[Halifax] – Five years of good fiscal management and budgetary discipline in most of Atlantic Canada has slightly reduced the time the region’s people and governments will have to spend in “Debtors’ Prison”. This progress, however, is precarious. Shocks, in the form of higher interest rates, a fall in the value of the Canadian dollar, or an economic downturn could easily end up stretching out the time of Atlantic Canadians who are imprisoned by the excesses of earlier governments. 

These are just some of the findings contained in a new paper, Debtors’ Prison II: Shortening the Sentence (requires Adobe Acrobat), released today by the Atlantic Institute for Market Studies and available on the AIMS website at www.aims.ca “Debtors’ Prison” is the term the Institute has chosen to describe the trap into which the region’s governments have fallen by accumulating far more debt than the economies of the four provinces can reasonably bear. That debt, which now represents a breathtaking record $27.0-billion, or $11,400 for every Atlantic Canadian, constrains every action of government. It threatens the viability of every government program. It holds back the economy because such huge debt loads imply the threat of higher taxes sooner or later.  

According to Roland T. Martin, the author of Debtors’ Prison II, relief from the burden can only come from the disciplined pursuit of four guiding principles:  

increasing sustainability, or matching spending and debt levels to available means;

improving flexibility, or the ability of government to raise new money for needed public purposes;

reducing vulnerability, or the risk that inability to sustain present debt levels will result in a loss of financial and even political control;
improving financial management practices, such as transparency and full disclosure about provincial finances, and using revenue windfalls wisely.
Martin, a former Comptroller and Deputy Minister of Finance in the Government of Newfoundland and Labrador, has used these principles as a guide to measuring the progress of each of the region’s governments in shortening their sentence in “Debtors’ Prison” since the Institute’s June 1996 report card on the public debt of the region. Here are his findings:  

·                     Prince Edward Island receives the best Report Card of the four Provinces, remaining in first place. It achieved the highest marks because of its financial results, by demonstrating good management practices, and by improving its sustainability and financial flexibility while not increasing its financial vulnerability. The ranking for the other Provinces has Newfoundland and Labrador moving from third place to second place, New Brunswick slipping to third place and Nova Scotia remaining in fourth place. 

·                     During the past five years, the Atlantic region managed its way through significant Federal cuts in Health and Social Programs. However, if solutions are not found quickly, the relentless spending pressures in the health care sector, and renewed growth in education demands, threatens to return all four Atlantic Canada Provinces to unacceptable deficit positions.  

·                     In spite of the progress made, the crushing size of the Atlantic Provinces’ debt, together with the annual debt servicing costs, cannot be sustained without urgent action to both reduce the size of government spending, and improve the efficiency and productivity of existing programs.  

·                     Population is growing very slowly in three provinces and actually declining in Newfoundland, making rapid economic growth the prime focus for the creation of additional financial flexibility in the long term. In the short term, only the Government of Canada has the capacity to implement programs in debt refinancing, taxation reform and new economic oriented infrastructure projects that could provide a significant “kick start” to broaden and strengthen Atlantic Canada’s financial position and economy.  

The Report Card  

Prince Edward Island (Grade: B or 73%), while the best performer of the four provinces over the period, still only manages a middling mark. This is because while its economy has grown strongly, and the province has wisely managed to reduce its unfunded pension liabilities, danger signals are flashing. Spending on health and education is rising, and this threatens the province’s ability to reverse its small increase in total accumulated debt in the past two years.  

Newfoundland and Labrador (Grade: C+ or 62%) has, over the past decade, become one of the best managed provinces financially in the country. It has significantly reduced unfunded pension liabilities, and managed a crushing reduction in federal transfers while achieving two credit rating increases. The province has the best economic growth rate in Canada. This strong performance continues to be overshadowed by a significant population outflow, which means that fewer taxpayers are left to produce the wealth necessary to service the region’s highest per capita debt and highest debt to GDP.  

New Brunswick (Grade: C or 60%) has slipped significantly in the ratings this year. It still has the region’s best credit rating and a relatively strong financial position overall, but rising spending and NB Power’s poor performance have dragged it down from the top ranking. This fall has been exacerbated by a restated budget for 1998/99 that turned a small surplus into a $227-million deficit. These factors, together with poor handling of unplanned federal payments and a growing total debt burden, justify the province’s third place showing.  

Nova Scotia (Grade: D or 54%) remains the region’s poorest fiscal performer by a long shot. The debt burden is massive, and the current (restated) deficit of $497-million is truly alarming. Several key financial indicators have deteriorated significantly, and its financial practices and lack of commitment to balanced budgets has earned it the lowest grade. The only bright spot is a strongly performing economy, which improved its debt to GDP ratio and its revenue position.  

The recommendations:  

In order to hasten the region’s release from financial constraint, Martin recommends that:  

·                     Ottawa offer a stimulative tax cut and undertake a “millennium debt program” to help refinance the region’s debt burden and place it on a sustainable footing.  

·                     PEI should strengthen its commitment to balanced budgets and debt reduction, while controlling health care spending and improving revenue by diversifying the economy.

·                     Newfoundland and Labrador must remain committed to fiscal prudence, including by binding itself through new balanced budget legislation. It must reduce its foreign currency exposure to 20% within three years and it should devote all windfall revenues to reducing its huge debt.  

·                     New Brunswick must restore confidence by implementing recommendations contained in the recent Grant Thornton report, deal with the disquieting state of NB Power, return to tight controls on health and education spending, close the budgetary gap opened by the end of the HST transition payments next year, and tighten its balanced budget legislation.

·                     Nova Scotia must eliminate its $500-million operating deficit. An operating surplus is possible within two years if tough decisions are taken on crown corporations such as Sysco and Nova Scotia Resources, and health spending is contained.  Confidence in the province’s commitment to financial transparency and accountability can only be improved by concerted leadership by the Premier and Minister of Finance. Balanced budget legislation is a must, as is a target for aggressive reduction in foreign currency exposure to 20% within three years.  


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