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BMO Financial Group Economics Department
May 3, 2004
Atlantic Canada Economic Outlook
North American Economic Context
Expansionary fiscal and monetary policies
prompted a significant acceleration in US
economic activity in the second half of the
2003. Key contributing factors included a robust
housing sector and strengthening business
investment in machinery. For the entire year,
the US economy grew by 3.1%.
The US economy began 2004 on a robust
footing, with manufacturing exhibiting a firming
pattern and business investment gathering even
more momentum. While recently showing some
signs of an improvement, labour market
conditions have remained soft, as firms boost
output through productivity-raising capital
spending rather than through hiring. Overall, the
US economy is slated to grow by 4.7% for the
year. This would be a significant improvement
from the average annual increase of 1.9%
during the previous three years. Further out, the
expansion should temper to 3.9% in 2005 and
3.3% during the 2006-2008 interval.
After outpacing its US counterpart during the
previous four years, the Canadian economy
grew more slowly in 2003, with a real GDP gain
of just 1.7%. Factors contributing to the slower
rate of expansion included weak, halting US
growth in the first half, a sharp rise in the
Canadian dollar, the SARS outbreak, and the
discovery of ‘Mad Cow’ disease. Towards the
end of the year, however, the economy
Real GDP Growth (%)
5
4
3
2
1
0
00
01
Canada
This year, strong results in resource-based
sectors and home construction are being
tempered by a manufacturing sector which is still
coming to terms with a higher Canadian dollar.
Thus, we expect the average pace of economic
growth to rise only moderately to 2.6%. Looking
further out, Canada’s economic performance
should improve, with real GDP growth rising to
an average of 3.4% during the 2005-2008
interval. As growth strengthens and excess
capacity is used up, we expect the Bank of
Canada to gradually raise interest rates. The
90-day t-bill rate is projected to rise from an
average of 2% in 2004 to 3% in 2005 and to
reach its ‘policy-neutral’ level of 4.5% by late
2006.
From its low point of just under 62 US cents in
January 2002, the Canadian dollar rose rapidly,
climbing 27% to its recent peak of 78.8 US cents
in mid January of this year. Since its peak, the
dollar’s value has eased to about US 73.5¢
(April 28, 2004). Looking through recent shortterm gyrations, we expect the Canadian dollar to
consolidate at around US 76 cents during the
next couple of years.
Commodity Prices
During the past couple of years, commodity
prices rose sharply, providing a healthy boost to
Canada’s resource-based industries. This has
been very important to sustaining economic
growth in Atlantic Canada in a period of
generally weak macroeconomic conditions in
North America and adverse developments such
as SARS, rising global terrorism, and extreme
weather.
6
99
appeared to be embarking on a recovery path,
with growth picking up to a pace near 4% in the
fourth quarter from just over 1% in the third.
02
03
04
05
US
Atlantic Canada Economic Outlook 2004
BMO Financial Group’s monthly Commodity
Price Index, which tracks the progress of 19
commodities produced in Canada, rose 56%
from a recent trough in January 2002 to March
1
BMO Financial Group Economics Department
2004. All major sub-categories recorded strong
increases over that period: oil and gas surged
110%, metals & minerals climbed 42%,
agricultural products rose 34%, and forest
products increased 29%.
Tight market conditions for crude oil and
products and for natural gas have raised energy
prices to very high levels. While oil prices are
not likely to remain at their current level in the
upper-$30 range for US benchmark West Texas
Intermediate (WTI), they are projected to remain
high by historical standards. We expect the
price of WTI to just edge down from an average
of US$31.15/barrel in 2003 to US$30/barrel in
2004 and US$25 in 2005. Global production is
growing strongly enough to return inventories of
crude to comfortable levels, even with strong
demand in Asia. However, concerns about
gasoline refining capacity in the United States
and supply risks associated with Middle East
violence and political instability in Venezuela
and Nigeria have kept the risk premium on oil
very high. For their part, elevated natural gas
prices reflect a fundamental shortage of the
commodity in North America. Over the next
several years, high prices will be required to
“price out” some demand and validate the
economics of major projects to expand the
import infrastructure for liquefied natural gas and
to build pipelines to access northern frontier
supplies. High energy prices are supportive of
existing and expanding projects offshore
Newfoundland and Nova Scotia.
Within the metals & minerals sub-index,
particularly strong gains were recorded for nickel
BMO Commodity Price Index
1993 = 100
160
140
120
May 3, 2004
(129%), copper (100%), and lead (71%).
Aluminum recorded a significantly weaker gain
(22%), held back by difficult conditions in end
markets such as automotive and aerospace
manufacturing. The sharp increase in nickel and
copper prices stemmed from tightening global
inventories of the commodities as the rebound in
US economic growth and a very fast pace of
expansion in Asia, particularly China, bolstered
demand. Additionally, there have been a
number of work stoppages at major mines and
little in the way of new project development.
More recently, metal prices retreated sharply as
authorities in China indicated they might have to
take even stronger measures to bring growth
down to a more sustainable pace.
Nevertheless, prices have remained relatively
high and should remain strong over the next two
years, given supply restraints and our
expectations that global economic growth should
improve. This is positive for the major mining
project under development at Voisey’s Bay in
Labrador.
Over the same period, forest product segments
showed a more varied performance. Booming
residential construction in North America sharply
boosted the demand for panelboard and lumber.
The price of oriented strandboard surged 240%
to record-high levels, while lumber prices
climbed 42%. However, the prices of market
pulp and newsprint continued to labour under
generally weak demand conditions and morethan-adequate inventories in North America.
Rising consumption of pulp in China has allowed
for a moderate rise in prices while buyers of
newsprint have provided considerable
resistance to price increases. Over the course
of this year, improving global economic growth,
the summer Olympics, and the US presidential
election should raise the demand for and prices
of newsprint. The improving price picture for
market pulp and newsprint should provide some
welcome relief for related mills in New
Brunswick and Nova Scotia.
100
80
60
95:1
97:1
99:1
01:1
03:1
Atlantic Canada Economic Outlook 2004
The agricultural sub-index has risen, as very
tight global inventories of grains and oilseeds
have run into periods of poor harvests and rising
demand in the developing world. Although
2
BMO Financial Group Economics Department
May 3, 2004
prices are likely to remain volatile, buffeted by
changing forecasts of growing conditions, grain
and oilseed prices should remain firm due to
generally low inventories and rising global
demand.
healthy growth rates in 2003.
In part, the downswing in the region’s growth in
2003 reflects one-time, special factors in
Newfoundland and Prince Edward Island.
