Newfoundland and Labrador government must restrain spending to avoid debt crisis
Newfoundlanders and Labradorians are on the hook for the largest provincial per-person net government debt (total debt minus financial assets) burden in the country. And in light of recent (and perhaps forthcoming) interest rate hikes by the Bank of Canada, there’s a strong chance this debt, and the cost to service it, will continue to grow.
When governments run deficits, they accumulate debt. And governments must pay interest on the debt they accumulate, similar to households with mortgages or car loans. If interest rates go up—all else equal—debt interest costs also rise.
On a per-person basis, Newfoundlanders and Labradorians face the highest provincial government debt interest costs in the country—$2,004 per person or roughly double the amount of any other province (excluding Quebec). Why? Because the province has a major debt problem. Per-person net government debt will reach a projected $30,897 in 2023/24, roughly $4,000 more than Ontario, the province with the second-highest debt burden.
So, why should Newfoundlanders and Labradorians care?
In 2023, according to projections, debt interest costs will consume 10.9 per cent of the province’s total government revenue. In other words, more than one of every 10 dollars of provincial revenue will go towards financing debt rather than to programs and services. For additional context, consider that in 2023 the province will spend $1.9 billion on education. In other words, in 2023, debt interest costs will equal nearly half the education budget.
And crucially, as old debts expire with comparatively low interest rates, new higher interest rates (all else equal) will increase the debt burden. Even if debt does not grow, higher interest rates will push costs up.
This is why the Furey government should listen to economists and restrain spending. When the government increases spending, it increases the likelihood of deficits into the future, which means more debt. Unfortunately, despite warnings about the province’s fiscal situation, the government’s program spending increased by almost 19 per cent from 2019 to 2023. While the province did report a significantly reduced provincial deficit this year, new spending initiatives will increase the chances the debt burden will continue to rise.
But there’s good news. The Furey government can learn from other provinces. In recent years, New Brunswick, for instance, has restrained spending, which allowed that province to balance its budget for six consecutive years, reduce its debt, and create fiscal space to reduce taxes on individuals and families. New Brunswick’s improved financial situation stands in stark contrast to several other provinces, as it was the only province to reduce its debt compared to pre-pandemic (2019) levels and one of only two provinces to reduce debt interest costs.
The fiscal problems in Newfoundland and Labrador are very serious. The Furey government must reform and restrain spending to avoid a looming debt crisis.
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