In Nova Scotia this week, the Houston government will table its second budget. Thus far, the government has experienced unusually strong growth in revenues while funnelling most of this new revenue into new government spending. But new polling data suggest the government should be cautious about continuing this approach.
To understand why, we first must review the province’s fiscal position. From the time the government tabled the 2022 budget last spring through to December’s fiscal update, provincial revenue has grown 10.6 per cent or $1.3 billion. At the same time, provincial spending has grown 7.3 per cent or $966 million. Put differently, 71.7 per cent of new provincial revenue has been funnelled into new government spending.
Such strong revenue growth could have allowed the province to balance the budget, but instead, it’s still projecting to spend $142 million more than it receives in 2022/23. According to the most recent projections, at least three more deficits are on the horizon in 2023/24, 2024/25 and 2025/26.
Deficit spending now means higher taxes later. In simple terms, running a deficit in one year means that the full cost of that year’s spending isn’t covered by that year’s revenue, but rather some of the spending is covered by increasing debt. All else equal, taxes must be raised later to cover the full cost.
The problem? According to a recent poll conduced by Leger, Atlantic Canadians have little interest in higher taxes. In fact, 77 per cent of those polled felt taxes were too high in the region already, with 41 per cent reporting that taxes were “much too high.” Though data specific to Nova Scotia is not available due to an insufficient sample size, it’s reasonable to assume that the results would be fairly consistent in all four Atlantic provinces.
The polling data should not necessarily come as a surprise, as Atlantic Canada generally and Nova Scotia specifically are already among the highest-taxed jurisdictions in North America. Consider one recent study, which measured tax competitiveness across all 60 U.S. states and Canadian provinces, and found that Nova Scotia applied the second-highest tax rate on personal income for those who made $50,000 and the third-highest for those who made $75,000 (the province is also uncompetitive with peers when it comes to business taxes and sales taxes).
The available data suggest that many Nova Scotians would like to see their taxes decreased. Under the current fiscal approach, the government will be unable to reduce taxes in a meaningful way and will likely need to raise taxes barring a change in fiscal direction.
With government revenues strongly on the rise, these data should cause the Houston government to rethink its fiscal approach. By freezing or even simply restraining spending in the upcoming budget, it could balance the budget and create the opportunity for lower taxes in the future, a move that may prove popular for many Nova Scotians.
Alex Whalen and Jake Fuss are economists at the Fraser Institute.