adequately to achieve fiscal balance. The result has been growing deficits and debt.
Reduced transfer payments as a share of GDP have been caused largely by long-term economic trends in Canada’s biggest provinces, and it would be imprudent to count on a reversal of these trends to rescue the province’s finances. New Brunswick’s government must address its fiscal problems itself by restraining government spending.
The most practical solution for addressing New Brunswick’s debt problem is a concerted effort to rationalize and reduce spending. Raising taxes is not a viable alternative. The provincial government increased tax rates significantly in fiscal year 2013-2014 and it would be unwise to risk damaging the economy by raising them further. Given that longstanding trends surrounding federal transfers are unlikely to change, any additional tax hikes could derail economic growth. Spending restraint stands as the most promising strategy to deal with the province’s deficit and debt problem.
Recently, the provincial government has taken steps to reduce expenditures by reforming government pensions, implementing wage freezes, and reducing the size of the public service. These measures have helped address the issue, however, given the scale of New Brunswick’s debt problem, continued spending restraint and additional fiscal consolidation measures will be necessary in coming years.
New Brunswick should study the experience of other small, rural provinces that have had to make similar fiscal adjustments to identify policy lessons on how to achieve fiscal balance without reducing the quality of public services. Saskatchewan’s provincial government reduced the number of rural hospitals in the 1990s, when the province was facing severe fiscal problems. It undertook this rationalization without seriously affecting healthcare delivery. New Brunswick could adopt a similar approach by rationalizing spending on healthcare, which is a primary driver of expenditure growth in the province.
Education is another major spending area where the government should work to achieve savings. In its first budget, the current government noted that 321 schools in the province are at less than 60 per cent capacity due to declining enrolment. These numbers suggest closing underutilized schools and merging them with nearby institutions is a promising strategy to help bring down per-pupil costs that have risen steadily in recent years. Furthermore, paring down post-secondary spending by eliminating overlap and removing unneeded programs would have a significant impact.
In addition to rationalizing spending in these key areas of public management, the provincial government should carefully examine spending on the large number of departments, boards, and special operating agencies that it funds. We recommend a systematic series of cost-benefit analyses in each of these areas to identify sources of savings.
New Brunswick faces serious fiscal challenges, and frugal public management is required to bring expenditures into line with revenue and bring stability to provincial finances.
*This piece appeared in the Telegraph Journal’s opinion section