Nova Scotia government faces debt tidal wave

Rising government debt can dampen economic growth and divert billions of dollars away from important public priorities

By Jake Fuss
and Alex Whalen
The Fraser Institute

Just three months ago, provincial Finance Minister Karen Casey released a budget projecting an operating surplus, which would have been the Nova Scotia’s fifth consecutive balanced budget.

However, due to COVID-19, circumstances have changed dramatically and the province now expects to run a large deficit this year.

jake fuss Fraser
Jake Fuss

The provincial budget introduced in February predicted an operating surplus of $55 million in 2020-21. But the province’s net debt (total debt minus financial assets) was expected to increase by more than $500 million because the government separates annual spending (the operating budget) from long-term spending (the capital budget, which pays for new schools, highways, etc.).

Nova Scotia’s net debt as a share of the provincial economy was also anticipated to increase from 33 per cent in 2019-20 to 33.3 per cent in 2020-21, after having fallen in recent years.

Today, the province is in a much different situation.

The COVID-19 recession has rendered these projections unrealistic. Major banks such as TD and CIBC, for example, now predict an “unprecedented contraction in the economy,” projecting real gross domestic product to shrink between 5.5 per cent and 7.4 per cent this year.

Moreover, their forecasts suggest Nova Scotia’s unemployment rate will rise from 7.2 per cent in 2019 to somewhere between 10.6 per cent and 12.1 per cent in 2020.

Alex Whalen Fraser
Alex Whalen

This steep decline in economic activity means government revenues will fall. On the spending side, the government of Premier Stephen McNeil has already announced $161 million in new COVID-19-related spending. As a result, the province’s operating surplus will quickly evaporate.

So how large can Nova Scotians expect the provincial deficit to be this year?

Let’s look at projections from the major banks. RBC forecasts an $800-million deficit this year and Scotiabank forecasts $970 million.

Dire as these forecasts may be, they could actually underestimate the province’s fiscal deterioration. If provincial revenues drop at a comparable rate to the national numbers forecasted by the Parliamentary Budget Officer, the deficit could reach $1.4 billion, an historic number.

And remember, these deficit-projections are only for the operating budget. If the Nova Scotia government the same capital spending plan offered in its spring budget, the province’s net debt will quickly increase: from $15.2 billion in 2019-20 to nearly $17.2 billion in 2020-21.

Of course, the final number will depend on how much revenues decline and the economy shrinks, and the government’s choices along the way.

A shrinking economy also means the province’s debt-to-GDP ratio (a common measure of the province’s ability to pay its debt) will rise higher than the government anticipated in February, reaching 39.6 per cent this year if the above projections are correct.  

So what are the consequences of all this red ink?

Growing government debt can negatively affect economic growth and divert billions of dollars away from important public priorities such as health care, education and tax relief. Nova Scotians will also face higher taxes in the future to pay off government debt interest payments.

It’s been an extraordinary last three months. And Nova Scotia’s fiscal situation is dramatically worse than was expected a short while ago.

For the government, tackling the likely soon-to-be-much-larger debt load and returning to balanced budgets in the medium-term should be an important part of the provincial recovery plan once the COVID-19 crisis passes.

Jake Fuss and Alex Whalen are analysts at the Fraser Institute.

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