Newfoundland’s economy received a huge boost
in 2002 from the coming onstream of new oil
from the Terra Nova field and from resolution of
earlier production problems at Hibernia. PEI’s
economic growth in 2002 was boosted by the
return to normal growing conditions for the
potato crop, following a drought-induced decline
the previous year. However, aside from the
special-factor impacts, the pace of economic
growth also slowed substantially in Nova Scotia
and New Brunswick. In Nova Scotia, growth fell
to less than 1% -- the slowest pace since 1996 –
reflecting production problems at the Sable
Island natural gas field and the completion of
construction of a drilling platform the previous
year. New Brunswick’s economy fared better,
with growth outpacing the national level, albeit
well down from the previous year. While home-
Atlantic Canada Overview
Atlantic Canada’s economy underwent a
pronounced weakening in business conditions in
2003, when the pace of the region’s economic
growth slowed to 2.8% from a Canada-leading
6.7% in 2002. Nevertheless, even with this
slowdown, the region’s economy outpaced that
for Canada as a whole by close to one
percentage point. This relatively good growth
performance for the Atlantic Canada region
largely stemmed from strong market conditions
in the natural resource sector, particularly for oil
and gas and metal mining. Real output in the
natural resources sector rose by close to 8%,
following a 21% jump in 2002. The construction
and business services sectors also recorded
Canada's Regional Economic Outlook: 2002-2005
Newfoundland & Labrador
Prince Edward Island
Nova Scotia
New Brunswick
Quebec
Ontario
Manitoba
Saskatchewan
Alberta
British Columbia
Canada
2002
15.4
5.7
4.4
4.0
4.0
3.6
2.1
-1.5
1.5
2.4
3.3
Real GDP
% change
2003
2004
6.5
2.4
1.9
2.5
0.9
1.9
2.6
2.7
1.6
2.5
1.3
2.4
1.4
2.5
4.5
2.2
2.2
4.0
2.2
2.3
1.7
2.6
2005
2.5
2.3
2.9
2.8
3.2
3.4
3.2
2.8
4.0
3.1
3.4
Housing Starts
000 units
2002 2003 2004 2005
Newfoundland & Labrador
Prince Edward Island
Nova Scotia
New Brunswick
Quebec
Ontario
Manitoba
Saskatchewan
Alberta
British Columbia
Canada
2.4
0.8
5.0
3.9
42.5
83.6
3.6
3.0
38.8
21.6
205
2.7
0.8
5.1
4.5
50.3
85.2
4.2
3.3
36.2
26.2
218
1.8
0.7
4.9
3.5
55.0
78.5
3.7
2.8
34.0
30.7
216
1.8
0.7
4.2
3.1
39.5
73.5
3.4
2.6
32.0
24.5
185
Atlantic Canada Economic Outlook 2004
2002
1.3
1.8
1.2
3.4
3.4
1.8
1.6
2.0
2.6
1.6
2.2
Employment
% change
2003
2004
1.6
1.6
2.5
1.2
1.8
1.5
-0.2
1.4
1.6
1.2
2.7
1.2
0.3
0.8
1.0
0.3
2.8
2.6
2.5
1.9
2.2
1.3
2002
Retail Sales
% change
2003 2004
2.9
3.3
5.4
3.5
5.9
5.6
7.2
7.4
8.3
6.0
6.0
5.2
-0.4
0.7
-0.2
4.4
2.8
2.2
3.6
3.9
1.8
3.1
5.7
0.7
0.8
1.0
3.8
2.5
3.3
0.9
6.5
3.2
3.2
2005
1.3
1.5
1.3
1.2
1.3
1.0
0.8
0.6
1.9
1.6
1.1
Unemployment Rate
%
2002
2003
2004
2005
16.9
16.8
16.5
16.3
12.1
11.0
11.1
10.7
9.7
9.3
9.3
9.2
10.4
10.6
10.3
10.2
8.6
9.2
9.0
8.9
7.1
6.9
6.9
6.9
5.2
5.0
5.1
5.3
5.7
5.6
6.0
6.0
5.3
5.1
4.9
5.0
8.5
8.1
8.0
7.8
7.6
7.6
7.5
7.4
2005
Consumer Prices
% change
2002 2003 2004 2005
4.5
3.5
3.3
3.2
4.3
4.4
4.0
3.0
5.6
4.0
4.4
2.4
2.7
3.0
3.4
2.0
2.0
1.5
2.8
3.4
2.3
2.2
2.9
3.5
3.4
3.4
2.5
2.7
1.8
2.3
4.4
2.2
2.8
1.0
1.2
0.6
0.7
1.3
1.3
0.9
1.0
1.6
1.2
1.2
1.3
1.1
0.9
0.9
1.2
1.2
1.1
1.1
1.7
1.3
1.2
3
BMO Financial Group Economics Department
building and non-residential construction
advanced sharply, a decline in exports held back
overall growth in the province’s economy. For
the Atlantic Canada region as a whole, very
weak performance of the hospitality industry
(accommodation and food) also contributed to
lower economic growth in 2003. This reflected
collateral damage from the SARS scare, the
impact of the rising Canadian dollar, and
terrorism-induced declines in both personal and
business travel.
Looking ahead, we anticipate the region’s
economic growth to moderate even further to an
average of 2.5% over the 2004-2005 interval.
That would be approximately half a percentage
point below the expected national average. This
further moderation in growth largely reflects
anticipated developments in Newfoundland,
May 3, 2004
where production of oil is expected to grow more
slowly. Conditions in the other three provinces
should actually strengthen moderately. The
manufacturing and tourism sectors should
benefit from a stronger North American
economy and adjustments by both producers
and consumers to the higher level of the
Canadian dollar. Major oil and gas, metal
mining, and infrastructure projects should keep
construction and overall business investment on
a growing track. The half percentage point gap
between the Canada and Atlantic Region’s
expected growth during the next couple of years
reflects differing profiles of population growth.
The population in Atlantic Canada has actually
been edging down at an average annual pace of
0.1% during the past four years, while that for
Canada as a whole has been rising 1%. Thus,
on a per capita basis, our projections show
average growth in the Atlantic Canada of 2.6%,
compared to 2% for the country as a whole.
Real GDP by Selected Sectors
billions of constant 1997 dollars
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
97
98
99
00
Agr., Forestry, & Fishing
01
02
03
Mining, Oil & Gas
Share of Exports, Atlantic Canada (%)
45
40
35
30
25
20
15
10
5
0
Energy Fisheries Forest Rubber Food Mineral
Products
Processing Ores
1990
2003
Atlantic Canada Economic Outlook 2004
4
BMO Financial Group Economics Department
New Brunswick
The New Brunswick economy is expected to
continue expanding at mid-speed in 2004,
reflecting mixed results among sectors.
