A looming financial crisis

Published in Telegraph-Journal, Saturday September 19th, 2009

A9
Donald Savoie
Commentary

There is an old saying that politics is the art of the possible. One could add that governing is the
art of extending hope, managing expectations and providing good government.

Noel Chenier/Telegraph-Journal
Public policy analyst Donald Savoie believes New Brunswickers need to engage in a broad, non-partisan
debate over the sustainability of public services. The province’s over-dependence on federal funding and
lack of other economic resources make it particularly vulnerable.

New Brunswick, like other jurisdictions, is confronting a number of major public policy challenges.
I would rank the province's deteriorating fiscal situation at the very top, because in time it could
well permeate every policy sector and force the hand of the provincial government to make
extremely difficult decisions.

I can hardly overstate the importance of the challenge at hand and its implications. Dealing with it
will require the ability to lead New Brunswickers north-south, English-French, urban-rural, the
economically successful and the less fortunate, as well as the business community and labour to
deal with difficult and politically very divisive decisions. It requires a public debate, hopefully free
of partisan posturing, so that New Brunswickers can gain a thorough understanding of the forces
at play and have a say in shaping the way ahead. I write this in the hope that it will stimulate such
a debate.

Here are some facts. This year (fiscal year 2009-2010), the provincial government reports that it
will have revenues of $7,097,335,000 and expenses totalling $7,838,214,000 for a deficit of
$740.9 million. The province's net debt is set to increase to $8.3 billion by the end of fiscal year
2009-10. Last year, instead of a $19 million projected surplus, the government ran a $265 million
deficit. At the same time, the government introduced important tax cuts on income.

Few will be opposed to recent tax cuts on personal income. Tax cuts are always popular. But
simply cutting tax on income without raising other taxes or cutting spending will not work in the
medium or long term. It is much like creating a one-legged stool, and one-legged stools work no
better in public policy than they do in the kitchen.

This has the making of a structural deficit rather than a cyclical one. Business cycles are usually
able to deal with cyclical deficits but not structural ones.

Put differently, New Brunswickers should not buy the argument that borrowing money is like
turning to a mortgage to buy a house. The province's gross capital budget (i.e., spending on
capital projects such as highways and schools) for 2009-10 is $661 million, which is less than the
projected $740.9 million deficit. Without putting too fine a point on it, we are now borrowing
money not just to pay the mortgage but also to buy groceries. This is not sustainable over the
medium term, let alone the long term.

New Brunswickers also should not buy the argument that it is fine for the province to run a huge
deficit because the other provinces are doing the same. Most of the other provinces do not have
the same demographics and the same level of dependence on federal transfer payments as New
Brunswick. Several of the other provinces have large proven oil and gas reserves, and we do not.
Here are more facts: the federal government is also running an important deficit, and the
country's industrial heartland, notably the auto sector, is going through a far-reaching economic
adjustment of the kind that our region's fishery witnessed a few years ago. The federal
government's appetite to continue pumping money in transfer payments to have-less regions has
waned in recent years. All signs suggest that this is the shape of things to come.

Consider this - Ontario now qualifies for equalization payments, and Ottawa recently established
a regional development agency for southern Ontario (its own ACOA). This would have been
unthinkable as recently as 10 years ago.

Ottawa is slowly but surely shifting its shared-cost program spending to a per capita formula
which favours highly populated provinces such as Ontario, Quebec, and Alberta. This alone
should be an important warning to New Brunswick, considering the demographic changes
currently taking shape in our province (out-migration, inability to attract new Canadians, and an
aging population, which will place added pressure on our health care system, with fewer
taxpayers).

It only takes a moment's reflection to appreciate that Ottawa will also look to cutting back transfer
payments to the provinces as it struggles to get its own deficit under control. It will be recalled that
Ottawa did just that (circa 1995-98) when it decided to deal with a stubborn deficit and debt
problem. Given Ontario's economic circumstances, one can easily speculate that things will be
worse this time around.

