Financial Update: Debt Payments Driving Deficit

Repaying debt with 64-cent Canadian dollars is driving up the province's debt charges and is the biggest single contributor to a projected $108.6-million deficit for the 1998-99 fiscal year, Finance Minister Don Downe said today.

Nova Scotia's finance minister released the province's second forecast update for 1998-99, which shows debt payments account for $55.5 million --more than half --of the forecast budget shortfall. Health costs pushed higher by pharmacare and doctors' services and lower-than-expected revenues are the other primary contributors to the projected deficit.

"Spending is under control," said the minister. The government expects that it will end the fiscal year only slightly --0.7 per cent or $26 million --over budget on total program spending of more than $3.7 billion.

Echoing Premier Russell MacLellan's recent statement on the projected deficit, Mr. Downe said a $108-million shortfall on a $4.46-billion budget is cause for concern but not cause for alarm. He said the province will not slash programs --health and education consume the lion's share of discretionary spending --to offset a budget deficit created by economic and monetary conditions originating outside Nova Scotia.

"What we will do over the short term --the remainder of the fiscal year --is continue with tight spending controls," the minister said. Government-wide savings and other measures taken since the minister issued the first update in September carved $27.5 million off spending. Those efforts will continue, he said.

"More importantly, we are taking a long-range view to put this province's public services and finances on solid ground permanently," said Mr. Downe.

Changes in health care funding arrangements, to ensure health services are adequately funded and at a sustainable level, will be a central element of the long-term fiscal strategy. Mr. Downe said those changes will not be clear until February or March of 1999.

At the provincial level, new funding arrangements will result from an intense effort to develop and implement multi-year business plans for regional health boards and hospitals. Those plans will be made final early next year. Federally, a budget in early 1999 is widely expected to address the national problem of underfunded health care services.

"It would be folly to release a long-term fiscal strategy before the health care element is determined," said Mr. Downe. "Those who are clamouring for instant solutions to our current financial shortfall risk imposing short-sighted remedies on issues that have been building for a generation."

The province's total health budget is now forecast to be $1.48 billion, $29 million more than anticipated when the budget was introduced in June.

"The government will continue to meet the health care needs of Nova Scotians," said Mr. Downe. "As the premier said, this government will not cut essential health or education programs.

"We're well on our way to achieving something we haven't had for years: an adequately funded health care system at a predictable cost to Nova Scotia taxpayers. With the federal government on board, we will reach that objective next year."

Over the past four years, the federal government has cut total health funding to Nova Scotia by some $340 million. The minister said every province in Canada is exerting pressure on Ottawa to restore health funding and there are signs the message is getting through.

Mr. Downe noted that the premier also said the government will practise consistent, responsible financial management and keep government spending in check.

"We're not far off that objective --less than one per cent over budget on program spending," said the minister, adding the province's business and budgetary planning for next year is already well advanced, and tight budgetary restrictions will continue to guide the process.

"Our long-term view is optimistic. This province's economy is growing faster than most in Canada. Our prospects for continued, sustainable growth are better than ever before."

He said Nova Scotians need to see the current budgetary shortfall in that context.

"In 1993, when a previous government ran up at $617-million deficit, conditions were very different in Nova Scotia. In 1993, the economy was at a standstill. Investment in Nova Scotia was moribund. The unemployment rate was 14.6 per cent. We were, literally, a province on the brink of financial ruin.

"Today, Nova Scotia's economy is among the strongest in the nation. For the second consecutive year, we lead all provinces in new investment. Unemployment is down to 11 per cent. We are, literally, on the threshold of opportunity, growth and prosperity."

He said the difference in context is important.

"Unlike 1993, Nova Scotia is now headed in the right direction. We can absorb this year's shortfall within the next few years. In 1993, drastic measures were required. In 1998, it would be counterproductive to slash and burn our way back to a balanced budget. Worse, taxing our way out of the problem would kill our growing economy."

Mr. Downe said evidence of the government's ability to manage the province's finances can be found in its record. In 1993, a new government inherited a $617-million deficit, and since 1993, Ottawa has cut more than $340 million from Nova Scotia's health system.

"Taken together, that's a billion-dollar hole that this government pulled Nova Scotia out of, and that required good management by any standard."

Throughout the 1980s and early 1990s, Nova Scotia amassed the highest per capital provincial debt in Canada. This year's budget deficit is, in large measure, a hangover from those years, as payments on the debt increased as a result of the weak Canadian dollar. Much of the debt is held in foreign, predominantly U.S., currency so repayment costs increased as the Canadian dollar fell. In the past few years, the province has made significant headway in reducing the foreign currency exposure of its debt, from more than 70 per cent in 1994 to less than 50 per cent this year.

The forecast issued today is for the fiscal year that ends March 31, 1999, and is therefore based on revenues and expenditure projections that won't be finalized for more than four months. Mr. Downe said a good deal can, and likely will, change between now and the end of the fiscal year, particularly revenue numbers from Ottawa. Ottawa's projected revenues tend to fluctuate wildly throughout the year and are rationalized as "prior years' adjustments" long after the fiscal year ends.

Detail in the update shows government revenues from a number of sources are lower than expected in June when the budget came down. Gaming revenue is down about $11 million, and income tax revenue is currently projected to fall $15 million short of the budget estimate. The decision, taken after the budget, to limit the number of video lottery terminals is largely responsible for the former. The latter is due to a combination of factors, including the provincial income tax cut of 3.4 per cent; growth that is slightly slower than forecast in the budget, and most significantly, the method Ottawa uses to calculate provincial income tax.

On the spending side, most departments are reporting the same as they did in September's update, and all departments have contributed to general savings of more than $27 million.
Business and Consumer Services is now reporting a $3-million shortfall because funding expected from the Economic Diversification Agreement for the government's central business registry has not been received.