In 2003, the pace of activity slowed
considerably, although it still exceeded the
national average. The first decline in exports
since 1991 represented the biggest drag on
overall performance. The sharp rise in the
Canadian dollar, weak US demand through the
early part of the year, and tough market
conditions for many commodities important to
the province all negatively affected the external
sector.
Deterioration in the labour market – employment
fell in the year – also contributed to dampening
economic activity in 2003. However, the impact
on consumer spending has been, fortunately,
minimal. Strong growth in services expenditures
more than offset a decline in durable goods
purchases.
The main area of strength in the province has
been capital investment. On the residential side,
New Brunswick at a Glance
GDP, 2003 ($b)
Population, 2003 (millions)
22.4
0.750
Avg. Employ. growth, 3-yr. to 2003 (%)
Net Debt/GDP (%), Mar. 31/04 est.
1.0
31.0
Debt Rating (DBRS)
A
Sectoral Shares in 2003 (%)
Natural Resources
5.9
Manufacturing
15.7
Construction/Transport
11.1
Telecom/Information/Utilities
May 3, 2004
the hottest housing market in 20 years kept
home builders and renovators very busy. On
the non-residential side, highway construction
and the refurbishing of the Coleson Cove power
plant provided much of the impetus behind a
strong rebound in investment, after three years
of decline.
The main positive factor for the provincial
economy in 2004 will be an expected turnaround
in the external sector. With the Canadian dollar
projected to remain stable, the stronger US
economy and improved world commodity
markets should boost demand for New
Brunswick exports.
Also supporting overall growth this year will be
continued work on large capital projects. A
recent Statistics Canada survey indicated that
capital spending intentions are up nearly 10% in
2004, the second highest growth rate among
provinces, after Newfoundland and Labrador.
On a less positive note, advances in consumer
spending are expected to moderate. Smaller
gains in labour income following surprisingly
strong increases in 2003 (given the weakness in
employment) are projected to dampen domestic
demand. Housing starts are also forecast to
moderate from their 20-year high in 2003.
Finally, the fiscal situation will impose a drag on
the economy. The recent 2004 provincial
budget called for spending restraints in order to
keep the balance in the black. The government
plans to freeze public service wages and cut
Private and Public Capital Spending in
New Brunswick ($ billions)
4.5
4.0
7.1
Wholesale/Retail Trade
11.0
Finance/Real Estate
17.6
Education/Health
11.8
Recreation/Hospitality
2.8
Business Services
4.7
Personal Services
2.4
Public Administration
9.8
Atlantic Canada Economic Outlook 2004
3.5
3.0
2.5
2.0
91 92 93 94 95 96 97 98 99 00 01 02 03 04
5
BMO Financial Group Economics Department
May 3, 2004
employment (by about 750 positions). Overall, a
$54 million surplus is projected for the 20042005 fiscal year, after a $123 million deficit in
2003-2004.
demand in the first part of the year, the rise in
the Canadian dollar, and softer conditions
experienced by a number of key industries,
including tire manufacturing.
All considered, economic growth in 2004 is
projected to remain little changed from 2003, up
marginally by 0.1 percentage point to 2.7%.
This rate of expansion is seen to be only
minimally surpassed in 2005.
The drop in exports weighed heavily on the
manufacturing sector. The effect was
compounded by a steep fall in shipbuilding
activity, following the completion of a drilling
platform in 2002.
Nova Scotia
The Nova Scotia economy is expected to
rebound in 2004 from a poor performance in
2003. Still, projected growth this year remains
well short of the national average.
In 2003, Nova Scotia ranked last among
provinces in economic growth, as overall activity
was adversely affected by declines in natural
gas output, exports, manufacturing activity, and
business investment. Lower volumes of natural
gas production reflected maintenance work at
offshore facilities and smaller reserve estimates
of existing gas fields off Sable Island. Exports
fell for the first time since 1995, hit by weak US
Nova Scotia at a Glance
GDP, 2003 ($b)
Population, 2003 (millions)
Avg. Employ. growth, 3-yr. to 2003 (%)
Net Debt/GDP (%), Mar. 31/04 est.
Debt Rating (DBRS)
28.8
0.936
1.3
Business investment softened as a result of a
sizable drop in capital spending on machinery
and equipment. Solid performance by
residential construction – with housing starts
reaching a 12-year high – and sustained
demand for non-residential structures from
energy project developers provided some offset.
Damage caused by Hurricane Juan also
contributed to boost reconstruction and repair
work in the province.
The main drivers keeping the economy afloat in
2003 were steady growth in consumer spending
and a rebound in public administration output.
Total consumer spending was sustained by
rapidly rising outlays on services. An increase in
government program spending allowed the
public administration to grow for the first time in
three years.
The economic engine is expected to pick up
steam in 2004, as natural gas production
receives a boost from the entry into service of a
new field – Alma – and as manufacturing
44.1
A Low
Nova Scotia Natural Gas Production
Billion m 3
Sectoral Shares in 2003 (%)
Natural Resources
5.3
Manufacturing
11.0
Construction/Transport
10.3
Telecom/Information/Utilities
6.9
6
5
4
Wholesale/Retail Trade
11.4
Finance/Real Estate
21.4
Education/Health
13.0
2
Recreation/Hospitality
3.4
1
Business Services
4.8
Personal Services
2.3
Public Administration
Atlantic Canada Economic Outlook 2004
10.2
3
0
2000
2001
2002
2003
6
BMO Financial Group Economics Department
exports benefit from stronger US demand.
Continued capital spending in the energy sector
will fuel business investment. This should more
than compensate for some slowing in housing
starts. A Statistics Canada survey done earlier
this year signaled an increase (albeit marginal)
in capital spending intentions for 2004, after a
decline in 2003.
Low interest rates and moderate growth in
employment should continue to sustain
consumer spending, although the rollback of
part of a personal income tax (PIT) cut by the
provincial government has made conditions less
stimulative than earlier expected.
The cancellation of most of the 10% PIT cut,
which came into effect only this past January,
was the main feature of the 2004 provincial
budget presented in April. It became necessary
in order to ensure that the budget balance
remains positive in the face of rising
expenditures. Program spending in the 20042005 fiscal year is slated to rise quite rapidly,
with health care receiving a substantial boost in
funding. Community services also will get
noticeably more. While the budget will remain in
the black, the Nova Scotia government appears
to have abandoned its tax cutting plans in favour
of enhancing government services.
Overall, growth in the Nova Scotia economy is
projected to bounce back to 1.9% in 2004 from
0.9% in 2003. While this would represent an
improvement, it would not be sufficient to raise
the province from the bottom of the provincial
standings. Further improvement to 2.9% is
projected for 2005. Actual performance could
be even stronger if the Deep Panuke natural gas
project goes ahead. The project has been on
hold since 2002, while its economics were being
re-evaluated.
