With deficit reduced, debt should come next

NSDebt

By Alex Whalen, AIMS Operations Manager

Nova Scotia’s Minister of Finance announced a budget update this week, and to some surprise revealed the government has slashed its operating deficit. The new deficit figure is $10.7-million, significant progress from the $241-millon to end last year. We can be pleased with this progress. It is an important step.

Yet, slashing the deficit is only the first step to fiscal health. Of particular import is Nova Scotia’s high and rising debt totals—we cannot ignore this. For the first time in history, Nova Scotia’s net debt eclipsed $15-billion in 2015. That figure is a result of many years of accumulated deficits. Only five times in the last 34 years has the debt been reduced on a year-over-year basis.

Yes, the economy has grown along with the debt. However, debt is also growing as a proportion of the economy. This growth is unsustainable by definition.

The crucial measure, when it comes to household, business, or government debt, is the ability to service that debt. The debt-to-GDP ratio measures this capacity by comparing the size of the debt to the size of the economy. On this measure, Nova Scotia has a lot of room for improvement. The 2015 ratio of 38.5 percent debt-to-GDP was fourth-worst in the country, and debt-per-capita was fifth-worst. The debt-to-GDP ratio has worsened five straight years, and debt-per-capita has risen every year.

Debt cannot rise in perpetuity. Servicing debt costs Nova Scotians over $800-million each year, a staggering figure that equals nearly 10 percent of the provincial budget. Consider that for a moment: one out of every ten tax dollars vanishes simply to service debt.

Balancing the budget is a good first step. The critical second step is debt reduction. When balance is achieved, debt must be reduced as opposed to an immediate plunge back to deficit.

Progress on the deficit came as a result of higher-than-expected tax revenues. Nova Scotia should attack our debt problem by 1) as a start, holding the line on expenditure and 2) dedicating tax revenue growth to debt reduction. A lower debt burden will help Nova Scotians now by saving on interest, and helps Nova Scotians in the future by lightening the fiscal burden.

 

SOURCES:
http://www.rbc.com/economics/economic-reports/pdf/provincial-forecasts/prov_fiscal.pdf
http://www.novascotia.ca/finance/en/home/budget/budgetdocuments/2014-2016.aspx
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