The Atlantic provinces are in the midst of a sharp reversal in their fiscal fortunes with deficits in all four provinces pushing public debt up rapidly according to the latest Report Card  by the Atlantic Provinces Economic Council (APEC).

 

"The recession caused a sharp slowdown in revenue growth, deepened by a decline in resource revenues due to falling commodity prices," said APEC senior policy analyst Fred Bergman. "Meanwhile, program spending continues to grow." With infrastructure stimulus spending also adding to borrowing requirements, provincial debt in the Atlantic region will expand by between 9% and 14% in 2009/2010.

 

"The Atlantic provinces need to establish credible, long-term and detailed plans to return to fiscal balance" said Bergman. "This requires them to adjust both the level and long-term growth path of government spending to match projected revenues."

 

Without corrective action, the deficit could swell in the three Maritime provinces with structural deficits in the making -- deficits that will not automatically disappear as the economy recovers. Persistent or growing deficits pose significant risks, such as higher debt charges and less money for government programs.

 

Measures to restrain government spending need to be sustainable. In the mid-1990s, provincial governments did succeed in containing the growth rate of program spending. However, in the last five years, program spending growth has accelerated to between 6% and 8%. Particularly, governments need to address spending in core areas such as health care which accounts for about 35% of total program spending in Newfoundland and Labrador and Prince Edward Island, and about 40-41% of program spending in Nova Scotia and New Brunswick.

 

"Annual health spending over the last five years has grown at an average rate of about 8% in the Maritime provinces, whereas revenue growth has been about 5% annually," said Bergman, "Clearly this is not sustainable."

 

Only in Newfoundland and Labrador have own-source revenues expanded faster than spending in the last 5 years, leaving it best positioned to realign expenditures with revenues. Resource revenues have lifted the province from Canada's most indebted province in 1998/1999 to the province with the fifth-lowest debt-to-GDP ratio ten years later. Offshore royalties are expected to average well over $2 billion per year over the next ten years. Nevertheless, with offshore royalties accounting for 37% of total revenues in 2008/2009, the province is heavily exposed to fluctuations in oil output and global oil prices.