Debt servicing costs are a growing burden for the four Atlantic provinces, according to new research that shows Newfoundland and Labrador pays the biggest chunk of its budget towards interest in the country.
In a study released Wednesday, the Fraser Institute said interest costs are consuming an increasing portion of provincial budgets.
The right-leaning economic think tank, which merged with the Atlantic Institute of Market Studies last year, said Newfoundland and Labrador is expected to spend nearly $1.4 billion on interest this year — or 13.5 per cent of the total provincial budget.
Nova Scotia will spend about 7.5 per cent of revenue on debt servicing, or $839 million, while New Brunswick will spend 6.6 per cent, or $658 million, and Prince Edward Island will spend 5.7 per cent, or $126 million.
The study said deficit spending and growing government debt has become a trend for many provinces. It said interest payments “consume resources that could have been used for tax relief or for health care, education, and social services.”
Yet Memorial University of Newfoundland economics professor Wade Locke said it’s important to distinguish between “good and bad debt.”
“Governments perform a valuable service in society,” said Locke, an expert on public policy, government finance and the Newfoundland and Labrador economy.
“They provide hospitals, schools and infrastructure for roads that contribute to a growing and productive economy.”
But while borrowing to pay for capital expenses like a highway or hospital is largely considered good debt, he said borrowing to pay operating costs like salaries over an extended period is a sign of economic trouble.
“Since we joined Confederation, about 90 per cent of Newfoundland and Labrador’s budgets have been deficits,” Locke said. “We have a structural problem here. That’s not borrowing simply for roads … that’s borrowing to pay teachers’ salaries.”
Meanwhile, the study also looked at federal debt. In 2019-2020, Ottawa is expected to spend $24.4 billion on interest payments — more than the $19.3 billion spent on Employment Insurance benefits and the $24.1 billion spent on the Canada Child Benefit.
The cost of servicing both the provincial and federal debt works out to $3,343 per person in Newfoundland and Labrador, $1,370 in Nova Scotia, $1,317 in New Brunswick and $1,236 in P.E.I., the study said.
“No matter what province in Canada you’re in, a good chunk of your tax dollars is going towards funding interest payments on government debt,” said Alex Whalen, policy analyst at the Fraser Institute’s new Atlantic division.
“Canada as a whole is spending almost as much on interest payments on debt as we are on K-12 education.”
He pointed out that the interest payments are in the context of historically low interest rates, and argued that an increase in rates could expose governments with high debt levels to substantial risk.
However, Christine Saulnier with the Canadian Centre for Policy Alternatives said government debt is locked in for decades, and called the study “disingenuous.”
“It’s important to look at trends and debt to GDP, which is really looking at the state of the economy and what we can manage,” said Saulnier, the left-leaning think tank’s Nova Scotia director.
“The trend is that we’ve been going in the right direction and that we can manage the debt.”
She argued that those “feeding the hysteria around debt and deficit” are the same that advocate for tax cuts – reducing revenues in the first place and pushing provinces into debt.
“The trend since the '90s has really been to cut taxes, especially on higher income earners,” Saulnier said.
But Whalen dismissed the suggestion that raising taxes could help address government deficits, debt and interest payments.
“Nova Scotia is one of the highest tax jurisdictions in all of North America,” he said. “If you couple that with the aging population and weak prospects for economic growth, it’s a stretch to suggest taxes should be higher.”
Meanwhile, Locke admitted that the issue of addressing government deficits and debt “is not clear cut.”
“We could cut expenditures and balance the budget tomorrow,” he said. “But in so doing we could hurt a lot of people.”