May 3, 2004
The slowdown largely reflected a fall-off in
tourism activity, weakness in agriculture, and a
decline in exports. SARS, a stronger Canadian
dollar, and uneasiness regarding travel
combined to hamstring the tourism industry, with
the number of visitors falling close to 4% in the
year. The export sector was also hurt by the
dollar’s strength, as shipments abroad were
pulled down by a large decline in seafood
products. Additionally, farm cash receipts fell in
the face of soft prices for some key products.
Still, the island economy outperformed its
national counterpart in 2003, growing by almost
2% compared with 1.7% for Canada as a whole.
Provincial economic growth was supported by
improved conditions in construction. Driven by
low interest rates and buoyant labour market
conditions, home-building activity strengthened
substantially, with housing starts climbing to a
fourteen-year high of 814 units. Non-residential
construction was also solid in 2003, partly
reflecting capital expenditure on road building
and repair, education- and health-related
projects, and the building of manufacturing and
hospitality facilities.
Prince Edward Island at a Glance
GDP, 2003 ($b)
Population, 2003 (millions)
Avg. Employ. growth, 3-yr. to 2003 (%)
Net Debt/GDP (%), Mar. 31/04 est.
Debt Rating (DBRS)
3.9
0.138
2.1
32.9
A low
Sectoral Shares in 2003 (%)
Natural Resources
Manufacturing
Construction/Transport
Telecom/Information/Utilities
6.8
13.2
7.5
5.0
Wholesale/Retail Trade
10.5
Finance/Real Estate
19.4
Prince Edward Island
Education/Health
13.8
Recreation/Hospitality
4.2
After a robust expansion in 2002 – largely
reflecting a sharp recovery in crop yields –
economic growth in PEI decelerated in 2003.
Business Services
3.4
Atlantic Canada Economic Outlook 2004
Personal Services
Public Administration
2.6
13.5
7
BMO Financial Group Economics Department
The manufacturing sector turned in a solid
performance in 2003 as output rose 7% on the
strength of exports of aerospace products and
new activity in the printing industry. A
respectable potato crop also provided the basis
for an increase in frozen food output. However,
from a revenue standpoint, manufacturing
shipments increased by just over 2% – a rate
well down from recent years – reflecting the
negative impact of the Canadian dollar’s
strength.
Mirroring robust activity in construction and
manufacturing, employment creation quickened
to a pace of 2.5% in 2003. While this rate of job
growth was sufficient to push down the
unemployment rate more than a full percentage
point to 11%, healthier labour market conditions
could not manage to boost consumer spending.
Retail sales remained essentially flat in the year
(-0.4%), lacking the contribution of a more
vibrant tourism industry.
The province is expected to see economic
activity pick up in 2004, largely on continued
strength in construction and an improvement in
the tourism and manufacturing industries. While
residential construction is likely to temper, low
interest rates will be a continuing source of
support. Housing starts are slated to top a
relatively high 700 units and renovation will likely
continue apace. [Residential building permits
are being issued at a rate well above the
national average]. Moreover, non-residential
construction activity should remain robust
judging from the strength of building permits and
Prince Edward Island: Housing Starts
Units
91
93
95
97
99
01
03
a recent Statistics Canada survey which shows
intentions to raise investment by 7%.
Consumer spending is expected to rise in 2004,
although gains will likely be minimal amid a
tempering in job creation. Retail sales are
slated to register a meager increase (0.7%),
after remaining flat in 2003.
The public sector is also not expected to
contribute significantly to growth in light of the
higher taxes and spending cuts announced in
the recent budget, as the provincial government
attempts to eliminate its deficit and reduce debt
levels. Overall, economic growth in PEI is
projected to run at an average annual pace of
2.4% during 2004 and 2005.
Newfoundland & Labrador
Newfoundland and Labrador turned in another
outstanding performance in 2003, with the
economy growing 6.5% following an outsized
expansion of 15.4% in 2002. The increase in
output largely reflected strong activity in crude
oil extraction as raised daily production limits at
the Hibernia and Terra Nova oil fields
Newfoundland & Labrador at a Glance
GDP, 2003 ($b)
Population, 2001 (millions)
Avg. Employ. growth, 3-yr. to 2003 (%)
18.0
0.520
2.0
Net Debt/GDP (%), Mar. 31/04 est.
57.9
Debt Rating (DBRS)
BBB
Sectoral Shares in 2003 (%)
Natural Resources
900
800
700
600
500
400
300
200
100
0
89
May 3, 2004
05
Atlantic Canada Economic Outlook 2004
23.8
Manufacturing
6.1
Construction/Transport
8.0
Telecom/Information/Utilities
7.3
Wholesale/Retail Trade
9.3
Finance/Real Estate
15.2
Education/Health
13.9
Recreation/Hospitality
2.2
Business Services
3.4
Personal Services
2.0
Public Administration
8.9
8
BMO Financial Group Economics Department
contributed to brisk crude oil output growth [in
excess of 20%]. Economic activity in the
province was also driven by non-residential
construction, reflecting project development in
energy and mining (White Rose, Voisey’s Bay)
and public sector infrastructure (highway
construction, and school and health care
facilities). Residential construction also
experienced buoyant activity in 2003, spurred by
low interest rates and upbeat labour market
conditions, including substantial gains in
personal income.
Robust activity in non-residential construction
gave a fillip to job creation in 2003, helping to
nudge the province’s elevated jobless rate
down. Improving labour market conditions
boosted consumer confidence and fueled a
sharp acceleration in retail sales (5.2%). Home
building continued at a fast clip, with starts, at
2,690 units, hitting their highest level since 1991.
Manufacturers also contributed to the province’s
strong performance, with 12% growth in
shipments which, at the national level, had
remained flat. Although exports suffered a
substantial drop (-14%), as the higher Canadian
dollar reduced the value of sales of commodities
such as oil and gas and paper, there were bright
spots in refined petroleum products, fishing and
seafood products, and iron ore.
Economic growth in the province is expected to
temper notably in 2004, largely reflecting more
moderate gains (or possibly declines) in crude
oil production. However, non-residential
Newfoundland Crude Oil Production
(% Change)
100
May 3, 2004
investment associated with major mining
projects should continue to support the
expansion. Residential construction, too, should
remain at a fairly high level of activity. While
some moderation in home building activity is
anticipated, housing starts are expected to
remain at a fairly high level (1,800 units) and low
interest rates should continue to encourage
renovation activity, which has been running at a
very brisk rate.
