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During the last decade, public sector spending was growing far faster than private sector growth in New Brunswick, Nova Scotia and PEI, leaving these provinces much more vulnerable to a major recession. (PAUL DARROW FOR THE GLOBE AND MAIL)
During the last decade, public sector spending was growing far faster than private sector growth in New Brunswick, Nova Scotia and PEI, leaving these provinces much more vulnerable to a major recession. (PAUL DARROW FOR THE GLOBE AND MAIL)

Economy Lab

How federal cuts will hurt the 'have-not' provinces Add to ...

After the release of the federal budget on March 29, there was some suggestion that the government’s austerity measures were not particularly austere, and a debate emerged as to whether Ottawa was actually cutting spending, or merely slowing the growth in public spending. If you start to look at some provincial budgets, however, federal ‘cuts’ are already starting to bite -- and with hard implications.

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For the first time since the early 1990s, total federal transfer payments to New Brunswick are not projected to increase this year, the recently released provincial budget showed. This is not ‘slowing the growth’ in spending. The federal government has cut increases altogether.

From fiscal years 2001-2002 to 2009-2010, total federal transfer payments to New Brunswick rose an average of 5.5 per cent a year. It will be that much harder for the provincial government to wrestle down its $500-million-plus deficit when its biggest source of revenue has flat lined.

Federal spending ‘cuts’ are going to hurt provinces like New Brunswick in much broader ways than just the equalization program.

Direct spending cuts to the federal work force in New Brunswick will take hundreds of high wage jobs and millions of dollars’ worth of employment income out of an already fragile economy.

Proposed changes to the Employment Insurance (EI) system will be felt more deeply in New Brunswick, as the province is 2.5 times more reliant on the program as a source of income compared to Canada overall.

Cuts to other important government agencies will hurt too. The National Research Council (NRC) is expected to cut back its New Brunswick operations. The Canadian Institutes of Health Research (CIHR) is cutting its Regional Partnership Program, which is the main federal source of funding for health research in New Brunswick.

As I warned about in the mid-2000s, an economic growth model led by government spending developed in New Brunswick, and was also emerging in Nova Scotia and Prince Edward Island. Specifically, public sector spending was growing far faster than private sector growth, leaving these provinces much more vulnerable to a major recession.

From 1999 to 2008, government sector gross domestic product (GDP) per capita in New Brunswick increased by 61 per cent. Excluding the government sector, the rest of the economy grew by 42 per cent. This was the biggest spread between public and private sector GDP growth of any province in Canada.

What I called for then (and continue to call for now) was a more intelligent partnership between the federal and provincial government. This partnership would be focused on developing avenues for government to strategically support the growth of the private sector economy through tax policy, efforts to attract business investment, targeted infrastructure spending and work force development efforts.

There didn’t seem to be much interest back then in this kind of focused partnership. The good times were rolling and public coffers were overflowing. Who cared if underlying private sector economic growth was weak?

New Brunswick, already predicted to have the second worst GDP growth rate for the foreseeable future, will now have to bring its books into balance and try to address weakness in the private sector at the same time without much help from the federal government.

David Campbell is an economic development consultant and columnist based in Moncton, New Brunswick. He also authors a daily blog on economic issues in Atlantic Canada which can be found at www.davidwcampbell.com.

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