In Prince Edward Island, the province’s ongoing budget deficits are causing government debt to rise, such that the auditor general recently warned provincial legislators about the costs of debt interest.  

The auditor general’s warning adds to a growing body of evidence, which suggests that P.E.I. must get its financial house in order. Canada’s Parliamentary Budget Officer (PBO) recently assessed provincial finances across the country, concluding that P.E.I.’s finances are unsustainable. While this is true of several provinces, it does not lessen the challenge nor the urgency to fix the problem.

What does it mean to be “unsustainable?”

According to the PBO, finances are unsustainable when the province’s debt relative to the size of the economy (GDP) grows indefinitely over the long term. This is the case in P.E.I. due to ongoing deficits, rising debt and other challenges such as an aging population and rising health-care costs.

The difference between sustainability and unsustainability is what is known as the “fiscal gap.” Currently, P.E.I.’s fiscal gap is an estimated $200 million (or 3.1 per cent of GDP). In other words, the provincial government must reduce spending or increase revenues by this amount to be sustainable over the long term.

The province’s recent budget added to this problem by projecting a $112 million deficit this year. According to the budget, the province does not plan to balance the books until 2024/25 at the earliest. The result of this deficit-spending is that net debt will top $2.6 billion, which breaks down to $16,285 per Islander. Servicing this debt costs almost $800 per Islander per year—that’s money diverted away from other important priorities such as health care, education or tax relief.

Debt is projected to increase in the future given the ongoing plans for deficit-spending, which is part of what prompted the warnings from both the auditor general and the PBO. As we wrote after the King government’s latest budget release, increasing spending and ongoing deficits are not a recipe for sustainability or a robust recovery.

What can be done to achieve sustainability?

First and foremost, the province must balance the budget as soon as possible. Even before the pandemic, the provincial government was increasing spending (on a per-person basis) for several consecutive years. Bringing spending in line with provincial revenue—and therefore balancing the budget—would stem the flow of yearly increases to debt. This would bring the province closer to sustainability, while also putting P.E.I. in a stronger position to weather any future downturns.

Like many governments across Canada, the government in Charlottetown hiked spending during the pandemic and is now left with ongoing deficits and rising debt. Whether this spending increase was required to manage the pandemic is a matter of debate. What’s clear, however, is that the province must get its fiscal house in order, particularly now as the worst effects of the pandemic appear to be behind us. This means heeding the warnings of a growing body of evidence by balancing the provincial budget as soon as possible.