The manufacturing sector should also continue
to register good growth in 2004, with firm
demand for refined petroleum products.
Shipments of iron ore have also been increasing
at a fast pace, boosted by strong global demand
for steel. Retailing activity should also remain
buoyant in 2004, as consumer spending is
bolstered by rising employment and labour
income. So far, retail sales have increased at a
pace near 7%, much faster than the national
average, and are expected to grow by 6% for
the year as a whole.
In contrast, the public sector will not add any
impetus to provincial economic growth as the
government grapples with deficit and debt
reduction. Public spending is budgeted to rise
very slowly, some taxes are to be raised, and
approximately 4,000 public sector jobs are
slated to be cut.
Overall, the economy of Newfoundland and
Labrador is projected to grow by 2.4% in 2004,
well down from its heated pace of the past two
years. Nevertheless, growth at that rate would
be close to that projected for the country as a
whole (2.5%). In 2005, the economic expansion
in Newfoundland and Labrador is expected to
continue at a similar pace.
80
60
40
20
0
1999
2000
2001
2002
2003
2004
Atlantic Canada Economic Outlook 2004
9
BMO Financial Group Economics Department
May 3, 2004
Fiscal Finances: Analysis of Budgets for 2004-2005
New Brunswick
New Brunswick’s 2004-05 budget, presented on
March 30, calls for a $54 million surplus after a
$123 million deficit in 2003-04 on a consolidated
basis. The corporate tax rate on small business
was lowered to 2.5% — the lowest in the
country. A public service wage freeze will be
implemented, and about 750 public service
positions will be eliminated in order to keep
spending under control.
2003-04 results
The balance for 2003-04, budgeted at a deficit of
$101 million, is now estimated to be a deficit of
$123 million. The government claims that the
deficit is $21 million (not shown on the table at
right), but this is including a $102 million transfer
from the province’s fiscal stabilization fund, and
is therefore not on a consolidated
basis. The fiscal stabilization fund will
no longer cause any confusion about
the true surplus or deficit, as the
$102 million withdrawal from the fund
in 2003-04 left it fully depleted.
Revenues were $31 million (0.6%)
under budget. Own-source revenues
were $35 million (1.1%) above
budget, despite real GDP growth in
2003 coming in below the projection
in last year’s budget — 2.0% vs.
2.8%. (We estimate 2003 real GDP
growth at only 1.6%.) Personal
income tax and sales tax revenues
were well above budget, but
corporate income tax revenues were
well under. Federal transfers were
$66 million (3.5%) under budget due
to the downward equalization
adjustments that affected all the
equalization-receiving provinces.
Spending was $38 million (0.7%)
under budget. Program spending
was $71 million (1.6%) over budget, with most of
the spending overrun occurring in the
Department of Health and Wellness. However,
low interest rates and a strong Canadian dollar
reduced debt service costs by $109 million
(16%).
New Brunswick’s balanced budget legislation
requires that the province balance its budget
cumulatively over a four year period. A four year
period ended at the end of 2003-04, with the
cumulative surplus over that period estimated at
$162 million.
2004-05 budget
For 2004-05, the government projects a surplus
of $54 million. The province has instituted a
change in accounting policy for 2004-05. It has
moved to full accrual accounting, whereby
New Brunswick Fiscal Summary
$ millions
Budget
2003-04
Latest
Estimate
2003-04
Budget
2004-05
3,230
1,905
5,135
3,265
1,839
5,104
3,371
1,992
5,363
4,558
697
5,255
4,629
588
5,217
4,664
604
5,268
Ordinary account balance
-120
-113
95
Capital account
Special purpose accounts
Special operating agencies
Sinking fund earnings
-241
1
14
245
-246
3
10
223
-332
0
11
228
Change in net debt
-101
-123
2
Ordinary account
Revenue
Own-source
Federal transfers
Expenditures
Program spending
Debt service costs
Net investment in tangible capital assets
52
Balance
54
Atlantic Canada Economic Outlook 2004
10
BMO Financial Group Economics Department
capital assets are recorded as assets and then
expensed gradually over their useful lives, rather
than expensed in the year of acquisition. Under
the old accounting policy, the budgeted surplus
for 2004-05 would be $2 million.
There were no new taxes or tax increases in the
budget, and one tax cut. The tax cut was to the
small business corporate income tax rate, which
will fall from 3% to 2.5% on July 1, 2004. This
will make New Brunswick’s rate the lowest in the
country. (At 3%, New Brunswick was tied with
Alberta for the lowest rate.) Also, on July 1,
2004, the net income limit for eligibility for the
small business rate will increase from $400,000
to $425,000. These tax measures will cost the
provincial coffers $2 million in 2004-05.
Though there were no tax increases, higher fees
for some government services, along with
increased fines and penalties are expected to
raise $23 million.
In total, revenues are budgeted to rise $259
million (5.1%) in fiscal 2004-05. Own-source
revenues are slated to rise $106 million (3.2%),
including the above-mentioned tax cut and
increases in fees, fines and penalties. This rate
of increase appears to be conservative in light of
the economic outlook and the above-mentioned
revenue enhancing measures. The government
forecasts real GDP growth in 2004 of 2.8%
(4.0% nominal) — almost identical to our
forecast for real GDP growth of 2.7%.
Federal transfers are expected to rise $153
million (8.3%) in fiscal 2004-05, as both
equalization payments and health and social
transfers increase. The health and social
transfers include New Brunswick’s share ($47
million) of the recently confirmed $2 billion
federal supplement.
May 3, 2004
are to be found in General Government ($42
million or 9.2%) and a number of other areas.
About 750 public service positions are to be
eliminated, and the budget includes no funds for
public sector wage increases. Debt service costs
are to rise $16 million (2.7%).
Capital account expenditures are budgeted to
rise sharply by $86 million (35%) in 2004-05,
with increases for hospital, school and,
especially, road construction.
Debt levels and credit ratings
Net Brunswick’s net debt stood at $6.713 billion
at the end of 2002-03, and it is estimated to
have risen to $6.836 billion as of the end of
2003-04. The net debt is budgeted to drop
slightly to $6.864 billion by the end of 2004-05.
As a percentage of GDP, net debt has fallen
continuously for the past few years, reaching
31.0% at the end of 2003-04. Thus, the 2003-04
deficit ($123 million or 0.6% of GDP) was not
large enough to increase the net debt/GDP ratio.
The net debt/GDP ratio should fall further to
29.8% by the end of 2004-05 if the budget
targets are achieved. This would result in New
Brunswick having the lowest net debt/GDP ratio
of the five eastern-most provinces (the Atlantic
provinces and Quebec) — a position currently
held by Prince Edward Island.
