With Tuesday’s budget, the curtain was lifted on Prince Edward Island’s fiscal outlook for the 2007/08 year.
Some praise is due to Finance Minister Mitch Murphy for his handiwork, but the budget contains scenes of bad and ugly along with the good. (This theme is reminiscent of last year’s budget, for which our recently released Could Do Better 3: Grading Atlantic Canada’s 2006/07 Provincial Finances report gave mixed marks. Looking ahead to next year’s assessment, it appears that the Island will score good marks for recording a surplus and reducing taxes, but poor ones for increased interest charges and significantly greater spending.)
Starting with the bright side of things, it is good to see that a budget surplus is projected (not taking into account the capital budget that was released in December). Although, with the Island’s economy performing well in terms of measures like job creation and with wads of new federal dollars rolling in, an operating budget deficit would have been scandalous. Some polite clapping, yes, but no standing ovation on this front.
It also is good news that no taxes are going up and that some taxes are coming down. In particular, it is encouraging to see that broad-based tax relief is being implemented in the form of increases to the Basic Personal Amount threshold and the High Income Surtax Amount.
Another reduction in the small business income tax rate – now the third lowest in the country behind Alberta and Manitoba – is commendable as well, as is the goal to get down eventually to a nation-leading rate of 1 percent.
So congratulations are in order for these positive moves, but Mr. Murphy shouldn’t hold his breath waiting for a bouquet of roses.
Given the strong economy and the influx of federal funds, the opportunity to tackle the province’s debt should have been seized. Reducing debt leads to lower interest charge in future years, which frees up money for further tax cuts or spending on actual services and programs. In fact, the provincial debt – now almost $10,000 per Islander, and the interest charges paid on it are going up this year. These interest payments account for close to 10 percent of provincial expenditures: out of every loonie Islanders pay in taxes, close to a full dime goes to pay bondholders, rather than to fund schools, hospitals, or roads, or to lessen the bite out of workers’ paycheques.
Instead of embarking on an aggressive strategy to pay down the province’s debt and launch a virtuous cycle of interest charge reductions, the government instead chose to increase program spending by a whopping 10 percent. Meanwhile, the overall economy is expected to grow by only 2 percent in 2007.
On the tax side, the province still ranks dead last in the country in terms of its sales tax rate and its general corporate income tax rate (a tie with Nova Scotia on the latter one, to be precise). These are not the types of statistics that entice businesses to invest and create jobs and wealth within your borders.
In summary, it’s a budget that can be sold to voters as being balanced, providing tax relief, and enhancing spending on core services, all of which sounds pretty good. However, with more courage, discipline, and creativity, the government could have acted more boldly and set the Island on a more firm foundation for the future. Only when that kind of leadership is displayed will a second bow be warranted.
Ian Munro is director of research at the Atlantic Institute for Market Studies (www.aims.ca), a non-partisan, public policy think tank based in Halifax NS. He was born and raised in Charlottetown.