Decades of Deficits: Revenue Sources and Spending in New Brunswick

New Brunswick is currently experiencing a fiscal crunch. Revenues are below expectations and expenditures are proving difficult to control. Meanwhile the Federal Governmnent has announced a new formula for allocating equalization payments that will tie increases in health care payments to GDP growth, plus those payments will (after 2015) be allocated on a per capita basis. That might effectively reduce payments to NB once inflation, slow population growth, and growing health care costs are factored in. Fortunately, although the provincial debt is approximately $9 billion, interest rates are now low by historical standards and debt servicing has not yet caused a crisis. That is just as well, since slowing economic growth is doing a fine job of reducing government revenue all on its own.

The aim of this post is to present some historical background to NB’s funding sources and examine the role of health care spending as a driver contributing to spending increases over time. More details on how NB spends its revenue, and how that compares with spending in other provinces will be provided in following posts. As we will see (note the last chart below), when we adjust spending by inflation, government spending increases on things other than health care have been kept fairly modest in recent years.

In the chart below, NBREV is revenue raised by the province via taxes and fees, FEDT represents federal transfers to NB. The total of these two represents the total revenue available to the provincial government to fund programs. All data are from the Statistics Canada Provincial Economic Accounts. Data in this chart are not adjusted for inflation.
 

 
The chart below shows trends in the contribution of federal transfer dollars to overall expenditures. Note that, in the early 80s, NB was actually more dependent upon federal transfers than is the case now. After a period of decline, federal transfers have become more important as a component of revenue in recent years. Rather than reducing our dependency on federal dollars, we are now more reliant on those funds. Is that sustainable? I guess that depends upon how generous the population in the rest of country is willing to be as time goes by. You could also argue that the increase in reliance on federal revenues is an artifact of the recent recession. However, the downward trend pattern flattened in the mid-90s then went back up before the recession hit. This appears to be a long-standing problem, not a recent event.

 
In the following chart, the Statistics Canada Economic Account data shown above are re-stated to show relative amounts of revenue and expenditure. Data for 2010 and 2011 are from provincial budget statements and may not be directly comparable to Statistics Canada data. Note that over the past decade budget surpluses have been few and far between. We are fortunate that interest rates have been low during this period.

The chart below shows data in constant 2002 dollars, using the CPI provided by Statistics Canada (Cansim table 326-0020) to adjust values for inflation. REV represents total revenue available to the province (including equalization and other transfers); EXP represents total expenditures for that year. Expenditures are broken down into two parts: ‘Health’ is the total provincial government spending on health care, while “Other Exp” represents all other spending. Health care expenditure data are taken from the Canadian Institute of Health Information’s (CIHI) National Health Expenditure Database (NHEX).

Note that health care expenditures have gradually increased as a proportion of total spending, rising from 30% of the total in 1981 to 40% in 2011. Non-health care spending (when adjusted for inflation) has largely plateaued since about 1994, apart from the marked but temporary increase in 2008-2009 – likely due to provincial and federal stimulus programs during those years. The steady increase in inflation-adjusted health care spending mean that health care absorbs a growing proportion of government revenues and is responsible for much of the increased government expenditure in recent years. In subsequent posts, we will look at how the health care dollar is spent in comparison to other provinces.