Robert C. McLeod: Fiscal Update

Mr. Speaker, I want to take this opportunity to provide Members with more background on our fiscal situation.

As Members heard, on February 16, 2016, the federal Finance Minister announced a partial restoration of $24 million in annual Territorial Formula Financing funding lost through the unintended consequences of the data methodology revisions.

While this is welcome news, the GNWT had already included a scenario in its fiscal forecast presented to Members that included a partial restoration of the Territorial Formula Financing.  The problem, however, has not changed.  The GNWT still faces a situation where expenditures are growing and revenues are declining over the life of the 18th Assembly.  

Under this scenario, the GNWT operating surpluses will start to decline resulting in a small operating deficit position by 2019-20.  Put another way – unless we find a way to curtail our expenditures and/or grow our revenues by approximately $150 million over the next five years, the GNWT will continue to use short-term borrowing to pay for operating expenditures and to finance infrastructure investment.

Clearly our current fiscal situation is not sustainable, and, unless we take decisive action, we will be in a clear violation of the guiding principles in our recently approved Fiscal Responsibility Policy.  The formal approval of this policy by Cabinet re-confirms our commitment to responsible fiscal management, in order to produce the operating surpluses to fund at least half of our capital investments.  We cannot fund day-to-day operational needs by undertaking increased short-term borrowing that would see us increase our total debt to over a $1 billion and drive us unnecessarily closer to the federally imposed debt limit of $1.3 billion.  We cannot burden future generations and future governments with the costs of the services we consume today.   

We will pay for programs and services that meet our priorities and are affordable over the long-term.  Our government is committed to fiscal responsibility and our Fiscal Responsibility Policy.   We need to live within our means – not just for today or for just this year, but for the entire four years of the 18th Legislative Assembly.

As we start addressing our current fiscal situation, in the long-term, we are not encouraged by the five-year outlook for the NWT economy and its implications for GNWT revenues. Although some regions are benefitting from resource development projects, economic activity in other areas has slowed considerably.  Over the medium-term, the available information suggests a protracted decline in resource production. Existing diamond mines are maturing and currently planned projects will not replace their contribution to the territorial economy.  At the same time, exploration necessary for new development is also slowing down.  The expected slow economic growth and flat population growth are the main reasons for declining total revenue projections.

The NWT economic outlook and the implications for GNWT revenues are the 18th Legislative Assembly’s most serious challenges.  We need to support growth and diversification in the NWT economy with investments now, so that the closing of the existing mines in the medium-term do not shrink the economic base.  Promoting economic growth, and increasing the tax base, is important for the long-term health in own-source revenue.  However, unless we make changes in expenditure management we will not have the fiscal resources to make strategic economic investments, let alone sustain current programs and services.  Investments in infrastructure are vital because infrastructure provides the framework in which our economy operates.  We depend on infrastructure to transport goods and services between communities and improving and maintaining transportation infrastructure is critical to combat the high cost of living in all parts of our territory.  We need to continue to protect the infrastructure we already have and prevent our assets from falling into disrepair.  These are our schools, health facilities, and transportation and community infrastructure.  We choose to make strategic investments to support a prosperous economy that connects NWT residents with economic opportunities. Our infrastructure investments provide the means to deliver services important to NWT residents, including health care and education.

Reducing and delaying infrastructure investments is not an option.  It should go without saying that we need to protect and support our economy as it provides the jobs for our residents and the revenues for our government.  Today our economy is fragile and tomorrow we want an economy that is strong, diversified and sustainable.  This means we must address our fiscal problem now.  If we do nothing, we will be forced to take more serious action at the start of the 19th Assembly to remain in compliance with the Fiscal Responsibility Policy.  By taking decisive action now, we will achieve fiscal stability over the longer term that allows us to increase investment in infrastructure and fund new initiatives to address our priorities, improve residents’ lives and support our economy.

Make no mistake Mr. Speaker, we are also looking at actions to raise revenues but we have to be realistic about what we can and cannot do.  We cannot solve our fiscal problem solely on the revenue side.  As we all know, approximately 70 per cent of our revenues come from Territorial Formula Financing.  As provincial governments continue to restrain their spending to address deficits and increasing debt burdens, growth in our Territorial Formula Financing Grant will remain limited. 

Later this Session, I will be tabling a paper on possible options to increase our own source revenues but the paper does not provide any new information or alternatives than those provided to previous Assemblies.  Quite simply, our tax base is too small to make increasing taxes the answer to our declining revenue problem.  If we increase the tax burden on businesses and individuals we risk damaging the economy further.  Increasing taxes will take money out of the local economy, which affects family pocketbooks and the bottom line of local businesses.  It also reduces the attractiveness of the NWT as a place to do business, live and work.  Already our tax revenues are in decline as global events affect our resource-based economy.  Increasing tax rates on a declining tax base, will require careful consideration to make sure we do not jeopardize our ability to advance the Assembly’s priority to support and sustainably grow the economy.

Revenue projections for 2015-16 have declined $36 million from the 2015-16 Budget to $1.79 billion, largely due to lower resource and corporate income tax revenue projections. On the expenditure side, fire suppression cost and increased diesel fuel costs incurred by the NWT Power Corporation meant the GNWT was over its $30 million supplementary appropriation reserve allocation by $46 million.  Consequently, the $147 million operating surplus projected in the 2015-16 Budget is now projected to be $69 million, a $78 million decrease.

This mix of bad news reinforces the need for prudent and responsible fiscal planning, meaning we need to learn to live within our means.  Mr. Speaker, we cannot take the position of an Ostrich and bury our heads in the sand and pretend and hope to escape reality.  We are no longer in a position where we can keep expenditures at their current rate and hope to keep expenditure growth in line with revenue growth to maintain fiscal sustainability.  Revenues are declining, and we need to reduce the level of expenditures as well as restrain their growth.  We do not make this conclusion lightly.  Government expenditures are part of the economy that we are trying to support.  However, we need to consider an economic outlook that anticipates the difficulties in the resource sector, which is the main driver of our economy.  Commodity prices today and in the foreseeable future are much lower than in recent history, and we are already seeing the effects of these lower prices.  We also know that potential mines are having difficulty getting financing and even if these projects are built they will not replace the economic output of today’s existing mines.

We must take steps now to provide us with the fiscal flexibility to make strategic investments in our economy, such as the Mackenzie Valley Highway, the Wha Ti all-weather highway and the all season road into the Slave Geological Province, all of which will lower the cost of living and doing business, and provide skills training so NWT residents have more opportunities to contribute to and diversify the NWT economy. We also need this flexibility to have cash available to take advantage of any federally cost-shared infrastructure, like the New Building Canada Plan, which is needed to provide economic stimulus in our regions.

The GNWT has started doing its part by making the difficult decision to freeze any economic adjustments to the salaries of deputy ministers, senior managers and excluded employees for two years starting in 2016-17.

The priorities of the 18th Assembly include addressing the cost of living, supporting education, training, and youth development, fostering community wellness and safety, and investing in the economy, environment and climate change.  In short, we are seeking to foster the environment that allows NWT residents to create a future of prosperity.  This goal requires investments that we cannot make without addressing the expenditure side of the budget.

We were aware of the fiscal challenges as we came into this Assembly and we know we have difficult choices leading up to this year’s budget.  We must now work together to address the fiscal challenges so that this Assembly’s priorities may be realized in a fiscally responsible and sustainable manner.  We are building for the future in the decisions we make today.

Thank you, Mr. Speaker.