The Titanic debt problem threatening to sink New Brunswick’s economy

Quick, which Canadian province is the country’s most hard-up?

While Newfoundland and Labrador fell the furthest, fastest after its oil boom went bust, New Brunswick’s inexorable demographic decline makes it at least an equal contender for that dubious distinction.

Yet, as New Brunswick voters head to the polls on Sept. 24, no party has put forward a credible plan to put the province’s finances on a sustainable fiscal track. Indeed, the governing Liberals are seizing on a surprise budget surplus in 2017-18 to wage a “don’t worry, be happy” campaign.

One year of decent growth does not make it a trend, however. The Liberals started the campaign by announcing a $67-million surplus thanks to 1.9-per-cent economic growth in 2017 and higher federal cash transfers. The government also deferred some planned spending. A return to slower economic and population growth this year and beyond, however, means the province will soon be back in the red for several years to come.

Coming on the heels of a lost decade in which the provincial net debt doubled to more than $14-billion, or to about $19,000 for every one of New Brunswick’s 747,000 residents, the situation calls for drastic action in order to avert a fiscal crisis. As it is, rising interest rates and a declining working-age population make for an explosive fiscal cocktail that could blow up at any time.

“Getting a handle on this problem will be like turning the Titanic,” New Brunswick Auditor-General Kim MacPherson declared in June, after tabling a damning report on provincial finances.

The report showed that New Brunswick’s net debt as a percentage of gross domestic product surged by 65 per cent between 2008 and 2017, to 41.1 per cent of GDP. Neighbouring Nova Scotia (with a similar demographic profile) managed to slightly reduce its net debt-to-GDP ratio to 36.4 per cent over the same period. The two provinces have moved in opposite directions in recent years, with Nova Scotia getting a handle on its finances while New Brunswick dithers.

“I am concerned that future generations [of New Brunswickers] will need to pay for this excessive spending and the province has no immediate plan to address the continuing fiscal decline,” Ms. MacPherson said.

Despite that warning, voters so far haven’t heard much about New Brunswick’s dire fiscal straits on the campaign trail. Premier Brian Gallant’s Liberals tabled a big-spending, election-year budget in January and have rolled out new spending promises after last week’s campaign launch.

Since winning office in 2014, Mr. Gallant has insisted the government needs to spend more to grow the economy and improve public services. The latter are admittedly under strain. New Brunswick has the longest medical wait times in the country, according to the Fraser Institute.

But while relying on stimulus spending might be defensible during an economic downturn, it is a dubious strategy when you are up against the long-term demographic trends that New Brunswick faces. Some experts expect the province’s population to decline by as much as 100,000 over the next few decades. That will leave New Brunswick with a much smaller tax base to support existing and future debt levels. Eventually, its only recourse might be a federal bailout.

Already, no other province except Prince Edward Island relies more on federal cash transfers than New Brunswick. Equalization payments and other cash transfers account for about one-third of provincial revenues. That leaves the province vulnerable should a future federal government heed Western Canadian calls to reform the equalization program, which critics contend encourages have-not provinces to rely on handouts rather than develop their own resources.

Mr. Gallant, who had been counting on the now-abandoned Energy East oil pipeline to lift the economy, has promised to continue a moratorium on hydraulic fracturing. Progressive Conservative Leader Blaine Higgs has refused to commit to lifting the fracking ban province-wide, only suggesting he might lift it in some regions if local residents agree.

Meanwhile, high public debt and tax rates makes it harder to attract high-skilled workers to the province. After raising the top personal income tax rate in its first budget, the Gallant government was soon forced to backtrack after the Trudeau government’s move to increase federal taxes on the wealthy left New Brunswick with a top combined federal-provincial marginal tax rate of 58 per cent in 2016. The top combined rate is now 53.3 per cent.

Recent programs, such as the Atlantic Immigration Pilot aimed at luring skilled workers to the province, have met with some success, but not enough to compensate for net migration by native New Brunswickers. In 2017, there were more deaths than births in the province.

With funerals now outnumbering baby showers, New Brunswick needs to stop whistling past the graveyard.