Jon Tattrie

When Charles Dickens visited Halifax in 1842 and got the grand tour from his friend Joseph Howe, he famously described the young city as, “Like looking at Westminster [Parliament] through the wrong end of the telescope.”

A few years later, he wrote David Copperfield, which offers another useful perspective reversal as Nova Scotia prepares its budget for 2018-2019. A character inspired by Dickens’s own father, who spent time in a debtors’ prison after failing to repay a baker, offered sound financial advice that experts agree the province would be wise to follow:

“Annual income twenty pounds; annual expenditure nineteen pounds nineteen shillings and six pence; result: happiness. Annual income twenty pounds; annual expenditure twenty pounds and six; result: misery,” Wilkins Micawber decreed.

Patrick Sullivan, President and CEO of the Halifax Chamber of Commerce, puts it in modern English. “We can’t spend more than we make,” he says. “It’s really important that we spend within our means.”

The province has delivered back-to-back balanced budgets and expects to follow with a third this spring. Sullivan says that’s a good start, but notes: “We are still a province that has a $15 billion debt and a province with some of the largest tax rates in Canada.”

While the media focuses on the rise and fall of political powers in the province, for Sullivan it’s not a matter of red, blue, orange or green — we’re either in the red or in the black.

“They have a responsibility to the entire province and to every person who lives in the province, not just the folks who elected them,” he says. “I would love to see a vision for the future, rather than a vision that comes in one-year, or best-case four-year, increments. We need to think about how Nova Scotia’s going to do in five years, 10 years, down the road.”

When Gerard Walsh, an economist with the Royal Bank of Canada, looks deep into Nova Scotia’s future, he sees two tectonic plates slowly crashing into the province. Today, there are 3.3 working-age Nova Scotians for every retired Bluenoser.In 12 years, there will be only 2.1 working-age people here for each retiree.

That’s the first plate. The second one is health care, which now eats up 40 percent of the budget. Changes to the Canada Health Transfer got rid of the old formula, which saw the money from Ottawa growing by six percent each year. Under the new formula, Nova Scotia will see its share increase by about 2.4 to three percent a year.

“That means as health care spending continues to grow as Nova Scotia grapples with an aging population, they’re going to have less increase in that federal transfer every year. That’s why I’m calling it a challenge,” he says.

The largest cohort of Nova Scotians are in their 50s and steadily sailing toward retirement. Walsh says that’s exacerbated in rural areas, where young people are moving to Halifax or out of province.

“For the rural areas, it’s going to be increasingly difficult to deliver governmental services,” he says. “Nova Scotia is facing a demographic problem in the medium to long-term in which there are fewer tax payers every year. What that means is the government has to provide a certain number of services to an increasingly aged population, on the back of lower own-source revenues — income taxes and business taxes.”

On top of a balanced budget, Walsh says the province is steadily lowering its debt-to-GDP ratio. The Ivany Report said that number should reach 30 percent by 2024. This year it sits at about 35 percent and is on track to fall to 33 percent by 2020. The metric gives a sense of how well the province is doing at keeping debt down as a share of the economy.

Paul Bent added himself to the ranks of the retired after a 37-year career in public accounting, mostly with Grant Thornton LLP. He leads the Chamber’s Create a Positive Business Environment Task Force.

He agrees balanced budgets are good, but says the surpluses amount to little more than a “rounding error.”

“It’s a very positive message that the government recognizes that in their view we can no longer continue to spend more in expenditures than we’re bringing in in revenues,” says Bent.

He applauds the government for increasing the small business corporate income tax threshold from $350,000 to $500,000, a move he called for in these pages last year. He says it “levels the playing field across the country.” He also supports the increase in the basic personal exemption amount for people earning up to $75,000.

“We remain of the view that taxation in Nova Scotia for the average Nova Scotian is still significantly out of line with the residual tax rates for the rest of the country,” Bent says.

Sullivan agrees. “Frankly it doesn’t impact the individuals who have a 54 percent tax rate,” he says. “Granted, they’re making a good salary — I will absolutely acknowledge that — but it wasn’t an increase in the basic personal amount, it was a credit provided for folks up to $75,000. I think there are additional opportunities for tax reductions for every Nova Scotian, not just for some.”

