The King government's first full budget is also the province's first "collaborative budget”, which comes at a collective cost. Criticism has to be targeted with precision, as there is something for everyone in this budget – including shared debt.
The impact of arresting an economy, especially one in motion at the velocity being experienced on P.E.I. is now undeniable. Defibrillation was required, cardioversion was administered. Spending $172.7 million in excess of our revenues is the prescribed remedy, and hopefully this is enough to reset and propel the Island.
Jerome Powell, U.S. Federal Reserve Board chairman, was testifying before U.S. Congress Wednesday; the same day this budget dropped. He was challenged on his commitment to use whatever means necessary to maintain the U.S. economy. His reply echoed in simplicity, "Go big, … be judged over time."
The same sentiment has guided the architects of the Island's budget. Every department enjoys an increase in expenditures in accomplishing the largest deficit this province has ever experienced. The investments are more progressive, than conservative in their pandemic application.
I remain an advocate for tax reduction and seek this in every budget. The increases in basic personal income tax deduction and reduction of the small business tax rate are welcome. Tax deductions are expected in good times but controversial in bad. Tax reductions are a form of economic stimulation, one that I hope is not reversed. But public spending capital must originate from somewhere, and the tax pulls have been reduced.
Although projections forecast growth in the coming quarters, my sense is these are overly optimistic as the consumption and income taxes may be suppressed below projections in the coming year.
The early indications of economic ignition are positive. These must be the forecasts the province is basing models on. But if the assumptions are incorrect, we will have compounded the challenges as many local small businesses remain structurally challenged to reset to a pre-pandemic baseline.
A larger part of provincial spending is actually allocation and management of federal funds. A full $146 million is anticipated in new transfers, an offset of over half of the $265 million of increased expenditures.
In addition to the special line item of “COVID-19 response and recovery contingency” in every departmental budget, every single department is increasing salaries. At a time when business economic drivers are experiencing compression and stress; this is an unusual economic tactic (unless the investment in public sector salaries is driving the projected 21 per cent of tax generation). If the economy does not improve as anticipated, government will be faced with drastic austerity which can only be applied within.
The effect of deficit financing is measured in long-term carrying costs. In a zero-interest-rate environment, this is sound policy. Rates won’t be low forever, though, and there isn’t an articulated plan to recover this 2020-21 investment.
The current interest on debt is $128 million; an amount greater than the budgets of our three primary industries: agriculture, fisheries and tourism.
In a year’s time the economy will, hopefully, be back roaring as we reflect on an eight-week forced-fear-holiday. Entering this crisis, our provincial economy was stronger and better positioned to weather this economic pivot than most other provinces in our Dominion. If we can increase our population and spend multiplier, then we will have survived the industrial transformation COVID-19 induced.
If our economy falters, which it may in the fall, and if revenue projections are deemed overly optimistic, the province will be in a weakened position. The irony is we will be among the best positioned in a fragile situation.
If we take comfort in the aggressive position of the U.S. Federal Reserve and, by consequence, the Bank of Canada, our economies will not be allowed to suffer. The full weight of all available powers will ensure our stability, and P.E.I. may be the strongest entering this downturn and the strongest to emerge.
Blake Doyle is The Guardian's small business columnist.