In any event, many in the national media and elsewhere are making the case that Ottawa can no
longer sustain the level of transfer payments it currently has in place in support of health care
cost. We also are hearing that Ottawa is in no mood to continue funding to the same levels the
generous 2004 federal-provincial health accord, which expires in a few years.

The federal government is on track to add more than $100 billion to the federal debt over the next
five years. The federal government will soon be focussing on its own fiscal problems and, more to
the point, the status quo in health care spending is not sustainable.

Here is another fact - New Brunswick will not likely be able to support its vast public infrastructure
in the future. We do not have the economy to support the number of hospitals, universities, two
aspiring medical schools, the current size of provincial and municipal bureaucracies, the growing
number of consultants that now constitute something of a parallel bureaucracy in the province, as
well as the number of cabinet ministers and their associated expenses and departments. (If Nova
Scotia, with more population and a more complex urban-rural problem than New Brunswick, can
do with 11 ministers, why can't we?)

We have, over the years, built an array of institutions and programs mostly by looking to Ottawa
for cost sharing. That world is changing and we need to adjust to it with a sense of urgency.

Recent developments may well make it still more difficult to manage the province's books.
Though stimulus spending has merits, it also is not without drawbacks. Adding to the debt
obviously means greater cost in servicing debt down the road. But this is hardly the only
drawback. We are adding square feet to a number of public institutions. The universities jump to
mind here. Ottawa will happily share the cost of new buildings on our university campuses. It will
not, however, be as willing to share the cost of maintaining them, which, over time, can be
expensive and a burden on provincial taxpayers.

No one, it seems, is asking the question - do our universities truly need more square feet of
buildings, given that student enrolment is likely to drop in the coming years? Economist David
Foot provided an answer recently in this newspaper when he said that "because of the
demographic shift and a much slower growing population and economy, it's time (for universities)
to stop thinking that growth is the main target." Rather than add more square feet to our university
campuses, we should be promoting student recruitment from other jurisdictions and excellence in
research and teaching.

New Brunswick can sleepwalk into a fiscal crisis or lay the groundwork today to deal with the
challenge at hand. To be sure, pretending that all is well and that in time economic growth will
solve the problem holds short-term political appeal, but it is fraught with danger. Before too long,
financial markets will ring the alarm bell and the province may have to introduce indiscriminate
spending cuts and put the axe to its public infrastructure. The cost of servicing the debt will go up,
forcing the government to cut spending in other sectors.

This would be a new world for New Brunswickers. We have, since the 1960s, continually built
public sector programs, new institutions and sponsored a multitude of publicly funded activities.
Imagine having to dismantle part of this world. Now imagine the kind of political, regional and
linguistic tensions that would be sure to surface. Indiscriminate spending cuts could well
compromise the work and legacy of Louis Robichaud, Richard Hatfield, Frank McKenna and
Bernard Lord.

Given the difficult decisions ahead, our politicians, regardless of their party affiliations, will need
our help. They cannot do it on their own. The challenge is such that New Brunswickers need to
be involved; after all, we will all be paying the bills and we all have a stake in public sector
programs of one kind or another.

But politicians need to do their part in laying the groundwork for this collaboration. They need to
speak truth to New Brunswickers on the state of the province's fiscal situation. They also need to
signal that they understand how serious the situation is and that they are prepared to do
something about it.

No more new spending commitment. No more task forces or commissions criss-crossing the
province, looking for solutions in virtually every sector. These cost money. To be sure, quite a few
consultants have done well by them and some have very likely become self sufficient. But they
invariably raise expectations that the government can solve any number of problems that it or
someone else identifies.

The challenge at hand is not finding ways to spend more money but rather to manage public
expenditure more efficiently and to launch a thorough review of government programs and
activities.

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Donald J. Savoie holds the Canada Research Chair in Public Administration and Governance at
Université de Moncton.