Prince Edward Island’s finance minister has been leading the Liberal government’s charge to accomplish a practically unheard of feat: balance the budget over the scant span of three years. Not everyone is a true believer.
In the pantheon of purveyors of bad news, provincial finance ministers generally rank somewhere between radiation oncologists and trustees in bankruptcy. After all, death and taxes are about the only certainties on which we mere mortals can count in our brutal lives. But if you talk to the chief financial officer of Prince Edward Island on, say, an unseasonably warm day in late September, you might reasonably mistake him for a youthful president of a high school glee club, so full of hope and rhetorical glitter is he.
“You have to have full buy-in,” enthuses Wes Sheridan, P.E.I.’s minister of finance, in a telephone interview. “You have to have a premier who is willing to do this. You have to have ministers who are playing along. We’ve also had great buy-in from our deputy (minister) group here. It has been a very positive experience.”
Which is something else you won’t often hear these days from members of his ilk: An ode to the sweet, sweet joys of balancing a provincial budget. Still, if all goes as planned, Canada’s smallest member of Confederation (population, 145,000; geographic area, the size of two of Switzerland’s larger cantons), will be deficit-free, even in the black, sometime in the next fiscal year (2015-2016).
Compare this with the recent, annual fiscal performances of the other Atlantic provinces and you might appreciate Sheridan’s garrulous roil. Nova Scotia’s 2014-2015 deficit forecast is $274.5 million; New Brunswick’s is $387 million; and Newfoundland and Labrador’s is $538 million.
Of course, in the absence of any analysis of regional variations, circumstances and exigencies, straight comparisons are not always fair to make. Unquestionably, though, P.E.I.’s trek towards some semblance of sustainable, year-over-year solvency has been the envy of, if not precisely the model for, public-sector budget planners across the region. And their question is, inevitably: How has this tiny province managed a feat such as this in a post-recession, slow-growth era of diminished expectations?
According to Sheridan, luck had nothing to do with it. “From the beginning, we had a plan,” he says simply. “We had balanced (budgets) in 2006-2007 and 2007-2008. As the economic downturn hit, all jurisdictions, including the federal government, went into deficit in order to try to stimulate their economies. And it worked.
“It worked in spades here on the Island. In fact, we didn’t actually suffer a recession on Prince Edward Island. Through the stimulation that we applied mostly through our capital budget and a number of different program measures, we were actually able to increase the number of jobs by about 4,500. In fact, we were able to keep our province above the recession. We were the only jurisdiction in North America to do that. But the plan also called on us to get back to a balanced budget, and that’s what we’re up to.”
The initial draft of the three-year budget program, released in 2012, is more specific. “The… plan will hold expenditure growth lower than growth in revenue,” it states. “To achieve this target… expenditure growth will vary by sector. Funding for the health care system will increase by 4.1 per cent in 2012-13 and will be capped at 3.5 per cent in subsequent years. Education expenditures will increase by 1.8 per cent this year (2012-13), with no further increases in years two and three. Expenditures in most other government departments will be reduced by between three and five per cent this year, and will hold the line in subsequent years… Over that time, revenues are projected to grow at an annual rate of 3.4 per cent.”
The original estimate pegged P.E.I.’s deficit at $74.9 million in 2012-2013, and $34.2 million in 2013-2014, with a modest surplus of $3.6 million in 2014-2015. In fact, last year, the province ran into the red by $56 million, and this year, Sheridan notes, the defi cit will be closer to $40 million.
Still, he says, “next year we will go to zero… I have to say I am very pleased and so are the bond raters. It is exactly the story that we gave to them. It’s simple economics and simple math. You look at the two growth patterns of expenditure and revenue and wherever they intersect is when you’re going to balance.”
Certainly, financial markets appear buoyant about P.E.I.’s progress.
“For 2014-15, the defi cit is projected to decline by $39.7 million,” the Economy and Strategy Group of the National Bank wrote in its assessment of the province’s fi nancial performance and prognostications at the time of its 2014 budget in April. “Revenue is projected to increase $25 million, mostly from personal income tax and sales tax.”
