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Free-spending Nova Scotia budget gets failing grade

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Free-spending Nova Scotia budget gets failing grade

The Houston government on Thursday tabled its budget for 2024/25, and the plan is straightforward—spend, spend, spend. The government has doubled down on what was already a free-spending approach to provincial finances by promising a deficit this coming year, deficits to at least 2027/28, rapidly rising debt, and no plan for a return to budget balance.

Specifically, the government projects a deficit of $467.4 million in 2024/25, with additional deficits in the three following years totalling over $1.5 billion. Net debt is projected to rise by more than $6 billion during the same time period, as the government combines yearly operating deficits with historically-high levels of capital spending.

This approach to spending can only be described as reckless. Between the Houston government’s first budget in 2021/22 and 2027/28, this budget now projects the government will increase total spending by $4.7 billion or 37 per cent. Of course, the province has experienced strong population growth, yet total spending on a per-person basis will top $15,251 this year, the highest on record (even after adjusting for inflation) and among the highest in Canada.

As a result, debt (measured various ways) is projected to return to levels not seen for some time. Measured as a share of the economy, provincial net debt is projected to rise from 33.3 per cent this year to 38.4 per cent by 2027/28, a level not seen since large deficits run by the Darrell Dexter government produced a sharp increase in debt in the mid-2010s. Over the next four years, net debt will grow an average of 7.2 per cent per year. Outside of the anomaly of a COVID year, that level of increase has not been seen since at least the mid- to late-1990s.

One positive element in the budget is a commitment to index the province’s personal income tax brackets to inflation, a move we’ve argued for in the past. The previous practise of not indexing tax brackets amounts to a hidden tax hike on a yearly basis, and disproportionately affects lower-income earners. Indexing tax brackets will provide Nova Scotians some modest relief, and brings the province in line with most other Canadian provinces, which conduct indexation yearly.

However, indexing tax brackets simply means that Nova Scotians’ after-tax earnings merely keep pace with inflation. The province still has a massive tax problem, which the budget does nothing to solve. In fact, the reckless approach to spending, deficits and debt will make it even more difficult to meaningfully reduce taxes in the future, since today’s deficit-spending is simply tomorrow’s taxes. Nova Scotia’s taxes on personal income remain among the highest in North America, a position that works against the Houston government’s goals in health-care recruitment and attracting talent to the province more generally.

The substantial accumulation of debt driven by increased spending also threatens Houston’s health-care goals in another way—by increasing the chances of a full-blown fiscal crisis in the province. Rising debt will place upward pressure on interest costs, which are projected to increase yearly under the budget plan, topping $1 billion per year by 2026/27. These are funds diverted away from priorities such as health care, education or tax relief.

Further, growth in interest costs will make it even more difficult to balance the budget in future years, increasing the chances the province will need to make difficult spending cuts or have spending cuts forced upon it by bondholders. Implementing this free-spending approach during relatively good economic times also introduces the risk that the province’s fiscal challenges get substantially worse in the event of an economic downturn. In other words, the plan articulated by this budget is fraught with fiscal risks.

Overall, budget 2024/25 not only continued the Houston government’s free-spending approach to provincial finances, it has actually worsened the outlook. With runaway spending, ongoing deficits and rapidly rising debt, the government is now firmly in reverse when it comes to provincial finances. While the decision to index tax brackets counts as a modest improvement, by any other financial measure, budget 2024/25 gets a failing grade.