New Brunswick is rated high-A (with a positive
outlook) by Moody’s, mid-A (with a positive
outlook) by DBRS, and low-AA (with a stable
outlook) by S&P. The actions taken in this
budget to eliminate the deficit may prompt
Moody’s and DBRS to upgrade the province.
Commentary
New Brunswick’s recent fiscal history has been
fairly consistent, with a mix of small surpluses
and small deficits, combined with declining
debt/GDP ratios. It remains to be seen whether
the spending restraint proposed in this budget
can actually be implemented in the face of
significant spending pressures. But even if a
deficit results, it will likely be small enough to
keep the net debt/GDP ratio on a downward
track.
Ordinary account spending is budgeted to rise
$51 million (1.0%). Program spending is
budgeted to rise $35 million (0.8%), with the
largest increases for the Departments of Health
and Wellness ($68 million or 4.4%), Family and
Community Services ($11 million or 1.6%), and
Education ($10 million or 1.3%). Cost savings
Atlantic Canada Economic Outlook 2004
11
BMO Financial Group Economics Department
Nova Scotia
Nova Scotia’s 2004 budget, presented yesterday
by Finance Minister Peter Christie, was
balanced for both 2003-04 and 2004-05, but
cancelled most of the 10% personal income tax
cut which came into effect less than four months
ago. A number of other tax increases were also
implemented.
2003-04 in review
The government projected a small $3 million
surplus for 2003-04 in its April 2003 budget, and
announced a 10% personal income tax (PIT)
cut, effective January 1, 2004. The 10% PIT cut
had been a plank in the Conservative’s 1999
election platform — the Conservatives had
promised to eliminate the deficit and then
implement the 10% PIT cut. With the deficit
eliminated, and the 10% PIT cut announced, but
not yet in place, the government called an
election for August 5, 2003. The New Democrats
supported the tax cut, while the Liberals
campaigned against it, arguing that the province
could not afford it.
The Conservatives were returned
to power, but reduced to minority
status. Shortly after the election,
the fiscal situation took a turn for
the worse. The government
implemented $32 million in
spending cuts in order to maintain
a balanced budget in the wake of
a slowing economy and spending
overruns in health. Then,
Hurricane Juan swept through the
province on September 29. A few
months later, the government
warned that it would likely run a
deficit, particularly as equalization
payments from the federal
government were reduced.
As it turned out, two
developments allowed the
province to run a surplus in 200304. The first was a large $152
million prior year’s adjustment on
May 3, 2004
income tax collections. (Personal and corporate
income taxes are collected by the federal
government, and remitted to the provincial
government based on estimates of the
province’s share. When the actual share
becomes known, a prior period adjustment is
made, with the province either paying money to
or receiving money from the federal
government.) The second development was a
change in accounting policy regarding capital
assets which reduced program spending by $25
million. The result was a small surplus now
estimated at $15 million.
Total revenues were $52 million (1.0%) above
budget. Own-source revenues were $197 million
(6.0%) above budget. But excluding the $152
million prior period adjustment, own-source
revenues were still $45 million (1.4%) above
budget, despite substantially weaker than
expected economic growth in 2003. The
government now estimates 2003 real GDP
growth at only 0.4% compared to the 2.9% rate
projected in last year’s budget. (High natural gas
prices had little effect on revenues as the
province will not collect significant royalties from
Nova Scotia Fiscal Summary
$ millions
Ordinary revenue
Own-source revenue
Federal transfers
Expenditure
Program spending
Pension valuation adjustments
Debt service costs
Operating surplus
Debt retirement plan
Consolidation adjustments
Income from government enterprises
Unusual items
Surplus
Actual
2002-03
Budget
2003-04
Latest
Estimate
2003-04
Budget
2004-05
3,175
1,769
4,945
3,308
1,976
5,284
3,505
1,831
5,336
3,575
1,983
5,558
4,567
-150
847
5,264
4,756
-14
893
5,636
4,817
-18
867
5,666
5,078
-9
878
5,946
-320
-351
-331
-388
12
338
1
354
-4
349
-10
42
359
32
3
15
2
Columns may not add due to rounding
Atlantic Canada Economic Outlook 2004
12
BMO Financial Group Economics Department
May 3, 2004
Sable Island for several years.) Federal
transfers were $145 million (7.3%) below budget
as the province was hit with downward revisions
to equalization transfers that affected most
provinces.
Corporate capital taxes were also increased.
The corporate capital tax on large corporations
was increased from 0.25% to 0.3%, while the
rate on financial institutions was increased from
3% to 4%, both effective April 1, 2004.
Total spending was $30 million over budget, with
program spending $61 million over (and would
have been $86 million over budget it not for the
change in accounting policy mentioned above).
About $57 million of the spending overrun
occurred in the Department of Health, and about
$20 million was due to last spring’s flooding, last
winter’s severe snow storms, and Hurricane
Juan. Debt service costs were $26 million under
budget, thanks to continued low interest rates
and the strong Canadian dollar.
There were a few modest tax cuts. The income
limit for the small business income tax rate,
currently $250,000, will be increased to
$300,000 in 2005 — previously it was scheduled
to increase to only $275,000 in 2005 and then to
$300,000 in 2006. Also, the province will match
a number of initiatives in the recent federal
budget that benefit caregivers, people with
disabilities, employees taking career-related
courses at their own expense, and military
personnel serving on overseas missions.
Tax cuts rolled back in 2004-05
In total, the personal and corporate tax changes
are expected to add $118 million to revenues in
2004-05. However, there were two other
revenue enhancing measures announced in the
weeks prior to the budget. On March 17,
tobacco taxes were increased $5.00 per carton
of 200 cigarettes, raising $23 million per year.
And, a number of government service fee
increases came into effect on April 1, raising $12
million per year. In total, tax and fee increases
will boost revenues by about $153 million —
thus, more than recovering what would have
been the full annual cost ($147 million) of the
10% PIT cut had it remained in place.
A surplus of $2 million is projected for 2004-05.
In order to maintain a balanced budget, the
government was forced to implement a number
of tax measures, including rolling back part of
the 10% PIT cut.
On January 1, 2004, a PIT cut was
implemented. The lower rate (on incomes up to
about $30,000) was reduced from 9.77% to
8.79%, the middle rate (on incomes between
about $30,000 and $60,000) was reduced from
14.95% to 13.58%, and the upper rate (on
incomes above about $60,000) was reduced
from 16.67% to 15.17%. Mr. Christie announced
yesterday that only the lower rate cut will be
maintained. The middle and upper rate cuts will
be cancelled, retroactive to January 1, 2004. In
addition, a new tax bracket will be introduced on
incomes above $93,000 with a rate of 17.5%.
