New Brunswick government finances remain unsustainable
In a year when most provincial balance sheets have been ravaged by the response to COVID-19, New Brunswick has weathered the storm relatively well. Compared to other provinces, the size of the province’s deficit and increase in debt has been comparatively small this year.
That’s the good news.
But according to a new report from Canada’s Parliamentary Budget Officer (PBO), New Brunswick’s population will age faster than most other provinces, which will affect the workforce and economy at large. Specifically, due to the province’s aging population (and subsequent rising health-care costs), relatively low projected economic growth, ongoing budget deficits and growing debt, the PBO concludes that the province’s long-term finances are unsustainable.
Unsustainability, as defined by the PBO, occurs when the province’s debt relative to the size of the economy (GDP) grows indefinitely over the long term. Economists call the difference between sustainability and unsustainability the “fiscal gap.” New Brunswick’s current fiscal gap is an estimated $600 million or 1.6 per cent of GDP. In other words, the provincial government must reduce spending or increase revenues by this amount to be sustainable over the long term.
In its recent budget, the Higgs government revealed a $245 million budget deficit, the largest since 2015/16. And it plans to run at least two more deficits in 2022/23 and 2023/24 before potentially balancing the budget in 2024/25 (at the earliest). If things go according to plan, the province will add another $398 million in debt over the next two fiscal years.
This year, provincial debt topped $14 billion (or $18,043 per person), with interest payments on that debt topping $655 million (or $838 per person), which is money diverted away from important priorities such as health care, education or tax relief. According to the PBO report, this problem will continue to grow until the province’s fiscal position improves.
So, what can be done to make provincial finances sustainable?
Following the provincial budget, we argued that the province should balance the budget as soon as possible to halt the accumulation of debt, which is part of the problem.
Another part of the long-term problem is weak projected economic growth. New Brunswick struggles to attract businesses, investment and newcomers, which are all key components of economic growth, due in part to the province’s high tax burden. Once the budget is balanced, the government should focus on tax relief to improve the province’s growth prospects. Taken together, a balanced budget and growing economy would allow New Brunswick to shrink its debt burden over time and therefore become sustainable again.
While Premier Higgs deserves credit for controlling government spending to a greater degree than other governments across Canada during the pandemic, this is not enough to overcome New Brunswick’s long-term fiscal challenges. As the economy begins to recover, balancing the budget and focusing on sustainability will be crucial to the province’s future.
Subscribe to the Fraser Institute
Get the latest news from the Fraser Institute on the latest research studies, news and events.