Thursday, March 4, 2010

Some Really Scary Numbers

This evening, Prince Edward Island Provincial Treasurer Wes Sheridan appeared on CBC's Compass to discuss the Federal Budget released late this afternoon by Finance Minister Jim Flaherty. In an interview with Bruce Rainnie, Minister Sheridan discussed the financial state of our Island's economy. He stated that for the 2009-2010 fiscal year, the Provincial Treasury was running a deficit of $85 million. As well, Minister Sheridan informed us that transfer payments from the Federal Government that were expected to grow from $340 million this fiscal year to $356 million have, in fact, been capped at $330 million this fiscal year resulting in an additional shortfall of $26 million. When the deficit and the transfer payment shortfall are added, our Island will be running a deficit of $111 million for the 2009 - 2010 fiscal year.

Prince Edward Island had an estimated population of 139,400 in 2008. The Provincial Treasury's deficit of $111 million is a deficit of nearly $800 for every man, woman and child on the Island. Every week during the last fiscal year, PEI's debt grew by over $2 million. As well, according to the CFIB, by the end of this fiscal year, PEI's provincial debt will reach $1.6 billion. That's a provincial debt of $11,500 for every man, woman and child on the Island. Yes, that includes the babies born today at Queen Elizabeth Hospital in Charlottetown!

Unfortunately, Minister Sheridan and the Provincial Treasury find themselves between a rock and a hard place when it comes to balancing the budget. Islanders already pay the second highest marginal income tax rate (at most income levels) in Canada. Since our personal income taxes are no longer linked to Federal tax rates (for example our Dividend Tax Credit is lower), we are actually taxed more onerously than we think. At an effective rate of 10.5%, we already pay the highest sales tax of any jurisdiction in Canada. As a consequence, Minister Sheridan's ability to balance the budget by increasing either personal or sales taxes is severely limited. Minister Sheridan's ability to cut spending by freezing or rolling back public sector pay is also severely restricted. Memories run deeply on this Island and the 7.5% public sector pay cut dished out by the previous Liberal administration nearly 15 years ago is still very fresh in the minds of the electorate. Most importantly, Prince Edward Island's next provincial election is scheduled to be held on October 3rd, 2011. It would be political suicide to raise taxes or cut/freeze public sector pay at this juncture.

What is particularly frightening is the looming spectre of further cuts to transfer payments and increases in interest rates. In today's budget, Minister Flaherty projects that the federal deficit for 2010 - 2011 will be $49.2 billion and this is projected to decrease markedly to $27.6 billion for fiscal 2011 -2012. How this drop of $21.6 billion in one year will be achieved is uncertain. Deep spending cuts will have to be made and these cuts may include further cuts to transfer payments. If the economic expansion stalls and the economy does not grow as projected (and in light of the huge deficit/debt issues with our major trading partner to the south that is not a remote possibility), all bets are off. Another wildcard in this scenario are interest rates. If, as expected, interest rates increase by as little as 2 to 4 percentage points, all bets are off for deficit projections at both the federal and provincial levels.

After reading Canada's Parliamentary Budget Officer Kevin Page's fascinating Fiscal Sustainability Report dated February 18th, 2010, I am more certain than ever that Prince Edward Island, in particular, is now in a position of having a structural deficit. No matter how much the economy grows, the government will be unable to balance its books. This is particularly frightening when one takes into account our aging demographic and our growing need for social programs to assist the elderly.

It is most unfortunate that our elected officials expend so much energy placating the public over the short term so they can be re-elected and so little time looking at what impact their actions have on the more distant future.

References:

Report from Canada's Parliamentary Budget Officer Kevin Page


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