Les Smith Commentary
New Brunswick’s Gross Debt, or Funded Debt, as of March 31st, 2019, hit an alarming high of $18 billion.
This is an increase of $800 million over the previous year.
Funded Debt is the total long-term debenture debt the Province is legally bound to repay and has borrowed to fund its obligations.
Over the past ten years, the Funded Debt has increased $7.5 billion, or 72 per cent.
Said another way, New Brunswick has borrowed an average of $750 million each year for the past ten years to meet its obligations.
In her latest Financial Audit, Auditor General Kim MacPherson says,
“Funded debt is like household debt which many New Brunswickers have. The Province must make interest payments on its outstanding balance and repay principal as Funded Debt matures. The Province’s outstanding Funded Debt balance consists mostly of bonds issued in the financial market.”
She goes on to say that, “If the Province repaid $100 million per year, it would take 180 years to repay $18 billion. If we include NB Power’s debt of $4.6 billion, then we add another 46 years for a total of 226 years to repay the debt at this rate. Also, this does not include the annual cost of interest, also known as servicing the debt.”
In the last fiscal year, the cost of interest hit $648 million. This amounts to an interest payment of $1.775 million per day, or about $74,000 per hour, or $1,233 for every minute. Think about it!
It must be emphasized that this payment is interest only and does not reduce the principal amount outstanding.
The 2019-2020 Provincial Budget forecasts an interest payment of $677 million, up 4.5 per cent.
If the annual cost of interest was a government department, it would be the fifth largest, trailing only Health, Education, Social Services, and Transportation and Infrastructure.
Many years ago, the Province established a Sinking Fund with annual contributions intended to repay Funded Debt when it matures. The asset balance of the fund at March 31, 2019, was about $4.6 billion.
But something happened on the way to the circus. Over the past ten years, the Funded Debt exploded leaving the Sinking Fund in the dust.
In other words, the Sinking Fund Equity increased over the past ten years but not at a rate consistent with the increase in the Funded Debt.
To you and me, a Sinking Fund is similar to a savings account. As an example, if we know that we must replace the roof on our home in 15 years, and the cost is projected to be $10,000, then we should place $667 annually in our savings account so that we will have the money necessary to replace the roof 15 years hence.
But that did not happen to the provincial Sinking Fund.
Today, the Sinking Fund of $4.6 billion represents only 26 per cent of the total Funded Debt of $18 billion, excluding NB Power’s debt of $4.6 billion. Not good!
This is due to the Provincial Loans Act requiring only annual installments paid at a minimum rate of one per cent of the outstanding Funded Debt principal balance into the Sinking Fund.
To meet this requirement, the Province has simply left the accrued interest in the Sinking Fund which this fiscal year is projected to yield approximately $205 million.
So, what must we do?
Well, borrowing must stop and stop now!
In December 2019, Finance Minister Ernie Steeves tabled a Capital Budget of $600 million in the Legislative Assembly.
Believe me when I say this, the Minister has no money to fund the Capital Budget. The entire $600 million will be borrowed.
By continuing this borrowing, we are simply kicking the can down the road to the next generation of New Brunswickers, an action which, in my opinion, is entirely irresponsible.
For the life of me, I cannot understand why we continue to borrow when there is sufficient revenue to support our programs and capital investments.
One of these days, in the not too distant future, our children and grandchildren will be in places of leadership and authority in New Brunswick, and they will look back at our generation knowing that we did not exercise fiscal responsibility, and they will refer to us, in the words of Don Cherry, as a “Bunch of jerks.”
So how can the Capital Budget of $600 million be financed without borrowing?
Well, here is my take.
First, the Sinking Fund yields an annual interest of about $200 million. Use it.
Second, New Brunswick received over $200 million from Ottawa in additional equalization payments this fiscal year. Use these funds.
And third, draw down $200 million from the Sinking Fund, which would reduce it to about $4.4 billion.
We have our $600 million.
Now, I realize that this is a one-year, stop-gap, measure.
But use this year to restructure the finances of the province so that we live within our means.
Auditor General Kim MacPherson makes this observation. She says, “For the Province to significantly improve its fiscal situation, it will need to find a way to restrain spending, consider revenue increases or a combination of both in the future.”
I so agree.
I don’t know about you but I’m sick and tired of hearing that New Brunswick is last in the nation in, well, just about everything.
I truly believe we can restore progress and prosperity to New Brunswick.
Let’s be strong in leadership and united in purpose and direction.
Let’s continue our quest to build a province where you and I can pursue our own dreams and our children and grandchildren can chase theirs.
Les Smith is a former President of the Fredericton Chamber of Commerce and current member of the Coalition of Concerned Citizens led by President Daryl Branscombe. He lives in New Maryland.