Balancing Act
Posted August 23, 2012
When asked recently about the prospects for balancing the budget in 2012-2013 Finance Minister MacDonald sounded less than confident that she would succeed.
It is fashionable for Finance Ministers to worry aloud (e.g. Flaherty) or moan (e.g. Steele, MacDonald) about the fragile state of the economy. In fact, Canada has done rather well since early 2009, especially in comparison with other advanced economies.
Unfortunately, Nova Scotia has not shared equally in the recovery. For example, in 2011 while Canada as a whole grew 2.6%, our economy grew only 0.3%, ranking 9th overall. The leading provinces benefited from resource developments where Nova Scotia may have less opportunity than say Newfoundland, Saskatchewan, or Alberta. But with the notable exception of aquaculture, where the government has provided stalwart support, there has been little encouragement for the resource industries that are making other provinces thrive.
Rather than seeking a suitably rigorous regulatory regime for onshore oil and gas exploration, Nova Scotia has joined governments in Quebec and a handful of other jurisdictions in declaring a moratorium on fracking. Meanwhile communities from Pennsylvania to North Dakota to Western Canada have been prospering because of this technology.
The government has pursued a variety of handouts which have mostly performed badly: $5.5 million for Scanwood just weeks before it went bankrupt, $60 million for DSME Trenton which at present amounts to about $1 million per job, $15 million to dredge Sydney Harbour for no jobs at all, and well intentioned but poorly managed efforts to prop up the pulp and paper plants.
Other government initiatives have been unhelpful. The first contract arbitration legislation sends an employer-unfriendly signal to potential investors. Targets for renewable electricity generation that are not needed to meet greenhouse gas goals contribute to uncompetitive power rates. Government seems to be unable to connect the dots between these policy initiatives and their impact on jobs.
Although it bears partial responsibility for weak jobs growth there are some issues over which government has little control.
The challenges facing the pulp and paper industry extend far beyond Nova Scotia’s borders.
The price of natural gas has been plummeting, reducing the level of royalties from existing wells and discouraging ongoing production, let alone further exploration. This will mean a further loss of $100 million in revenue in the next fiscal year. While the prospect of Shell finding offshore oil is exciting (and kudos to the current and previous governments for enabling the exploration) it will be a decade or more before exploratory success could translate to government revenue.
On the other hand governments across Canada are enjoying a prolonged period of exceptionally low interest rates. Although our net financial market debt has grown 26% since 2009 our interest costs have grown less than 4%. Had rates remained the same our borrowing costs would have gone up by about $180 million. This favour able environment is likely to continue as more and more of our debt is renewed at low rates.
In future years, the benefit from low rates will be as big as or bigger than the loss of revenue from offshore gas. The relatively poor job performance is in part a self-inflicted wound.
Whether or not the balanced budget promise is fulfilled is thus primarily a function of the choices over which government has full control.
This column has looked at the external economic environment and related government actions. Next will be an examination of government’s spending choices.