A sleight-of-hand budget

The budget appeared to fulfil a long-standing promise of Premier Darrell Dexter’s government to balance the books. But some commentators smelled a rat. The province’s most important newspaper, the Chronicle Herald, called the surplus “illusory.”

“As in the case of Higgs boson,” the paper editorialized, “a subatomic snippet first theorized in 1964 but only tentatively confirmed to exist last month, not everyone is sure the surplus is really there.”

But, in reality, the new budget makes for grim reading. First, Nova Scotia is appallingly dependent on equalization payments and health and social transfers from Ottawa. In 2013-14, these payments and transfers will add up to about $3.2 billion – one-third of the budget and wildly in excess of any other revenue item, including the sum of personal and corporate income taxes.

Second, the budget relies on growth in the provincial economy to boost the province’s income-tax revenue. The finance minister says personal income taxes are expected to grow by about 7% a year over the next several years. The budget projects a $145-million increase in personal income tax revenue this year alone. But in fiscal 2012-13, revenue from personal income taxes declined. Why should the next few years be any different? No one has given cogent reasons for the baffling optimism.

Third, the budget provides for modest spending cuts. But even some of the modest savings seem like sleight of hand. The Chronicle Herald pointed out that a change in accounting standards moved $50 million in expenses from the 2013-14 fiscal year back to 2012-13. Without this accounting manoeuvre, the elusive Higgs boson surplus would never have been discovered.

And what about the startling promise in the budget to reduce the HST by 1% in 2014 and by another 1% in 2015? That would unwind the 2% HST hike of 2010, an increase that was deemed essential at the time. The HST reductions, if made, would reduce annual revenue by about $400 million – an ugly portent for the future. But, of course, this particular future will arrive long after the forthcoming election.

Nova Scotia is living in cloud-cuckoo-land. While relying on massive subsidies, projections of future growth are conjured up out of thin air. Accounting tricks produce a tiny surplus. Genuine spending cuts of any significance cannot be found. The HST cut is a ticking financial time bomb.

And spending cuts are not a good idea. Nova Scotia already has the lowest per capita program expenditure in Atlantic Canada. Most economists agree that austerity would further depress the province’s economic performance.

What is to be done? There’s no easy answer. But a good start would be to face up to reality. Then, just maybe, there is some chance of improving Nova Scotia’s feeble economy.

© 2013 Investment Executive. All rights reserved.