Notes on the public deficit: A mostly annual affair

New Brunswick’s annual deficit is now expected to be $500 million – although the cerebral NDP leader pointed out that this was wrong given that NB Power’s latest financials included less cash for the provincial government.

As I have said many times before, I never really liked the NB government taking ‘dividends’ from NB Power.  They reduced the ‘real’ deficit by $100 million last year and now that is showing up in the numbers.  When the public utility has one of the highest debt loads of any electricity utility in Canada, any surplus cash should be used to pay down debt.  Further, the provincial budget shouldn’t be tied to the swings in NB Power’s fuel costs.  NB Power builds a buffer in their numbers and if costs are lower, the surplus should go to pay down debt, if higher the ratepayer – not the taxpayer should be on the hook (unless we are looking at some kind of long term debt restructuring and then it might fall on the taxpayer whom – it turns out – is the ratepayer anyway.

Further, as I have pointed out before, we are in a firm structural deficit.    We will not just ‘grow’ our way out of this.  We either need ‘new’ sources of economic growth, new sources of taxes or structural changes in the cost of public services and infrastructure.  It’s still not a ‘huge’ deficit’ by historical standards (according to RBC 1.4% of GDP this year) but RBC is forecasting the provincial will be in a deficit position for at least eight straight budget periods – not a good thing to say the least.

So we need new sources of economic growth.  I won’t bring up “the sector that shall not be named” as the Angel of Death and her scythe may pay me a visit (as graphically depicted on a billboard in Rogersville) but it is clear that if there were no environmental hurdles, that sector would represent a significant, new source of GDP.  At full ramp (likely in 7-8 years if we started now), it might add 1 to 1.5 percentage points to the GDP every year.

Other opportunities?  Maybe more minerals development – potash, etc.  I am told there are some smaller but important forest product opportunities.  The Energy East Pipeline, an outbound LNG terminal, etc. would pump up the construction component of GDP.

In the medium to long term, we need to figure out how to squeeze more GDP out of other sectors such as transportation/warehousing, ICT, manufacturing, – maybe agriculture/agri-food, etc.  I’d like to see far more foreign investment via immigrant entrepreneurs.

So, don’t expect any government to promise elimination of the public deficit now until at least late in this decade – again unless there is some unexpected source of revenue or some government decides to dramatically increase taxes or decrease public spending – something that is highly unlikely.

I am one of these people who likes clarity.  In fact, clarity is my new favourite word.

Clarity?   What is the long term annual GDP growth rate that we need to sustain a good quality of public services and infrastructure?  If it is at least 2.5 – 3 percent, as I postulate, let’s be honest with the public (we are now running less than one half of one percent annual real GDP growth), and let’s task the organs of government – Finance, PETL, DED, INB, ACOA, etc. to figure out a constructive role to play in achieving that – not just their perceived role as a kind of bank for SMEs.

One thing is for sure, it will take a significant boost in private sector investment and we don’t see that on the horizon right now.

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