Deliberation on what is likely to be Nova Scotia’s pre-election budget neared an end last week. The budget was filled with enough attractive promises to keep criticism at a low volume, but as Gary Burrill argued, what comes next is worrisome.
In keeping with its pattern of departing as little as possible from the McNeil regime’s record, Ian Rankin’s government presented a budget predicting a return to operating balance in three years. But there’s a catch.
It’s a plan predicated on reducing departmental expenses by over $200 million next year. And as the table shows, notional balancing of the books by 2024-5 will require cumulative spending reductions from this year’s total amounting to nearly $400 million.
|Reductions from 2021-2 ($millions)
Source: NS Budget “Four-Year Fiscal Plan”
As would be expected the Premier did not respond directly to the NDP leader’s repeated question period invitations to explain where cuts would be made. Rankin preferred to talk about all of the good things in this year’s budget and cuts made by the Dexter government a decade ago.
Rankin did point out that some of this year’s spending is strictly pandemic-related and will not recur. However, even if next year’s $208.9 million reduction occurs painlessly as the pandemic eases, red flags are raised by the final two years of the plan. The plan calls for an increase in spending of less than $120 million between 2022-3 and 2024-5. Such a modest increase – an average of 0.5% a year – will be impossible to achieve without some combination of cuts and/or abandonment of many of the spending promises in the budget.
Second time around
As strange as it may seem, if this does turn out to be the pre-election budget, it will not be the first time the Liberals have gone to the polls with a plan promising spending cuts. As discussed here, they did the same thing in 2017, although it’s not certain that anyone noticed. As I wrote at the time, in reference to the four-year plan in budget 2017:
“Save for the election year spending blip, restraint is the Liberal plan right up until 2020, according to budget documents. After the 3.7% increase this year, balancing the budget would require limiting spending to a 0.7% increase in the 2018 budget and 1.3% in the 2019 budget. If Libs are actually running on the budget brought in this week they must be counting on no one bothering to read it, preferring instead that all people hear are the good news announcements and the magic words ‘balanced budget’. “
As it turned out, expenses increased by much more than shown in the plan – 1.4% in 2018-9, 8.7% in 2019-0 and 5.36% in 2021. The budget was balanced, however, as a result of revenue gains of 11.8% between 2016-7 and 2019-20, more than the twice the 5.7% revenue forecast in the fiscal plan that accompanied the 2017 pre-election budget. The problem is the buoyant revenue picture was the result of events that may not happen again – offshore-related windfalls and federal transfers.
The unexpected money began to arrive in early 2018 when a successful arbitration, reported here ,won the province $260 million in disputed offshore royalties, and the following year offshore license forfeitures netted another $61 million. And there was more to come. As discussed here, vagaries of oil prices and a peculiar feature of the federal equalization program produced significant increases for Nova Scotia and other equalization-receiving provinces. Between 2013 and 2017 Nova Scotia saw almost no increase in equalization but the increase from 2017 to 2021 is 27.5%.
Will history repeat twice?
As we’ve seen, the Liberals are repeating history by tabling a pre-election budget hinting at years of austerity. Presumably, this is to enable the Liberals to present themselves, according to the Premier, “as the only party now in Nova Scotia that advocates for balanced budgets.” The Liberals may also be hoping that history continues to repeat in the form of revenue windfalls and that, if re-elected, they can once again balance the books without cutting expenditures. That could happen, but there are reasons to be skeptical.
- No other province – and all but one have presented their budgets for 2020-21 – has been bold or foolish enough to predict balanced budgets in three years time. Manitoba, for example, expects it will take eight years.
- It’s a huge stretch to expect offshore gas, moribund for nearly three years, to continue producing revenue windfalls in the hundreds of millions.
- The equalization increases enjoyed over the last four years are unlikely to continue. Led by Alberta, provinces not receiving equalization have been calling for a change to the formula that has been producing the manna from Ottawa to the less wealthy provinces.
Another reason to suspect that the balanced budget scenario is more election campaign window dressing than a real plan is to look at what’s projected for the provincial debt, measured as a percentage of provincial Gross Domestic Product. Provincial debt arises from operating deficits as well as capital spending. Reducing net debt to 30% of GDP from the 37.5% they inherited in 2013 was once the raison d’être of Liberal fiscal policy.
McNeil dropped that strategy in last year’s budget in favor of a $billion-plus capital spending spree for highways, schools and health facilities. This year, capital spending is expected to be even higher, pegged at $1.17 billion, a level the Liberals expect to maintain for several more years.
The budget projects a debt-to-GDP ratio of 40.1% by 2024-5, the highest it has been since 2004. As in other provinces and at the federal level, sharp increases in net debt this year have been driven by reduced revenue and higher expenses brought on by the pandemic. But in subsequent years, the main cause of increased net debt in Nova Scotia will be capital, not departmental, spending.
It’s a tad fishy for the Liberals to be advocating a balanced operating budget while running up the debt with an avalanche of bricks, mortar and asphalt. But as Gary Burrill’s line of questioning revealed, there’s a dangerous flaw in their approach. How can they hold departmental spending well below the rate of inflation while avoiding cuts, let alone fulfilling budget commitments? Good luck explaining that.
 2017-8, the first year of the Liberals’ renewed mandate, was the most lucrative. According to Public Accounts, Nova Scotia revenues exceeded estimates by $454 million, including $233 million more from Ottawa than anticipated.