Credible Promises
Posted September 6, 2013
Each of the province’s political parties has committed to balancing the books, sooner or later. Two have said they will reduce taxes. These are worthy ambitions.
Such promises have been made before without being fulfilled. So how are voters to make a distinction? The answer is to listen for the willingness to make the tough decisions.
First, it is important to define what constitutes success. It is not enough to produce a balanced budget. On the day that it is issued, this is the just an expression of hope. The result can be much different. The provincial deficit for 2013 was $303 million, which was $91 million higher than the budgeted deficit of $211 million (all years are fiscal, so 2013 means the 12 months ending in March of this year).
Success is measured by results, not hopes. Furthermore, real success would also mean that the net debt – the difference between total liabilities and financial assets — has not increased. Governments are often enthusiastic about capital spending to build roads and schools or buy woodland, because it does not show up as a cost in the current year. But it does add to the debt that future generations will have to pay back.
Success is not easily achieved. Some important items can be quite volatile. Drops in prices and declines in production mean that petroleum royalties have dropped from $452 million in 2009 to $113 million in 2012, and almost nothing in 2013.
Movements in interest rates make a big difference. Although net debt has increased 14% over the last four years, the corresponding debt servicing costs have only grown 4% because of declines in interest rates. Of course, this will eventually go the other way.
Federal transfers after 2015 will be uncertain until the scheduled formula review is completed.
The performance of the provincial economy can affect tax revenue from individuals and corporations. Weaker growth means less taxable income. This year’s budget includes a substantial increase in personal income tax due to growth in income and growth in “yield,” by which they mean that tax payers will be paying more of their income in tax. Unlike the other Atlantic Provinces, Nova Scotia’s tax brackets are not indexed to inflation. Oddly, this is not acknowledged to be a tax increase.
Given the uncertainties, a government that is seriously committed to balancing the books should have a $200 – $300 million margin of error in its budgets. If things go well, the opportunity to fulfill tax cut promises will emerge. A 2% cut in HST, would cost about $350 million per year.
So voters should pay close attention not only to promises about the bottom line, but also to spending commitments that provincial governments can actually control.
The NDP’s credibility is under considerable pressure. Prior to the previous election it promised but did not deliver balanced budgets with no tax increases. In its first budget, it promised but did not deliver a 10% reduction in the number of civil servants. Promised public sector wage restraint was temporary. The weeks leading up to the election call have featured daily announcements of new spending.
Nevertheless, they have promised to balance the books and deliver the 2% HST cut over the next two years. Voters will be understandably skeptical.
The Liberals have promised to fulfill all of the NDP spending promises plus some of their own. They want to reduce the number of health boards to two but have made no other commitments to spending cuts or tax reductions, and have only said that there would be a balanced budget “within the mandate,” in other words by 2017.
Having promised so little their issue is lack of substance, not credibility.
The Progressive Conservatives have been non-committal on the recent NDP spending promises. They have said that they will make the 10% civil servant reductions the NDP promised in 2010, although they have not provided any indication where these reductions might come from. They also have committed to reducing the number of health authorities to three and to implement the other recommendations in the Ernst and Young report. Together these choices should save about $160 million per year but will take two to three years to be fully realized.
The PC’s have promised to balance the budget immediately and to cut HST by 1% in each of the first two years. Their planned savings so far are a good start, but not enough. They need to say more.
There is plenty of time left before election day for the parties to provide credible positions of substance. Here are some key issues.
- Pensions. The current government has done a good job of reducing volatility in the cost of civil servant pensions. But much work remains to be done. The “pension adjustment” is the amount that taxpayers are expected to put aside, in addition to regular annual contributions, to pay for pension promises. It is forecast to increase from $104 million in 2013 to $171 million in 2017 and even more thereafter. The dominant source of the problem is the Teachers Pension Plan, which also has large inequities between those who retired before August 1, 2006 and those who have retired since or are still active.Both current finance minister Maureen MacDonald and her predecessor Graham Steele have acknowledged for years the need to deal with this, but have taken no action. No party leader promising fiscal responsibility should be taken seriously unless he commits to resolving this problem.
- Public sector wage restraint. This will have to be firmly established until the books are in fact balanced. Politicians should show leadership by freezing their own compensation.
- Capital spending. The province’s net debt has grown from $12.3 billion to $14.0 billion over the last four years. Some of that has been for roads, hospitals, and schools but other large cheques have been written for woodland purchases, handouts to corporations, and public sector pension bailouts. To stabilize the debt the pace of capital spending should not exceed the amount by which past spending is being paid off.
Balancing the books is more urgent than many realize. As the election approaches our province has high debt, high taxes, little resource revenue, and an aging population.
In 2030 there will be 100,000 fewer working age Nova Scotians than there were in 2010. If we keep heaping debt on a dwindling pool of workers, more of them will leave. The present course is unsustainable.
Party leaders need to show serious engagement with the issue. To be credible they will have to show willingness to make difficult but necessary choices on items that they can control.