Small and Exposed: Debt Accumulation in Canada's Small Provinces

It hardly takes a shrewd premier to keep a province from racking up debt when economic times are good, and it does not necessarily take a reckless government to accumulate debt when economic times are tough. What matters more, when assessing a government’s fiscal responsibility, is how policy decisions — as opposed to cyclical effects — influence a province’s debt ratio. With economically small provinces being especially vulnerable to exogenous shocks, the need to avoid chronic deficits and debt accumulation is particularly high, since minimizing deficit and debt at least improves the resilience of these provinces to recover from shocks when they do occur. An analysis of the provincial government finances of Canada’s four smallest provinces— P.E.I., New Brunswick, Nova Scotia and Manitoba — finds that some are better at preparing for inevitable exogenous economic shocks. Taxpayers in Nova Scotia and P.E.I. in particular have legitimate reason to be worried. Taxpayers in New Brunswick and Manitoba can breathe a little easier, but both provincial governments have in recent years begun introducing policies that have reduced their potential for resiliency, too. From 1982–2008, New Brunswick’s governments — both Liberal and Progressive Conservative (PC) — were the most successful of the four provinces in keeping its operating account more or less in fiscal balance. However, to best manage future economic shocks the province will have to reverse a six-year string of sizeable policy-induced deficits amassed first under a Liberal government and more recently under a PC government. Currently, New Brunswick’s policies are doing more to increase provincial debt than are cyclical influences, by a factor of more than two. Manitoba also has one of the stronger records of the four provinces but labours under the burden of the consequences of a rapid accumulation of policy-induced debt incurred during the mid-1990s. Unfortunately, during the last three years of our period of analysis, policy-induced deficits have the province sliding in the wrong direction, adding 2.6 percentage points of GDP to its accumulated operating account deficit. Notably, there appears to be little difference between NDP and PC governments when it comes to policy-induced debt accumulation. The one distinction appears to be that the PCs have tended to begin governing by adding debt, and reducing it later, while the NDP has followed the opposite pattern. The record of P.E.I.’s policy decisions, meanwhile, has been the reverse of Manitoba’s: After managing to keep its debt in check for 20 years, the government since 1999 has added 11 percentage points of GDP to its accumulated operating account deficit almost entirely as the result of policy choices. Particularly worrisome is the recent rapid accumulation of debt between 2009 and 2014. In the meantime, Nova Scotia continues working to undo the risky policies of the “lost decade” from 1984 to 1994, where PC governments increased the debt ratio by nearly a third. In all four provinces the ability to keep debt ratios under control will depend heavily on constraining the growth in health-care spending. Health spending has soared in all provinces since 1999–2000, the most extreme case being in New Brunswick where the share of revenue spent on health has leaped from 25.4 to 35.9 per cent. Even if these provinces cannot change the fact that they are small and exposed, and are stuck with the specific economic risks that entails, they do have the ability to make policy choices that mitigate the length and severity of the effects of exogenous shocks. With three of the provinces (save P.E.I.) expected to enjoy faster growth in 2015, the work in better preparing their economies for shocks should begin right away.