A day in the life of Danny D'Amours

New Brunswick’s deficit – Where did it come from?

As has been widely publicized, New Brunswick along with the most Canadian provinces as well as the federal government have recently been struggling with budget deficits. Reduced revenues in forms of income and corporate taxes along with additional stimulus spending has converted break-even or small deficits into major problematic deficits. New Brunswick in particular has been running deficits of approximately $750 million per year with no clear indication of when or how it will return to a balanced budget. This troublesome trend was noticed by Moody’s Bond rating agency who downgraded the province’s credit rating in August of 2009 and by S&P who cut its outlook for New Brunswick’s long term credit.

The Quest to Spend

Why did the NB government spend so much over the last few years when revenues were down?

  1. Stimulus spending : Spending was increased to stave off undesirable effects of the recession. By increasing spending governments in Canada and indeed around the world cushioned the economy and prevented what could have been a much worse recession. There are questions as to whether perhaps the New Brunswick government spent too much money in the name of stimulus when the economy was relatively less impacted by the recession especially compared to the manufacturing focused province of Ontario.
  2. Matching federal funds : In the name of stimulus and combating the recessions, the federal government offered matching funds for many project via the Economic Action Plan. The provincial government of New Brunswick took advantage of the availability of these funds to help fund projects where possible. While this is seen as a good way to help fund projects the fact that the province typically had to match any dollars that the federal government provided meant that there was a large expense to outlay by the province. Overall through the various stimulus funds including the Building Canada Plan the federal government contributed almost $500 million in New Brunswick which forced Fredericton to contribute a similar amount.
  3. Politics and Elections : Election years are known to raise government spending as parties in power try to placate voters with spending promises. 2010 was no exception as Shawn Graham and the Liberal party tried to battle back from strong public backlash against a failed proposed NB Power sale to Hydro Quebec as well as other earlier unpopular decisions such as changes in French Immersion programs in schools.

All of these factors have led New Brunswick to go from a break-even budget in 2007-2008 to a $800 million deficit in 2010.

Next question: What can be done about it?

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January 22nd, 2011 Posted by Danny D'Amours | Economics, New Brunswick | no comments

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