P.E.I. government should freeze spending in upcoming budget

With a newly-minted majority and the legislative assembly set to return, the King government will soon table its next budget. With revenues on the rise and a strong economy, the government has an opportunity to balance its budget and begin paying down Prince Edward Island’s government debt.

According to the government’s last fiscal update, provincial revenues have increased $238.6 million from budget projections due to numerous factors including a strong economic recovery, growing population and transfers from Ottawa. However, the government chose to spend this boom in revenue, resulting in a projected deficit of $94.8 million for the current fiscal year.

As a result, P.E.I.’s provincial debt levels are continuing to rise. One recent study found that each Islander is responsible for $15,610 in provincial net debt, a figure that has risen 17.7 per cent since the financial crisis of 2007/08, because the government ran deficits more often that surpluses (that is, it spent more money than it received in tax and other revenue).

While fiscal issues may not have been a focal point of the election, the costs of this approach are clear. To service the province’s debt, the government will pay almost $149 million in interest costs to bondholders this year, more than 5 per cent of all provincial revenue. This works out to $872 per Islander—money unavailable for health care, education or tax reductions.

But there’s good news. The province’s upcoming budget represents a fiscal opportunity for the King government. With strong revenue growth and a booming economy coming out of the pandemic, the government should freeze spending at 2022/23 levels, which would almost certainly ensure a balanced budget. Following this up with additional spending restraint in future years would strengthen P.E.I.’s fiscal position and help reduce the debt burden.

The benefits of this approach are also clear. Consider, for example, New Brunswick where the Higgs government has controlled government spending and subsequently will deliver its fifth consecutive balanced budget this year. This will allow that province to pay down more than $2 billion in provincial debt and reduce the burden of interest payments on New Brunswickers. Crucially, it has also allowed the Higgs government to begin reducing personal income tax rates, which have been among the highest in North America (P.E.I. has a similar tax problem).

Of course, some groups including P.E.I.’s Union of Public Sector Employees argue against this approach in favour of evermore government spending. But P.E.I. already has one of the largest government footprints in Canada, as measured by per-person program spending and government spending as a share of the economy.

This budget season, the King government has a clear choice. On one hand, it can opt for higher spending and more deficits while adding to the provincial debt. Or it can choose to restrain spending, balance the budget, and follow the approach of the Higgs government in New Brunswick. Clearly, Islanders would benefit from lower debt, a reduced burden of debt interest payments, and the possibility of tax relief.