Budget Bulletin: Debt Retirement

The province of Nova Scotia continues to make progress in managing its long-term debt. Three successive balanced budgets, steady reduction in net debt to GDP ratio, and continued reduction in foreign currency exposure have contributed to financial recovery and prosperity for the province.

The government announced a debt retirement plan in June 2003. By lowering the debt, annual interest charges will be reduced, making the province more attractive in financial markets.

The plan's three components are:

• establishing a debt retirement contingency in fiscal year 2004-05 that will be required to reach $106 million by fiscal year 2007-08;
• creating a fund for debt retirement using a portion of the interest earned on investments; and
• enacting legislation that commits extraordinary revenues to the province, as well as money from the sale of provincially owned assets, to the debt retirement fund.

The debt retirement plan focuses on net direct debt (NDD) as the target measure of the province's debt. Despite balanced budgets, annual spending on tangible capital assets (TCA) such as roads, schools, and other public infrastructure, has been adding to the debt. To address this challenge, a $250 million annual capital spending TCA allocation was established. This will control provincial spending while prudent investment in capital infrastructure will support steady economic growth.

Net direct debt to gross domestic product (GDP) compares what the province owes with what it produces, thereby measuring the ability of the province to manage its debt.

NDD:GDP RATIO
2002-03 45.0 per cent 2003-04 44.1 per cent 2004-05 (estimated) 43.1 per cent

Reducing the amount of debt that is in foreign currencies reduces the province's vulnerability to sudden changes in foreign currency markets. By law, Nova Scotia's foreign debt had to be lowered to under 20 per cent.

FOREIGN CURRENCY EXPOSURE
1994-95 72.2 per cent 2001-02 28.9 per cent 2002-03 18.1 per cent 2003-04 16.9 per cent

The benefits of the above actions can be seen in debt servicing costs. In fiscal year 2003-04, debt servicing costs were down by $25.3 million compared to the budget estimate. This, despite the inclusion of $30.5 million in interest on post-employment benefits in 2003-04 debt servicing costs. Without that change in accounting policy, debt servicing costs would have been down $55.8 million. In part, decline in debt servicing costs was due to the improvement in the Canadian dollar and the continuation of low short-term interest rates.

Debt servicing costs in 2004-05 are up slightly compared to the 2003-04 forecast. However, the increase is due to interest on pension and other obligations totalling about $10 million.

NOTE: For further 2004-05 budget information, see the Department of Finance website at www.gov.ns.ca/finance .