Can Sheridan hold the line?

P.E.I. Finance Minister Wes Sheridan presents his provincial budget in the legislature Wednesday, faced with a promise made last year to make a significant move towards eliminating the deficit.

Sheridan presented a three-year plan with his 2012-13 budget that would see the province move to a small surplus in 2014-15. It seemed like an audacious plan, given that he made that promise while estimating a $74.9 million deficit for 2012-13, one of the largest in provincial history.

A big part of the turnaround, said Sheridan, would come from a change in taxation. He announced that effective April 1, 2013 the province would introduce the harmonized sales tax, folding together the GST collected by Ottawa and the PST collected by the province. Unlike other provinces that have introduced the HST, the change would not be revenue neutral. Sheridan estimated an increase of $25 million in revenue from the new tax.

With that one change, Sheridan picked up a big chunk of the $40.7 million he needed to meet his target deficit for 2013-14.

The downside of HST

As part of the deal with the federal government to introduce the HST, the province received $39 million in transitional funding. While this seems like good news, it has an interesting impact on the deficit.

The first $25 million of that funding was delivered in 2012-13, and was applied directly to the deficit. Without it, the deficit would have been near $100 million. The final $14 million will come to the Island in the 2013-14 budget year.

The key here, for the deficit, is this is in effect an $11 million drop in revenue from this year to next.

Where will the money go?

Revenue is just one side of the budget. Reducing the deficit also means keeping control of expenditures, and Sheridan also outlined specific plans for doing that.

Health spending would increase 3.5 per cent this year, he said. All other department spending would stay the same. If Sheridan sticks to that plan, it will mean a $19.4M increase in expenditures in the coming year.

But it appears that line will not be held. Tuesday on Island Morning, Premier Robert Ghiz said the line would be held in most departments, with small increases in spending not only in health, but also in social services.

"It's really a budget about maintaining the programs that we have in place, trying to get our finances under control," said Ghiz.

"You are going to see minor increases in health care and in social programs. But besides that everything will be flat lined."

There are two possible reasons the province is now planning an increase in social services spending.

First, they may simply have to. The province is committed to a certain level of social services payments. Changes to employment insurance, reducing the number of weeks Islanders can receive EI benefits, have led to an expectation that more Islanders will be applying to social services.

More Islanders on social services means budgeting more money for that department. The second possible reason is that they can. Could provincial revenues be outpacing expectations?

Where does the money come from?

The biggest single source of revenue for the provincial government is provincial taxes. In 2012-13 that was forecast to be $777.4M, a 4.2 per cent increase over the previous year.

And this is where we get speculative.

Tax rates, for the most part, did not see significant increases. The increase in revenue was projected from an increase in economic activity, that is, the same tax rate applied to a larger base.

The biggest chunk of provincial taxes comes from income tax, and that tax base is directly tied to the number of jobs on the Island.

That number continues to rise. Early in 2013 there was an increase of about 2.6 per cent in the number of jobs on the Island than in early 2012. The government is certain to look at a larger basket of economic indicators than this, but as a single indicator of economic activity you could do worse.

Job creation in 2011-12 was actually a little better than over the last year. Using job creation as the sole measure of the province's tax base, we can estimate a 3.5 per cent increase in provincial tax revenue, or $27.2 million.

Pension problems

One of the largest contributors to the provincial deficit last year was an unexpected downturn in the market. A loss in the value of the province's investments, meant to pay for civil service benefits and pensions, forced the province to top up the employee benefits line of the budget by $16 million. Expecting continuing trouble, the province budgeted $10 million for 2012-13.

But the markets have performed much better. The TSE, down almost 14 per cent from March 2011 to March 2012, was up a little over two per cent from March 2012 to March 2013.

Sheridan may be thinking the worst of its pension problems are over, and that there are savings to be had.

Balanced budget delayed?

Sheridan appears to have several things going for him in drawing up this budget: a boost from the HST, a decreased need to fund pension from revenue, and an apparent increase in economic activity. On the downside, there is a loss of HST transition funding, and the need to spend more money in health.

Adding up those up (see sidebar), we can see Sheridan is close to shaving off the $40.7 million he needs to hit the deficit target he set last year. Islanders will see a big increase in the tax on gasoline on April 1 as well, bringing him that much closer.

The final variable to consider in budget predictions is the timing of eliminating the deficit. During budget consultations, Sheridan said Islanders were telling him there was no urgency to hit the 2014-15 target. Last week when asked directly by the media he was not ready to renew his commitment.

The numbers in this analysis are speculative, but they suggest Sheridan is on track to hit the target he promised last year. The question remains whether he still feels it is politically the right thing for the government to do.

For mobile device users: Should Finance Minister Wes Sheridan stick to his plan to balance the budget by 2014-15?