Ben Eisen, Senior Researcher, and Alex Whalen, Policy Analyst at the Fraser Institute, provided the following opinion piece.

Recently, the Parliamentary Budget Officer (PBO) released his annual report on the health of government finances in Canada, including a troubling analysis of Prince Edward Island’s fiscal situation.

The purpose of the PBO’s annual report is to assess the sustainability of public finances using a technical definition of the term. According to the Parliamentary Budget Officer’s definition, a government’s finances are unsustainable if, under current policies and reasonable economic assumptions, public debt is on track to grow faster than the overall economy over the long term.

In other words, according to the report, Prince Edward Island’s finances are unsustainable. This means that if the provincial government does not take strategic action, the province’s net debt-to-GDP ratio, a key indicator of the sustainability of debt levels, will increase over time.

Program expenditures

The PBO is not alone in making this key finding. The main experts of the Finances de la Nation project agree with this basic assessment. Their calculations suggest that Prince Edward Island needs deep spending cuts to make the province’s finances sustainable without tax increases. To achieve sustainability in one year, their analysis suggests the government needs to cut program spending (all spending other than interest on debt charges) by about $140 million or 5.8%. In June, the Auditor General of Prince Edward Island raised similar concerns.

Of course, the government could take a gradual approach to reducing spending from the current trajectory. However, there are significant benefits to acting quickly, including reducing the likelihood of deficits in future years, which would mean more debt and (all other things being equal) higher interest costs borne by taxpayers.

Atlantic Canada

And the need for budget reform in PEI. and in Atlantic Canada generally is even greater than the headline numbers suggest, as the region’s public finances are subject to a number of region-specific risks that could make the fiscal situation more precarious.

For example, the region’s heavy reliance on transfer payments from Ottawa to fund provincial activities. The Maritime provinces specifically receive a greater share of their revenue from federal transfers than any other province in Canada. This makes the region particularly vulnerable to changes in federal transfer policy. Reconciling expenditures with own-source revenue (revenue generated within the province) would help mitigate this risk.

Credit ratings

Of course, the future effects of interest rates on public debt remain another source of risk for PEI. That’s why a recent report showed that in 2021, the four Atlantic provinces were among the top five spenders in Canada when it comes to interest payments relative to own-source revenue.

With interest rates rising, these factors make it all the more important for the King government to manage money sparingly to prevent the province from starting to rack up more costly debt than it has in decades. years, which could contribute to long-term sustainability issues.

The recent report from the Parliamentary Budget Officer made it clear that Prince Edward Island needs a change in fiscal direction. Spending restraint is necessary to restore sustainability and help make provinces more resilient to fiscal risks in the years to come.