THE 2007 PRINCE EDWARD ISLAND BUDGET

Released on April 10, 2007

HIGHLIGHTS

• Deficit transformed into a surplus in FY 06-07
• Surplus of $2 million projected for FY 07-08
• Rising federal transfers underpin revenues
• Tax cuts provided to individuals
• Increased health outlays fuel 8% jump in spending

In recent years, Prince Edward Island had been one of the last remaining deficit-fighting holdouts among Canada’s provincial jurisdictions. However, today’s budget confirms that P.E.I. has moved into surplus territory, supported by an unanticipated revenue windfall in fiscal year 2006-07 and an improved outlook for transfer payments on the heels of the March 19th federal budget. Basking in new-found fiscal room, the government has elected to ramp up expenditures in health, and to a lesser extent, education and has offered up about $34 million in personal tax relief.

Surplus of $1 million estimated for fiscal 2006-07

Since recording a deficit of $125 million in fiscal 2003-04, the P.E.I. government has worked to restore balance in its books partly on the back of spending restraint. In last year’s budget, the government had projected a considerably more modest deficit of $12 million in fiscal 2006-07, before a $95 million windfall in corporate and personal taxes and an upward revision to equalization payments pushed the fiscal position into the black for the first time since fiscal 1998-99. Not all of the year-end surprise flowed through to the bottom line, however, as spending in a number of areas – including health, education, the environment and social services – is estimated to have risen above the 2006 budget plan.

The upcoming year shows a small surplus projection of $2 million. Notably, a double-digit jump in federal transfers and a 5% gain in own-source revenues are forecast to drive up the total take 8% above last year’s estimated level. Notably, P.E.I. has benefited from moves by the federal government in its 2007 budget to reform the equalization system – including the shift to a 10-province standard – and to ramp up funding to the provinces for the environment and wait-time reductions. The healthy gain in own-source revenues is hinging on a sizeable increase in earnings from P.E.I. Energy Corporation and continued moderate but healthy real economic growth of 2% and job creation of 1%.

On the spending side of the ledger, outlays are expected to climb by 8%, fuelled by a 9% injection in the area of health care and a 7% increase in education funding. The province announced that it will cut university tuition fees by 10% next year and cap increases in the following four years at 2%. Skills training and the environmental initiatives were other areas of high priority in this year’s budget.

Last year, tax cuts for businesses stole the show, notably a plan to slash the small business income tax rate to a mere 1% by fiscal 2010-11. (The rate was trimmed from 5.4% to 4.3% on April 1, 2007 and threshold increased from $300,000 to $400,000). This year, tax reductions for households were the main focus of attention. The Basic Personal Amount, personal income-tax threshold levels, the Spousal Amount and the Age Amount will all be raised by 2% this year (in line with inflation) and by 4% in 2008. More substantive increases will be made to the High Income Surtax Threshold and Education Amounts for full- and part-time students.

Despite deficits, debt level expected to edge down

P.E.I.’s net debt (which is calculated as total liabilities less financial assets) is forecast to fall from $1.352 billion in fiscal 2006-07 to $1.330 billion in fiscal 2007-08. The drop in the level of debt, combined with growth in the economy, is projected to push down the province’s net debt-to-GDP ratio to just below 30.0%. P.E.I’s debt burden is expected to remain relatively low within the Atlantic region, but on the high side when stacked up against most other Canadian jurisdictions.

We applaud the government for staying the course on deficit elimination. A continued focus on reducing the debt burden, providing broad-based tax cuts and boosting investments in key strategic areas such as education and training (complemented with parsimony in other, lower-priority spending areas) will be critical to ensuring P.E.I.’s competitiveness strengthens over the long haul.

Derek Burleton, AVP & Senior Economist
416-982-2514