While their criticisms of the Nova Scotia budget have had some things in common, the two opposition parties in the legislature have also stressed different, but equally important, shortcomings. The NDP has questioned the unfair distribution of the budget’s rewards, with leader Gary Burrill describing the $70 million tax cut for big business to “a banquet feast laid on the table of the corporate sector of the province compared to crumbs cast on the floor for everybody else.” Some of those crumbs – for affordable housing, income assistance, disability supports – were discussed last week.
For its part, the Conservative opposition, while trying to make the improbable case for more services and lower taxes, raised concerns about the future fiscal soundness of the budget. They pointed out that recent surpluses have depended very much on increases in federal transfers, while a weakening provincial economy may further cut into already flat provincial own-source revenues.
First, on increases to federal transfers, this is a recent development, in contrast with several previous posts, most recently here and here. The inequities in federal health and social transfers remain, but transfers to Nova Scotia and most other equalization-receiving provinces have been going up the past few years. This is because of several formula-related factors. The drop in the price of oil has reduced disparities between resource-rich provinces and the rest, eventually disqualifying Ontario from receiving equalization, effective 2019-20. But the equalization fund has continued to grow in line with GDP, leaving more cash to be distributed among provinces that continue to qualify.
According to calculations contained in last month’s Alberta budget, growing the equalization pot while disparities narrowed created windfalls of $963 million to Ontario in 2018-19, $1.31 billion to Quebec between 2018 and 2021 and $501 million over the same period to be divided between the Maritime Provinces and Manitoba.
Those bonuses have led to larger than usual increases in equalization payments since 2017-8.
Increase in equalization, selected provinces 2017-2021 (000,000)
|Prince Edward I.||$ 390||$ 454||16.4%|
Sources: Finance Canada, Nova Scotia Budget
As the table shows, all qualifying provinces have received significant increases in equalization since 2017. Nova Scotia’s increases are not, as the Conservatives would have it, proof of the McNeil government’s economic policy failure. However, the windfall that contributed to the growth in equalization is being challenged.
The Jason Kenney government wants Ottawa to change the formula so that when disparities decline, the size of the equalization program will shrink. As well, Kenney’s government wants to remove natural resource revenues from the calculation of equalization, a move that would also reduce payments. Kenney was, of course, a member of the Harper government that crafted the existing equalization formula as a trade-off for health funding changes that most benefitted Alberta. That hasn’t deterred him from including equalization reforms in his list of demands that, if not met by Ottawa, will lead to a provincial referendum.
Provincial revenues flat
Preposterous or not, Kenney’s challenge casts some doubt on whether Nova Scotia and other less wealthy provinces can continue to count on the feds for the same equalization raises they’ve been enjoying over the last three years. In Nova Scotia’s case, that’s made more relevant by the fact that own-source revenues have been far from buoyant.
In a post about the September 2017 budget I wrote this:
As long as a balanced budget remains the political holy grail and the sluggish economy produces little revenue growth there will be intense pressure on public spending. Unless the Liberals can pull more accounting tricks out of a hat – or there is an unexpected windfall from the federal government – we are in for a very rough ride over the next four years.
As we’ve seen, there was a windfall in equalization from the federal government, helping to smooth out the ride over the last couple of budgets, as well as to set the 2020 banquet table. And the money from Ottawa was not the only stroke of luck. In early 2018 a successful arbitration handed the province $260 million in disputed offshore royalties, and the following year offshore license forfeitures netted another $61 million. Most of the 2018 bonanza was stashed in various trusts for future expenditure on things like rural broadband and the cleanup of Boat Harbour. It’s just as well the government has set aside some of past windfalls because the outlook for the main sources of provincial revenue is not bright.
Even before the uncertain economic effects of the corona virus raised doubts about the budget’s validity there was something questionable about the projections for revenue from the main provincial sources – personal and corporate income tax, the HST and government business enterprises. As predicted in 2017, growth in revenue from those main provincial sources has been sluggish – a mere 1.06 per cent from 2017-8 to 2018-9 and a more encouraging 4.20 per cent in 2019-20. But the latter increase is a forecast to the end of March and could be adversely affected by recent economic conditions. As for next year, the budget’s projected 2.2 per cent increase in major provincial revenue sources looks overly optimistic in light of the cut in corporate taxes, projected economic growth of only 0.4 per cent and the current economic turmoil that could lower even that tiny increase.
With the launch of its aggressive billion-dollar capital spending program for highways, schools and health facilities the Liberals have abandoned their previous commitment to steadily reducing the debt-to-GDP ratio. However they still seem fixated on balancing the operating budget each year. So it’s déjà vu, we’re back where we were in 2017. Without more pennies from heaven, Gary Burrill’s “crumbs cast on the floor” in the Liberal budget may be as good as it gets.
 Equalization total on Finance Canada website does not include $86 million in Offshore Accord offsets shown in the Nova Scotia budget documents. The other figures in the table are as reported by Finance Canada