AIMS’ message to Nova Scotia Finance Minister, Hon, Neil LeBlanc, is not to wait until a spring budget to act on the deeply disquieting fiscal position of the province, but to take action in the budget he will table in the legislature at 2 p.m. today. This advice was contained in a pre-budget briefing document submitted to the Mr. LeBlanc by AIMS President Brian Lee Crowley, the Institute’s Fellow in Public Finances, Roland Martin, and researcher Keith Messenger, at a meeting in the Minister’s offices last week.
To see the full text of the AIMS pre-budget briefing, “Nova Scotia – On the Financial Brink”, go to www.aims.ca/commentary/leblanc.html. Some of the highlights of the AIMS Pre-Budget Briefing requested by the Minister of Finance include:
The context:
Since 1993-94, Nova Scotia’s population has grown by over 13,000, or only 1.4%. Population growth is therefore flat, and demographics are shifting the age curve relentlessly older. While during the same period the Gross Domestic Product (GDP) of Nova Scotia grew 22.9% – better than the national average – financial pressures actually increased on the province.
While congratulating the Minister on his decision to be more transparent in the province’s accounting practices, AIMS noted that the total net debt burden borne by taxpayers in Nova Scotia is at least $679-million higher than the restatement of the province’s financial results show. The difference is attributable largely to the contingent and guaranteed debt outstanding for Crown Corporations such as Nova Scotia Finance Corporation, Sydney Steel Corporation, Nova Scotia Business Development Corporation and others.
How we got here:
Poor financial decision-making by borrowing a huge percentage of the deficits in US dollars, Japanese yen, German marks and Swiss francs. These foreign currency borrowings peaked at approximately 70% of the total outstanding debt and has resulted in more than a billion dollars of increased debt to repay and hundreds of millions of extra interest payments, $51-million in 1998-99 alone.
The extraordinarily large and consistent operating losses and capital requirements of Sydney Steel Corporation over the past 25 years have added between $2.5 to $3.0-billion to the provincial debt, including compound interest. Nova Scotia Resources Limited’s offshore energy participation has added between $500 to $700-million in debt. In 1998-99 alone, these two entities lost $116-million.
While the Province’s overall financial position has improved slightly over the past five years, most of those improvements have been due, not to good provincial management, but to economic growth or special payments from the federal government that are not dependable sources of revenue. Meanwhile, provincial program spending has continued to rise.
Conclusion:
The provincial government has very little flexibility since own-source revenues are already growing faster than the economy as a whole and it has little influence over federal transfers. With the crushing debt burden a fixed obligation, only reduced spending can have any short term impact on the financial picture. Every year there is a deficit only compounds the problem.
Action Plan:
A debt reduction plan must be put in place immediately. The long term target should be a total debt of no more than 30% of GDP, or a reduction of $3.8-billion on today’s debt load and GDP.
A real decreased in the level of health spending, bringing it in line with the 30% of revenues typically spent by other provinces in this area.
An aggressive foreign currency management plan is needed immediately to significantly diminish the province’s exposure to currency volatility. The target should be no more than 20% of total debt denominated in foreign currency within five years.
Private businesses and Crown Corporations should no longer be subsidized from tax revenues, and no further investments should be made in Sydney Steel or Nova Scotia Resources.
Serious thought should be given to the program of spending and tax cuts undertaken by highly successful jurisdictions such as Ireland and Holland. As a result of such policies, these countries have enjoyed significant GDP and employment growth, while government revenues have risen.
The Province must reduce its dependency on unstable federal transfers, currently accounting for over 40% of total provincial revenues. A tough, realistic and courageous financial plan is required. The first step has been taken by the Minister’s action to disclose fully the financial condition of the province and all of its agencies. The starting point to recovery and the quality of financial and economic health which present and future Nova Scotians deserve needs urgently to be outlined in the budget being delivered in the provincial budget today.
For further information, contact:
Roland Martin, AIMS Fellow in Public Finances, at (902)-835-8795
Brian Lee Crowley, AIMS president, at (902) 499-1998