Interest on government debt—a costly problem for the Rock

Several provincial governments across Canada are currently running deficits and accumulating debt to finance their spending priorities. But one province stands out more than others. Newfoundland and Labrador has the highest provincial debt burden in the country both as a share of its economy and per person.

In 2019/20, provincial net debt is expected to reach $14.0 billion in the province. That’s a burden of $26,748 for every person in Newfoundland and Labrador, which represents the highest total of any province in Canada. The debt-to-GDP ratio is also a useful measure that compares debt to the size of the overall economy and allows us to evaluate the sustainability of debt accumulation in the province. Newfoundland and Labrador possesses the highest debt-to-GDP ratio in the country, at 40.6 per cent of its economy.

Simply put, Newfoundland and Labrador is the most indebted province in Canada. But is there more reason for concern?

Like households, governments have to pay interest when accumulating debt. As a result, interest payments now represent a considerable annual expense for the provincial government. Newfoundland and Labrador expects to spend almost $1.4 billion on interest costs this year. To put this in perspective, consider that the province spends just $0.8 billion on their department for education and early childhood development. Put differently, the provincial government now spends nearly twice as much on debt interest than it does on children’s education.

Moreover, these interest costs represent a large expense for residents in the province. Provincial interest payments are projected to equal $2,675 for every man, woman and child in Newfoundland and Labrador this year.

The province is undoubtedly an outlier among the provinces when comparing interest costs as well. In fact, Newfoundlanders and Labradorians are the only citizens in Canada to spend more than $1,000 annually on sub-national interest expenses. Ontarians are the next closest at $912, which is just over a third of the expense in Newfoundland and Labrador. Closer to home, interest costs in Nova Scotia, New Brunswick, and Prince Edward Island are all less than half that of Newfoundland and Labrador on a per-person basis.

And this is to say nothing of the implications of federal debt on the province. If we include federal debt in our calculations, the interest expense grows by another several hundred dollars for every Newfoundlander and Labradorian. In total, combined federal and provincial interest costs amount to $3,343 per person.

Worryingly, the province also faces substantial challenges to its financial health moving forward. Between the costs of the Muskrat Falls project and the upward pressure on health-care costs for Newfoundland and Labrador due to its aging population, the province is likely to continue running deficits and accumulating debt for the near future. A high debt and interest burden, with strong potential for this situation to worsen, underscores the need for the province to shift gears quickly.

However, there is still some reason for optimism. Debt and deficits are largely within the control of the provincial government. These problems can be dealt with when governments demonstrate restraint and fiscal prudence. Having a credible plan to balance the budget over the long-term, pay down debt, and rein in spending are all critical steps the province can take in implementing a responsible path forward.

With a high interest burden already accumulated and storm clouds brewing on the horizon for government finances in the province, things look bleak. But it does not have to be this way.