Suppose a Nova Scotian family examines its finances over the past five years to find that its expenses rose 16% and its household debt rose 20% from $20,000 to $24,000. Should the family be alarmed at this “unfavourable” trend? It depends.
To properly answer this question, we first need more information, such as the family’s current and expected future income. Then we might look at a large sample of other families with similar incomes and debt levels to determine what proportion of these have fallen into financial difficulty. Few families with incomes over $80,000 would find this level of debt or its rising trend much of a concern.
On their own, trends in spending and absolute levels of debt tell us little about financial sustainability. Yet, a series of trends is the only evidence Nova Scotia’s Auditor General (AG) offers in his latest report on the province’s financial condition. The AG’s assessment consists of an examination of the one-year and the five-year trend of various financial indicators — such as the debt-to-GDP ratio and the budget surplus or deficit — which he simply rates as either “favourable” or “unfavourable.”
Though commentary on the AG’s report has raised concern about Nova Scotia’s increasing level of debt per capita, this measure is far less relevant that our debt-to-GDP ratio. For example, Switzerland has a higher level of debt per capita than Greece. However, since its GDP is so much higher, Switzerland enjoys a strong fiscal situation with a much lower debt-to-GDP ratio. Greece continues to struggle, as its GDP is so much lower. Ultimately, our ability to finance pubic debt depends on the government’s capacity to generate revenues, and this depends on our GDP.
It is no surprise that some of the indicators tabulated by the AG have increased slightly over the past five years. Nova Scotia, like much of the rest of Canada and indeed the world, has yet to recover fully from the 2008 global recession, and slow economic growth had a negative effect on our finances. It was also over this period that provincial finances took a one-time hit of $149 million to cover pension liabilities. Furthermore, the AG uses 2013’s GDP for calculating the debt-to-GDP ratio for 2014. Since Nova Scotia’s GDP growth for 2014 is estimated at 3.5%, the AG’s 2014 debt-to-GDP calculation is over-stated by almost a full percentage point. Had he gone back further, the AG would be reporting that, over the long term, Nova Scotia’s fiscal situation has been moving in a “favourable” direction. Since the turn of the century, our debt-to-GDP ratio has fallen by over 20%.
The AG does mention in the fine print that, “Favourable/Unfavourable represents the direction of indicator; not a comment on performance or policy.” So what he is really assessing is not the sustainability of Nova Scotia’s finances, but merely whether an indicator has increased or decreased.
Unfortunately, the AG’s choice of language is misleading, as media reports emphasized his use of the word “unfavourable” to question the province’s fiscal sustainability. Yet, the AG’s report offers very little evidence to that effect.
One way to provide context to the AG’s report is to compare Nova Scotia’s fiscal situation with that is other jurisdictions. Past reports have done just that, but not this time. Citing a lack of available data, the AG fails to make any comparisons. He could have reported that Nova Scotia’s fiscal situation compares favourably with most Canadian provinces. According to the Royal Bank, our projected debt-to-GDP ratio for 2015-16, at 36.4%, is comparable to the other Atlantic province’s and Manitoba’s, and is significantly lower than Ontario and Quebec with debt-to-GDP forecasts of 39.9% and 49.5% respectively. Only British Columbia and the oil-rich provinces of Alberta and Saskatchewan have significantly lower debt-to-GDP ratios. Further, Nova Scotia’s projected budget deficit as a percentage of GDP, at only 0.3%, is the second lowest, behind only British Columbia’s.
Yet, even with these positive comparisons, skeptics may wonder whether the majority of Canadian provinces’ finances are sustainable. Fortunately, there has been a proliferation of serious empirical studies on sustainable debt levels. These focus on identifying the point at which governments’ debt levels start to adversely affect their ability to finance programs. A recent study by the IMF, for example, concludes that debt-to-GDP ratios of less than 90-100% pose little concern and that serious problems only arise when debt rises above 150% of GDP. The OECD puts these figures at 120% and 170% respectively. Nova Scotia’s debt, even when combined with the federal debt, is nowhere close to unsustainable levels.
This does not mean that the Nova Scotia government should ignore its debt. The debt needs to be managed, and it may make sense to gradually lower our debt-to-GDP ratio. But this needs to be done responsibly. Rushing through austerity measures when our economy faces excess capacity will have a negative effect on economic growth, hampering our ability to manage the debt. Just as important, austerity imposes real costs on Nova Scotian’s prosperity in terms of higher unemployment, lower public-sector wages, increased poverty, and diminished quality of essential public services. We can afford to invest in our society and manage our debt responsibly.
The Canadian Centre for Policy Alternatives is releasing its Nova Scotia Alternative Budget on December 7th. This document contains a detailed analysis and discussion on the types of investments our government could make to promote prosperity while remaining fiscally responsible.
The federal Liberals’ recent electoral success demonstrates that the public is willing to accept a platform that includes modest deficits directed towards necessary public investments. Let’s hope their counterparts in Nova Scotia recognize the wisdom of the public.
James Sawler, is an economist at Mount St. Vincent University and one of the authors of this year's provincial Alternative Budget, to be be released by the Canadian centre for Policy Alternatives on Monday, December 7th.