The group also noted that the province netted $25 million more revenue than it was expecting in the form of federal government transitional assistance for implementing the Harmonized Sales Tax in 2013.
As for Prince Edward Island’s creditworthiness, the good news continues. In July, Moody’s Investor Services gave the province an Aa2 debt rating with a stable outlook. A rating, it confi rmed, that refl ected “a high degree of fi scal fl exibility that allows the province to address ongoing fi scal challenges… Although there were some small adjustments to the size of the defi cits for 2013-14 and 2014-15, the net result was largely neutral in terms of forecasted impact on debt accumulation.”
Added Michael Yake, a vicepresident and senior analyst with Moody’s Canada Inc., in a statement: “The province is still largely following the three-year plan to return to a balanced budget… Nonetheless, we will continue to carefully monitor the province’s ability to achieve its targeted level of expenditure growth.”
In fact, Sheridan characterizes the three-year plan as the means to restore Prince Edward Island’s fiscal health, not the source of the province’s success. And while the investment of public dollars during the downturn of 2008-2009 helped keep the ship of state stable in rough waters, it is the Island’s comparatively robust and diversified economy that has enabled the provincial government to meet its expenditure and revenue targets.
Since the early 1990s, Prince Edward Island has been slowly, but deliberately, transforming itself from a traditional farming and fishing society to a fundamentally knowledge-based one. And while there has been some debate about the success of various governments’ job-creation schemes over the years (including the current Island Prosperity Strategy, launched in 2009), there is no doubt that sectors such as biosciences, information technology, aerospace and renewable energy are becoming increasingly important to the tax base which, of course, makes them increasingly important to budgetminded public servants.
“We’ve had 1,200 full-time jobs created in just the past 12 months,” Sheridan says. “That has meant a great deal to our economy. In terms of unemployment, we’ve been down near nine per cent in the last three months. That’s something we haven’t seen in some time.”
Notwithstanding the voluble cabinet minister’s enthusiasms and the apparent endorsement of his department’s approach by capital markets and the rating agencies that serve them, not everyone on the Island is besotted by the balanced budget plan.
Don Desserud, a professor of political science at the University of Prince Edward Island points to a problem that’s more troubling than juggling pots of red and black ink every year. “This has now become the standard rhetoric,” he says in a telephone interview. “I am not suggesting that they (government members) are insincere. But as far as the public is concerned, every government for the past 30 years has been promising that they are going to balance the budget. It’s a claim that’s already devoid of meaning. This is simply a matter of whether they are going to bring in more money than they spend on a yearly basis. But the real point is that the debt is not getting smaller, it’s getting larger. The problem is looming so large, people almost greet it with a shrug. This is not an issue that makes or breaks governments.”
Indeed, according to the Greater Charlottetown Area Chamber of Commerce’s January 2014 pre-budget submission to government, between 2007 and 2014, Prince Edward Island’s total debt load has jumped from $1.3-billion to $2.1-billion, an increase of 61 per cent. Annual defi cits over this period, expressed as percentages of the increase in net debt, have risen from 11.4 per cent in 2008 to 49 per cent today. And, as the province’s gross domestic product has grown (in line with Sheridan’s observations) from $4.6 billion in 2007 to $5.5 billion, the net debt as a percentage of GDP has risen from 28.4 per cent in 2007 to the current 33.4 per cent.
So, while the Chamber “applauds the government for recognizing that the pattern of revenue and expenditures has to change if the budget is to be balanced, with the commitment to balance by 2016… living within our means requires expenditures to be no greater than revenues, not just for a year, but ongoing—a principle and practice that should be ingrained in the political and bureaucratic culture.”
None of which is likely to furrow Sheridan’s brow, however. He’ll take whatever win he can get, and if that means celebrating what appears to be a rare example of success in the complex and traditionally disappointing fi eld of public fi nances, then that’s exactly what he’s going to do.
Who, in his shoes, wouldn’t?