The economic report urges the NDP government to raise taxes. (CBC)

A panel of economic experts says Nova Scotia's finances are in such poor shape that the NDP government should consider raising taxes, cutting spending and scrapping a key election campaign pledge to balance the budget.

The four-member panel, which presented its report Friday, said the province should forget about eliminating the deficit until 2012 and, instead, consider raising income taxes and hiking the harmonized sales tax by two percentage points with protection for low-income families.

They described Nova Scotia as being in "serious financial trouble."

"You can't build a progressive government on a mountain of debt," said panel chairman Donald Savoie, an expert in public administration at the University of Moncton.

Darrell Dexter, who became the first NDP premier in Nova Scotia in June, had promised during the election campaign to balance the province's books next spring without raising taxes or cutting spending.

Panel member Tim O'Neil, a former vice-president of the Bank of Montreal, said the panel is suggesting a HST hike or a jump in personal income taxes because they are the two largest tax revenue sources the government has direct control over.

"Looking at the HST or the PIT as possible increased revenue sources is going to have the least impact on what is typically referred to as competitiveness," he said.

Selective cuts urged

Savoie added that any cuts to government programs should be made selectively, over three to four years.

"Across the board cuts don't work. Don't go there," he said. "They've been tried, it delays the problem, it doesn't get at the real meat of the issue."

The panel members acknowledged that Dexter's government will have difficult decisions to make.

"Every government that has gone through this process has had to face the fact that there's going to be broad-based pain, at least in the short run," said O'Neil. "That's the issue when you run a large deficit, whatever may be causing it. Someone has to face the burden of that."

Reached in Sydney on Friday, Dexter said he would respond to the panel's recommendations Monday. He also said there will be difficult decisions ahead.

"I think the Economic Advisory Panel has said there's a fair amount of pain in this report," said Dexter. "Regardless of who the government is, they would have to face this. We are the government, so we're going to take the responsibility to deal with it."

Election promises

Liberal Leader Stephen McNeil said the NDP leader knew he couldn't keep his promises even before the election campaign was over.

"Prior to the election campaign, Nova Scotians understood the difficulty we were facing and the only one who seemed not to was the present premier," he said. "Today, he's got cover to break … those promises."

Savoie said Dexter could not have known how bad the province's finances were because he did not have access to all of the province's financial data when he was Opposition leader. He said every provincial government was struggling with surprises regarding the depth of the recession.

"I don't think anybody could have predicted [this]," said Savoie.

He bristled at the suggestion that the panel, hand-picked by Dexter, was being used to provide political cover for a government retreating from its commitments.

"I like to think I'm non-partisan," he said. "We didn't take this on to provide cover for any government."

In September, the government introduced a budget with a $592-million deficit, but Dexter stuck to his pledge to balance the budget next spring.

The budget numbers suggested the NDP government would need to find $570 million in cuts to services between now and then if it intends to do that, but government officials have not said how they intend to make that happen.

With files from The Canadian Press