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Finance Minister Graham Steele takes questions from reporters in Halifax on Tuesday.

Nova Scotia's NDP government has kicked off a four-year deficit-busting plan by increasing the harmonized sales tax — making it the highest combined provincial and federal tax rate in the country.

Finance Minister Graham Steele unveiled his $9-billion deficit budget on Tuesday, calling it a "smart, strategic and steady" plan necessary to tackle a painful financial outlook.

The NDP expects to end 2009-10 with a deficit of $488 million. This coming year, it expects to finish $222 million in the red.

"We wish the legacy of unsustainable spending we have inherited didn't exist, but it does," said Steele. "It is our responsibility to deal with it — to clean up the mess — so that Nova Scotia's future is not compromised. Doing nothing is not an option."

The plan pivots around a hike in the HST, to 15 per cent from 13 per cent.

Despite warnings from businesses, the NDP is raising the provincial portion by two percentage points as of July 1. The government expects this will mean $214.8 million in much-needed revenue this year.

This tax hike will apply to everything except children's clothing and footwear, diapers and feminine hygiene products.

That means a tax increase of around $412 for about 128,000 households in the province with incomes between $30,000 and $60,000, provided they don't make big purchases like houses or cars.

The rebate on home energy remains.

Tax breaks for seniors

Personal income tax is going up for anyone who earns more than $150,000 a year, to 21 per cent from 17.5 per cent, but seniors and low-income Nova Scotians are getting a break.

There's a new rebate for people making less than $30,000 — about one-quarter of Nova Scotians. Under the Nova Scotia affordable living tax credit, they'll get $240 a year in quarterly instalments, plus $57 for each child younger than 19 living at home.

In addition, about 15,000 will get a poverty-reduction tax credit of $200, and an estimated 18,000 seniors who receive the guaranteed income supplement will no longer have to pay provincial income tax.

Budget 2010-11 highlights:

  • Projected deficit of $222 million.
  • HST rises to 15%, as of July 1.
  • Rebates for people making less than $30,000.
  • New tax bracket for earners of $150,000 or more.
  • 1,000 civil servant jobs gone over four years.
  • Debt climbs to $14 billion.
  • No balanced budget until 2013.

The NDP also promises to keep costs under control. Program expenses are down $94 million — or about 1.2 per cent — from the last fiscal year, and the government plans to cut spending by $772 million by 2013.

One of the biggest changes this year will be the elimination of full indexing for pensions, which will affect 31,000 members of Nova Scotia's public sector pension plan.

Steele said this move will save the province about $100 million this year.

"I think this is a major accomplishment," he said.

Bureaucracy cuts

The NDP is also cutting the civil service by 10 per cent through attrition over four years. No layoffs are expected, but about 1,000 jobs left vacant by retirees won't be filled. The move is expected to save $65 million each year.

The budget also includes $710.6 million in capital spending for roads and buildings as the province continues to piggyback on federal infrastructure spending programs.

There's also a cut in the small business tax, from five per cent to 4.5 per cent, starting in January.

In the end, the NDP expects a deficit for 2010-11, even after promising during last year's election campaign to balance the books without raising taxes or cutting spending.

This year, the government plans to spend $9 billion while bringing in only $8.39 billion. The debt is expected to soar to $14 billion, with servicing costs climbing $70 million to $959 million.

Opposition unimpressed

Both opposition leaders disagree with the NDP's approach.

Liberal Leader Stephen McNeil said the government should have cut spending rather than simply limiting growth. He said he doubts this plan will spur the economy.

"This government is talking about tough decisions lying ahead," McNeil said. "Quite frankly, they picked the easy one, and that was raising taxes."

Interim Progressive Conservative Leader Karen Casey was just as blunt.

"I can't support an HST increase at the expense of Nova Scotians."

Money woes

Steele said there will be more tough years ahead as the province aims to balance the budget in four years. However, in 2013 — when Nova Scotians could be heading to the polls — the NDP expects to post a tiny surplus.

Nova Scotians had been warned to expect some belt-tightening.

A review by Deloitte and Touche found that the province could face a $1.3-billion annual deficit by 2012 if it didn't generate more revenue or cut spending.

Last fall, a panel of economic advisers suggested the government roll out a deficit-fighting plan over a few years to deal with its "serious financial trouble." It recommended hiking the sales tax while protecting low-income families.

Steele laid the groundwork for an HST increase during his pre-budget consultations. In the end, he concluded, most Nova Scotians agreed that a tax increase was needed as a way to bring in revenue.

Businesses and local governments have spoken out against it.