Another day older and deeper in debt. -

PEI budget fails to follow fiscal advice for economic growth.

By Bruce Winchester
Director of Research Services
Atlantic Institute for Market Studies

Within hours of presenting another deficit budget, PEI Treasurer Mitch Murphy was quoted as saying, “Circumstances like spiraling program costs, deteriorating federal funding, and unforeseen events are not seriously challenging our ability to grow our economy.”

It’s rather like saying my food bill has doubled, my pay’s been cut, my house needs a new roof, but don’t worry, it won’t affect the health of my bank account.

The budget delivered last week by the Binns government failed to heed the advice of experts, or learn from the experience of those jurisdictions that have successfully turned their economies around. Economic growth is fueled by spending cuts, tax cuts, and debt reduction.

So did last week’s budget deliver? Hardly.

When it comes to a pro-business tax climate, PEI is one of the most heavily taxed jurisdictions in the country. This year’s budget has a number of targeted measures to reduce taxes for some businesses, and a planned one percentage point reduction in the small business, and manufacturing and processing business income tax rate. Even with this modest change, PEI still has one of the highest small business tax rates in the country.

What is perhaps most puzzling about the continued high business tax rates, is that these account for less than 2.9 per cent of all revenues. Certainly it is a leap of faith to cut taxes when there isn’t enough revenue to meet spending. However, the positive economic impact of a more competitive business tax regime would help solve the root problem faced by the Island’s government. Without strong economic growth, prospects for growing government revenues are slim to none.

Earlier this year, the Atlantic Institute for Market Studies (AIMS) published a paper entitled, “Could Do Better” by UNB economist David Murrell, which outlined key indicators to measure a province’s fiscal health. He rated PEI a C-/C, which he said is reflective of the province’s relatively severe fiscal difficulties, which are largely the result of chronic overspending.

The budget deficit grew by $4.5 million this year, even though the province is getting $43 million more from Ottawa in transfer payments. In fact, since taking office in 1996, the Binns government has consistently failed to keep the province’s finances balanced, and has increased the debt by 36 per cent. That means Islanders now have a per capita debt burden of $9,781. Sixteen cents out of every dollar the province collects on its own (that’s not the dollars handed over from Ottawa) is needed to service that debt, and it’s growing.

The government has given notice it is tightening its belt for all spending outside of health and social services. And it’s no wonder. The Binns government has increased spending so much in the health and social services sector, that it’s a surprise there’s much left for anything else. Every man, woman and child on the Island now pay $3,233 for health and social services, which is almost double the $1,696 per capita spending of just nine years ago. In most other areas the budget delivers spending cuts, but clearly with a planned deficit of $22 million in 2005-2006, these cuts aren’t enough to close the gap.

The government’s own budget documents admit that expenditures are growing higher than revenue as a result of escalating program costs, decreased federal funding and increased spending on social safety nets. It’s not a formula that encourages economic growth. This year’s budget does nothing to improve on previous fiscal performance, and illustrates the deterioration of PEI’s finances since the budget was tabled last year.

A plan that would actually lead to fiscal sustainability requires aggressive tax cuts, hard nosed spending reductions, a balanced budget, and a long-term plan to reduce dependence on federal transfers. The PEI budget for 2005 takes no meaningful steps to accomplish those initiatives, and for Islanders that means you’re deeper in debt, deeper in taxes, and digging deeper in your pocket to find a spare dime.

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Contact:

Bruce Winchester, Director of Research Services, AIMS –
[email protected]