Nova Scotia levies a 10% surtax on provincial
income tax in excess of $10,000. With the
surtax and the introduction of the new tax
bracket, Nova Scotia’s top marginal tax rate
jumps from 16.69% to 19.25%. Previously,
Nova Scotia had the fourth lowest top marginal
tax rate in the country, but it will now have the
second highest, after Newfoundland and
Labrador (see the chart below).
Atlantic Canada Economic Outlook 2004
13
In total, revenues are budgeted to rise $222
million (4.2%). Own-source revenues are to rise
$70 million (2.0%). Adjusting for the tax changes
and one-time items, we estimate the underlying
rate of increase for own-source revenues at
4.6%. This may be optimistic considering that
the government forecasts real GDP growth in
2004 at only 2.0% (3.4% nominal). Our forecast
for real GDP is somewhat more optimistic, at
2.7%. Federal transfers are to rise $152 million
(8.3%).
Program spending is slated to rise $261 million
(5.4%). Excluding the $20 million in 2003-04
disaster spending, the rate of increase rises to
5.9% — a fairly hefty rate of increase for a
province with nominal GDP growth expected to
BMO Financial Group Economics Department
be only 3.4%. Health receives an 8.0% increase,
Community Services 5.1%, and Education
(including universities) 1.2%.
Debt service costs are expected to rise $11
million (1.3%) due to slightly higher interest rates
and debt levels. Despite surpluses, debt levels
are increasing due to capital acquisitions.
Debt levels
Nova Scotia’s net debt (net financial liabilities)
stood at $12.206 billion (45.0% of GDP) as of
the end of 2002-03, and is estimated at $12.340
billion (44.1% of GDP) at the end of 2003-04. If
the targets set out in yesterday’s budget are
achieved, the debt will rise to $12.459 billion by
the end of 2004-05, but the debt/GDP ratio will
fall to 43.1%. Nova Scotia has the second
highest debt/GDP ratio among the provinces,
after Newfoundland and Labrador.
Nova Scotia received one credit rating upgrade
since its last budget — from DBRS. Moody’s,
Standard and Poor’s, and DBRS all rate the
province at low-A.
Commentary
Having successfully balanced the budget, Nova
Scotia appears to have abandoned its tax cutting
plans in favour of maintaining and indeed
enhancing government services. This is likely a
consequence of the consensus approach
required of a minority government.
May 3, 2004
Total revenues were $27 million under budget,
mainly due to federal transfers. Own-source
revenues were $8 million (1.4%) under budget,
mainly due to lower-than-expected tax
collections. Tax collections were lower than
expected despite the economy performing
slightly better — at least according to the
government’s estimates. Real GDP growth for
2003 was projected in last year’s budget at
2.0%, but the government’s latest estimate is
2.1%. However, we estimate that PEI’s real GDP
growth in 2003 was only 1.6%. Federal transfers
were $24 million (5.8%) below budget as the
province was hit by the downward equalization
adjustments that affected all of the equalizationreceiving provinces. Other revenue was $5
million above budget.
Total spending was $53 million (5.0%) over
budget. Program spending was where the
budget really got blown off course — $51 million
(5.6%) over budget. Spending overruns were
mainly in the Department of Agriculture,
Fisheries, Aquaculture and Forestry, the
Department of Health, and in General
Government. Debt service costs were $2 million
(2%) below budget thanks to continued low
interest rates. Capital expenditures were $8
million (22%) above budget. And, the balance of
crown entities was $4 million better than
expected — a $2.9 million surplus (which
appears in the table below as a -$2.9 million
deficit), compared to a budgeted deficit of $1.1
million.
Prince Edward Island
Tax hikes, spending cuts to reduce 2004-05
deficit
Taxes were increased and spending cut in
Prince Edward Island’s 2004 budget, presented
on March 30. The province is attempting to
reduce an $85 million deficit in 2003-04 to $33
million in 2004-05.
For 2004-05, the deficit is projected to fall to $33
million. The government plans to achieve this
through a mix of tax increases and spending
cuts.
Deficit balloons in 2003-04
PEI’s 2003-04 deficit is now projected to be
almost eight times as large as was budgeted last
year: $85 million vs. $11 million.
Atlantic Canada Economic Outlook 2004
14
Spending is budgeted to fall $40 million (3.6%).
Program spending will be cut $29 million (3%),
with the Department of Health and Social
Services receiving a 1.7% increase, the
Department of Education a 0.2% increase, and
most other departments forced to take cuts.
Notably, $9.5 million of the $29 million cut in
BMO Financial Group Economics Department
program spending is to come from a program
review, which is a way of saying that those
savings have not yet been identified. Capital
spending is to fall $16 million (38%). Debt
service costs are projected to rise $3 million,
while the surplus of crown entities is estimated
to fall $2 million.
the net debt to $1.303 billion, but a slight drop in
the net debt/GDP ratio to 32.7%.
Commentary
A $31 million (3.8%) increase in total revenue is
expected. Own-source revenues will be boosted
by a number of tax measures. The gasoline tax
was increased by 3¢ per litre, the tobacco tax by
$5.00 per carton of 200 cigarettes, the capital
tax on financial corporations will rise from 3% to
5%, and fees will be increased for a number of
government services. These measures are
expected to raise $12 million per year. Including
these measures, own-source revenues are
budgeted to rise $23 million (3.9%) in fiscal
2004-05.
The own-source revenue estimates are based
on forecast real GDP growth in 2004 of 1.2%.
The government attributes the slowdown in
growth to poor markets in the agricultural sector
and reduced government spending. Our own
forecast is for real GDP growth of 2.9%.
However, our forecast was prepared before this
budget was presented. The $45 million
budgeted drop in program and capital
spending represents 1.2% of GDP, which
accounts for most of the difference between
our forecast of 2.9% and the government’s
forecast of 1.2%.
Federal transfers are expected to rise $11
million (2.9%) in fiscal 2004-05, while other
revenues are slated to fall $3.6 million.
Debt levels
PEI’s net debt (net financial liabilities) stood
at $1.166 billion (31.1% of GDP) as of the
end of 2002-03. The large deficit in 2003-04
will push the net debt up to $1.27 billion
(32.9% of GDP) as of the end of 2003-04.
Clearly, this large a deficit is not
sustainable, as it pushed the net debt/GDP
ratio higher. The smaller deficit in 2004-05,
if achieved, should result in an increase in
May 3, 2004
Many provinces would be happy with an $85
million deficit — Ontario’s deficit, for example, is
projected to be $5.6 billion in 2003-04. As a
percentage of GDP, however, PEI’s 2003-04
deficit (at 2.2%) is twice as large as Ontario’s.
