'Hope and pray' budgets will haunt future taxpayers, economist predicts
'Voters prefer we defer the big decisions and hope the economy rebounds'
The more New Brunswickers must pay lenders, the less money they have for the services they want, a University of New Brunswick economist said Thursday after the province projected a bigger deficit than promised.
"When you're perpetually on the deficit side, it does start to become worrisome because somebody has to pay for that and if it's not going to come from growth of the economy, it means … taxes go up or benefits get cut," said Herb Emery, Vaughan Chair in Regional Economics at the University of New Brunswick.
Debt service costs will eventually lead us to the decisions we have to make and it won't be us making them, it will be the bond rating agencies and the lenders.- Herb Emery, economist
Earlier this week, in their last budget before a provincial election this year, the Liberals announced spending that will deepen what had been a projected deficit of $117 million for 2018-19 by $73 million, creating a $189 million shortfall instead.
An earlier forecast of a $21 million surplus in 2020-21, what would have been the first balanced budget in more than a decade, has been replaced with a $79 million deficit that year.
Emery said it doesn't matter which party is in power. A commitment to deficit reduction usually doesn't last, and the current generations of voters seem to like it that way, he suggested.
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"You see the same pattern over the last decade, which tells us … voters prefer we defer the big decisions and hope the economy rebounds," said Herb Emery, Vaughn chair in regional economics at the University of New Brunswick.
A 'hope and pray' approach
Finance Minister Cathy Rogers said the $73 million increase in the projected deficit represents spending on "new targeted investments," to be divided roughly evenly among what she called "a trio of challenges" — programs aimed at senior care, youth employment and helping businesses compete.
"We came to the conclusion that we cannot afford to ignore these challenges," she said.
But Emery said the province needs to change its mindset and grow a political will to commit to a policy such as deficit reduction, rather than using a "hope and pray approach."
"The hope is by doing this, the economy will have time to rebound," he said. "Maybe those softwood lumber exports will come back, maybe there will be some other driver and we'll grow our way out of this."
The Dominion Bond Rating Service, a credit-rating agency based in Ontario, said in an online commentary that it is concerned by New Brunswick's latest budget and "questions the credibility of the multi-year plan to return to balance."
What we're paying for is actually services we got in the past, not even what we're getting today.- Herb Emery, economist
"DBRS has indicated that any failure to demonstrate continued improvement in fiscal performance, or stabilization of the debt burden, would likely have negative rating implications," the agency said.
Emery pointed to the cost of servicing the New Brunswick debt, budgeted at $675 million in the coming year, and noted it was more than the $644 million the province will spend on post-secondary education.
"What we're paying for is actually services we got in the past, not even what we're getting today, that's what we've leveraged our kids and grand kids to basically give us a good standard of living."
But if the province had decided to pay down its deficit in this year's budget, Emery said, the Dominion Bond Rating Service might still have had a similar reaction.
There are forces the province has no control over, such as the North American Free Trade Agreement, he said.
"It's really about the external risks starting to creep in," he said.
"We may not have the same access to market that we had, we may not see the Bank of Canada keep interest rates low, we may not see young New Brunswickers choosing to stay around, which means population aging starts to accelerate and the liabilities that aren't even priced into this deficit yet get larger and larger."
What credit rating agencies are looking for is a government that understands the risks they're facing and takes steps, such as restraining wage growth, to bring things in balance, he said.
Otherwise, New Brunswick won't be able to borrow in order to keep up its standard of living.
"As long as we're mired in political rhetoric that it's an either-or, we're not going to solve it," he said, comparing it to the Greece debt crisis.
"Debt service costs will eventually lead us to the decisions we have to make and it won't be us making them, it will be the bond rating agencies and the lenders."
With files from Jacques Poitras