Both would like to see broader tax changes that would apply to all Nova Scotians. The province stopped the indexation of exemptions many years ago, but perhaps it’s time to reconsider as it has given rise to the progressive tax rate being higher here than in most of Canada. “As income goes up, you’re going to get into a higher rate of taxation at an earlier level of income. This is one of the few provinces in the country that has not adopted that indexation,” Bent says.

And one day, someone will have to deal with that $15-billion debt. Already, we pay $850 million a year to service it, the fourth most expensive item in the budget. When interest rates rise, so too will the cost of the debt. “We have increasing concerns about our ability in the future to pay that debt back. Somebody has to pay it and our concern is that we’re passing that debt onto another generation,” Bent says. “All these kinds of things play into the decisions that folks are making when they consider if they want to take up residency [in Nova Scotia].”

Bent says putting some of the surplus to pay off the debt would help. He notes that even with a balanced budget, the province is still increasing expenditures without showing where the balancing revenues will come from. “Right now, we have a growth in expenditures, which is well beyond inflation. I think the forecast of the year is something north of four percent and that’s materially above inflation,” Bent says.

Since the government has more control over spending than earning, Bent says it should look for efficiencies and try to get spending down to 2016-2017 levels. “We certainly don’t advocate negative labour relations, but we do absolutely support public sector salaries that would be comparable and reflective of their counterparts in the private sector. We cannot continue to have significant growth in expenditure above and beyond our ability to pay,” he says.

Walsh, RBC Economist, says the province is in “pretty good company” in Canada, budget-wise, with Ontario, P.E.I. and Quebec also balancing the books. “That said, what [the Liberals] sketched out in their last budget was the end of austerity, essentially.”

The austerity period saw the government hold the line on public-sector wage increases and add little new spending. But in the budget 2017, they started to put out new initiatives: tax cuts for corporations and individuals and targeted spending, mostly on infrastructure. Walsh says they’re making use of the new fiscal capacity to spend without tipping into deficit.

But despite the talk of balance and surplus, the province continues to add to its debt by borrowing for infrastructure investments like the Nova Centre, twinning highways and fixing schools. “Nova Scotia is hoping to give the economy a little bit of juice by spending close to $700 million on capital projects in 2017 and 2018,” Walsh says.

It’s similar to spending less than your salary for the year, giving yourself a surplus, but also borrowed money to buy a home. “The reason they’re doing that is because the federal government has offered to match it through the infrastructure plan,” Walsh explains.

He says the government can control spending, but can’t control interest rates. They can’t control revenues, either — that depends on how well Nova Scotian businesses do, and on how well individuals do, to grow the tax pool. “In general, I think the province has been realistic about economic growth in Nova Scotia and how much that translates into revenue growth,” Walsh says.

The 2017 budget forecasts some economic growth in the province, which translates into more tax revenue. It predicts one percent per year or less, which Walsh says is consistent with zero growth (or even slightly negative growth) in the workforce and modest performance on productivity growth.

He says those conservative estimates increase the government’s chances of meeting their goals. But the slim surpluses give them little wiggle room, meaning the province will likely tip into deficit at some point in the next few years.

“To try and build up fiscal capacity now is prudent and that’s what the [Ivany] report concluded and that’s what we think they should do as well,” says Walsh.

Walsh also notes it’s been about nine years since the last recession and the business cycle will tip back to recession at some point. “Governments this far into an economic expansion shouldn’t be running deficits, they should be getting ready for the next time they have to increase spending into a recession.”

Patrick Sullivan says when he was a CEO for private companies, his business plans had to include how he intended to grow the business and reduce costs. He thinks governments should do the same. "When we see spending by the provincial government go up last year by 4.3 percent, my question for the provincial government is: what are they doing to limit spending?”

For the upcoming budget, he wants to see a cost-reduction plan. He notes the province currently operates at 96 percent of its approved staffing levels; he thinks they should continue at that rate permanently. He wants to see the personal income tax bracket indexed to inflation, as it is in much of Canada. And he wants the corporate tax rate dropped from 16 percent to 14 percent.

All that might help us avoid the fate ultimately embraced by the Dickensian Wilkins Micawber, who finally cried: “Welcome poverty! Welcome misery, welcome houselessness, welcome hunger, rags, tempest and beggary!”

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