Although PEI’s 2003-04 deficit/GDP ratio is
nowhere near as large as Newfoundland’s
(5.3%), it is still cause for concern. In our
Commentary on last year’s budget, we noted
that PEI had a tradition of running small but
manageable deficits. (Deficits of up to 1% of
GDP can be considered small and manageable.)
However, that was before the 2002-03 deficit
came in a 1.7% of GDP, and the 2003-04 deficit
was estimated at 2.2%. Clearly, the province
needs to take action to keep its debt levels
reasonable. Whether or not its debt levels can
be kept manageable depends on how well the
province controls its program spending.
Prince Edward Island Fiscal Summary
$ millions
Revenue
Own-source revenue
Federal transfers
Sinking fund earnings
Capital revenue
Expense
Program spending
Interest charges on debt
Capital expenditures
Deficit of crown entities
Net change in tangible capital assets
Balance
Atlantic Canada Economic Outlook 2004
15
Budget
2003-04
Latest
Estimate
2003-04
Budget
2004-05
610.2
404.1
13.2
1.5
1,029.0
601.8
380.5
14.7
4.8
1,001.8
625.1
391.6
14.0
1.9
1,032.6
911.8
105.4
34.8
1.1
1,053.1
962.5
103.5
42.5
-2.9
1,105.6
933.5
106.6
26.2
-0.9
1,065.4
12.6
18.7
-0.3
-11.5
-85.1
-33.1
BMO Financial Group Economics Department
Newfoundland & Labrador
May 3, 2004
growth rate will slow is due in large part to an
expected 2.9% decline in offshore oil production
after a 17.9% increase in 2003. The even larger
drop in the nominal growth rate is partly due to
an expected decline in oil prices.
Newfoundland and Labrador’s 2004 budget,
presented on March 30, implemented a plan to
reign in the province’s burgeoning deficit,
including cutting about 4,000 civil services
positions over the next four years.
The province announced two tax measures
which roughly offset each other in terms of their
overall revenue impact. First, in 2005, the
province will implement a low-income personal
income tax reduction program costing $5 million
per year. Under this program, individuals with
incomes up to $12,000, and families with
incomes up to $19,000, will pay no income tax.
Second, tobacco taxes and vehicle registration
fees were increased, raising $7 million.
This was the first budget under the new
Conservative government elected last fall.
Following the election, the new government
engaged PricewaterhouseCoopers to conduct a
review of the province’s finances. The PwC
report projected deficits of $1 billion and rising in
each of the next four years.
2003-04 results
The deficit for 2003-04 is now estimated at $959
million vs. the budgeted amount of $666 million.
The balance on the current and capital accounts,
the province’s main operating funds, was
actually $63 million better than expected.
However, consolidation and accrual adjustments
drove the deficit higher. Agencies outside the
two main operating funds required a cash
injection of $183 million more than budgeted,
while accrual adjustments (mainly pension and
other retirement benefit accruals) were $173
million over budget. The $959 million deficit
represents 5.3% of GDP, which would make
it one of the largest provincial deficits in
Canadian history. (Alberta’s and
Saskatchewan’s deficits in the mid-1980s
were larger.)
2004-05 budget
For 2004-05, the deficit is budgeted to fall
to $840 million. Total revenues are
expected to fall in 2004-05, largely
reflecting a notable drop in federal
transfers. However, own-source revenues
are slated to increase moderately (3.3%).
The revenue projections are based on a
forecast of 1.3% real GDP growth in 2004 (0.9% nominal) after a 4.7% gain in 2003
(10.2% nominal). [This assumption of real
GDP growth in 2004 is moderately lower
than our forecast of 2.5%]. The
government’s assumption that real GDP
Federal transfers are projected to drop
significantly (15.2%) due to a decline in
equalization payments from the federal
government. Equalization payments are based
on the average fiscal capacity of five standard
provinces: British Columbia, Saskatchewan,
Manitoba, Ontario and Quebec. The larger the
gap between a province’s fiscal capacity and the
average of the five standard provinces
(especially Ontario, which makes up about half
the average), the larger that province’s
Newfoundland Fiscal Summary
$ millions
Budget
2003-04
Estimate
2003-04
Budget
2004-05
2457
1591
4048
2523
1582
4105
2607
1341
3948
3671
590
4261
3670
585
4255
3698
575
4273
Current & capital accounts balance
Borrowings - other entities
-213
74
-150
257
-325
37
Cash balance
Accrual adjustments
-287
-379
-407
-552
-362
-478
Accrual balance
-666
-959
-840
Current and capital accounts
Revenue
Own-source
Federal transfers
Expense
Program
Debt service
Atlantic Canada Economic Outlook 2004
16
BMO Financial Group Economics Department
equalization payments. The poor performance of
the Ontario economy recently has resulted in
lower equalization payments for most provinces.
Program spending is budgeted to rise only 0.8%.
The government implemented a public wage
freeze in January. With this budget, the
government announced that 4,000 of the 32,000
civil service jobs will be cut over the next four
years. (On April 1, several of the province’s
public service unions went on strike to protest
the wage restraint and the layoffs.) A number of
capital projects were cancelled. The number of
health boards and school boards will be
reduced.
The deficit on the current and capital accounts is
actually budgeted to increase, from $150 million
to $325 million. The overall deficit reduction is
expected to come from reduced borrowings of
agencies outside the two main operating funds,
and from reduced accrual adjustments. Since
less information is provided on these amounts
(borrowings of outside agencies, accrual
adjustments), it is difficult to comment on
whether these budgeted figures are reasonable.
Debt levels
Newfoundland’s debt levels are the highest in
Canada. By our preferred measure of debt —
net financial liabilities as a percentage of GDP
— Newfoundland’s debt stood at 58.0% at the
end of 2002-03. We estimate that it fell slightly to
57.9% at the end of 2003-04. Despite a lower
expected deficit in 2004-05, we project that the
debt will rise to 63.1% of GDP by the end of
2004-05, because of the expected decline in
nominal GDP in 2004.
Commentary
The government’s four-year deficit reduction
plan calls for the cash deficit ($407 million in
2003-04) to be reduced to $362 million in 200405, $320 million in 2005-06, $250 million in
2006-07, and zero in 2007-08. Notably, most of
the reduction is to come in the final year of the
plan. Even then, the province will be left with a
total deficit in the $400 – $500 million range.
Atlantic Canada Economic Outlook 2004
17
May 3, 2004
We noted in our Commentary on
Newfoundland’s budget last year that the deficit
had reached the point where drastic action was
required. The new government has now started
to take action, although it is facing a huge
challenge.