A few years ago, Nova Scotia’s auditor general of the day, Jacques LaPointe, nominated himself as the defender of future generations against the ravages of government debt and deficit. In his February 2013 annual report, Lapointe raised questions about the province’s debt levels, and whether, as he put it “it is responsible or even ethical to bind future generations with the costs of today’s spending.” This week, Lapointe’s successor, Michael Pickup, picked up the torch of fiscal responsibility and hurled it at Nova Scotians. (Sorry, the devil made me do that). I leave those who are more philosophically inclined to debate Lapointe’s ethical concerns around inter-generational liabilities – fiscal, social and environmental. This piece will be focused on the analysis used – and not used – by the AGs, and the false impression they have created about Nova Scotia’s fiscal state.
Unlike his predecessor, Michael Pickup didn’t get into the ethical question. Instead, he cut right to the chase. “Ten key indicators show that Nova Scotia is in poor financial condition,” he reported, complete with a chart showing an “unfavourable” trend for nine of the ten.Those bad indicators are based on the 2013-14 fiscal year. The unfavourable ratings on three of them – success in meeting revenue targets, spending targets and balancing the books – are readily explained by the fact that there was an election half way through the year.
The 2013-14 budget was introduced by the NDP government complete with pre-election optimism about buoyant (but AG approved) revenue estimates and bare bones spending projections. The budget was taken over six months later by a Liberal government intent on – like many of its predecessors – showing that the other guys had left the books in a mess. Thus, a tiny surplus predicted by the NDP turned into a $679 million deficit, a number inflated by a one time $318 million hit resulting from changes to the public service pension plan. (To show the impact of that one-time charge, consider that the Liberals’ December, 2014 budget update predicted a deficit of only $220 million for 2014-15).
AG Pickup noted the $318 million bookkeeping change but that didn’t stop him from sounding the alarm about the impact of the bloated 2013-14 deficit on the province’s debt position. He managed to spin it into five separate unfavourables.
- Net long term debt – unfavourable
- Net debt – unfavourable
- Net debt per capita – unfavourable
- Net debt as a percentage of total revenues – unfavourable
- Net debt as a percentage of provincial GDP – unfavourable
Wow. One bad year can sure produce a ripple effect on the whole debt scene, providing fresh arguments to those who insist that spending is out of control and drastic restraint in public spending – preferably at the expense of public sector workers – is the only response. The Chronicle-Herald’s editorial about Pickup’s report is telling in this regard. The paper of record used his assessment of the overall financial picture to beat the drum for action on the AGs other big revelation – cost of the unfunded liability public employee long-service awards, retiree health benefits and accumulated sick leave. We’ll no doubt hear more about that soon.
The over-emphasis on a one-year blip is not the only part of Pickup’s report with which I take issue. Continuing a practice started by LaPointe in 2010, his report compares Nova Scotia’s recent record on debt, deficit and several other fiscal measures with that of five other provinces. The provinces he uses for comparative purposes are Newfoundland and Labrador, Prince Edward Island and New Brunswick “because they operate in the same regional economic environment” as Nova Scotia, and Manitoba and Saskatchewan because they are comparable in population. However, I would argue that the comparisons he uses are skewed by the inclusion of Newfoundland and Saskatchewan, two provinces whose finances dramatically improved as a result of the boom in oil prices, and are in the process of deteriorating as the prices drop.
Newfoundland’s own source revenues increased by over 85% between 2007 and 2011-12, buoyed by offshore royalties that averaged $2.2 billion a year. Saskatchewan’s revenue growth has been a less dramatic over the period, but a $2.4 billion windfall of revenues from potash and oil in 2008-09 allowed the province to slash its net debt by 36% in a single year. By including those two resource-rich provinces (and excluding other resource-less provinces like Ontario, Quebec and B.C.) the AGs’ reports distort what has been happening with provincial debt in recent years. Until 2012-13, provinces with ample resources have been debt-free (Alberta) or able to reduce their debt (Newfoundland and Saskatchewan). Provinces without substantial resources have seen their debt rise – but here’s the good news – Nova Scotia has by far the smallest increase in net debt of any resource-less province, and even managed to do better than resource-rich Saskatchewan over the last four years.
The net debt number is important because from it the AG spun three other unfavourables – net debt per capita, net debt as percentage of GDP and net debt as a percentage of provincial revenue. Aside from a difficult to interpret bar graph, the main reference to net debt in Pickup’s report is that it rose by $2 billion or 16% since 2011. It is noteworthy (and not reassuring) that he used 2011 as the base year for comparison when most of the tables and graphs in his report use 2009-10. Using 2009-10 as the base year produces a startling result. Calculations based on Finance Canada data (easily accessible on the web) reveal that since 2009-10, Nova Scotia’s net debt has increased 13.16%, lowest among the seven resource-less provinces. The next closest are Quebec at 20.02% and British Columbia at 32.02%. Over that four-year period, Nova Scotia’s increase in net debt was a bit lower than resource-rich Saskatchewan’s and not far behind Newfoundland’s 9.70% increase. As for Alberta, it saw almost 60% of its accumulated nest egg vanish, dropping from $23.7 billion to $9.7 billion.
If the increase in Nova Scotia’s net debt is low relative to most other provinces, it follows that the increase in the other unfavourable metrics will also be relatively lower. Pickup acknowledges that, with the exception of Saskatchewan, the increase in net debt as a percentage of total revenues is being experienced by all of the other “compared provinces.” However when it comes to net debt per capita, Pickup’s report misleads by omission. The report says: “Nova Scotia has had the second highest net debt per capita for the past five years when compared to New Brunswick, Newfoundland and Labrador, Prince Edward Island, Saskatchewan and Manitoba.” That’s true, but what he doesn’t say is that since 2009-10, Nova Scotia’s increase of 13.1% is far lower than than New Brunswick and PEI, whose increases are about 30%, and Manitoba, whose net debt per capita has gone up by about 45%. As for the debt-to-GDP ratio, it increased from 37% to 38% in 2014, putting at its highest level since 2007. However, this ratio was significantly lower than the 47.1% registered in 1999-2000,. And as Nova Scotia (with help from the feds through the offshore gas accord) was reducing its debt-GDP ratio by 20% over that period, Prince Edward Island, New Brunswick, Quebec and Ontario all experienced significant increases while Manitoba and British Columbia, the other resource-less provinces, managed only small decreases.
Now, I’m not saying that everything is fiscally hunky-dory. Far from it. What I am saying is that when you look more closely at the numbers, the provincial trend is much different from that described by our last two auditors-general. Relative to other provinces, Nova Scotia has been fiscally responsible. The trends to which we need to pay more attention are the ones described in my posts of December 2014 – Harper delivers another lump of coal to the have-nots (Dec. 24) and Among Provinces, wealth equals health (Dec. 3). Those posts describe the drive by the federal Conservatives to download more of the country’s debt onto provincial governments and their tendency to direct a larger share of federal transfers to the wealthier provinces. And there is no need to cook the numbers to demonstrate that threat to our collective well-being.
 Newfoundland and Labrador budgets 1995-2012 are at http://www.budget.gov.nl.ca/budget2012/
 Finance Canada, Fiscal Reference Tables, http://www.fin.gc.ca/frt-trf/2012/frt-trf-1204-eng.asp
 Forward to Fairness, Nova Scotia Alternative Budget 2012 http://www.policyalternatives.ca/sites/default/files/uploads/publications/Nova%20Scotia%20Office/2012/03/NSAB2012.pdf