Provincial Budgets

February 29, 2024 | 14:18

Nova Scotia Budget (FY24/25) — Quick Return to Deficit

Economist

Robert Kavcic

Senior Economist and Director
Economics

Robert has been with BMO Capital Markets since 2006. He plays a key role... (Read more)

Shelly Kaushik

Economist
Economics

Shelly joined BMO Economics in 2020 and conducts research on the Canadian and regional economies. She also provi... (Read more)

Robert Kavcic

Senior Economist and Director
Economics

Robert has been with BMO Capital Markets since 2006. He plays a key role... (Read more)

Shelly Kaushik

Economist
Economics

Shelly joined BMO Economics in 2020 and conducts research on the Canadian and regional economies. She also provi... (Read more)

The Province of Nova Scotia is projecting a $467 million deficit in FY24/25 (0.8% of GDP), a notable turn after three consecutive years in the black. The FY23/24 balance is now pegged at small $40.3 million surplus, improved from the latest quarterly estimate of a $264 million deficit. Nova Scotia has seen strong revenue upside through the fiscal year, but will turn that momentum around by ramping up spending in a number of priority areas. Looking further ahead, Nova Scotia shows no plan to balance the books, instead allowing deficits averaging $515 million to persist through FY27/28.

There were a number of policy measures announced in this budget, with a large chunk addressing affordability challenges. Notable measures include:

Personal income tax brackets, the basic personal amount, and some tax credits will be indexed to the provincial inflation rate starting January 1, 2025. This will have minimal impact this coming fiscal year, but provide tax relief of $150-$160 million by 2028.
Additional funding for housing affordability, including previously-announced removal of HST from purpose-built rental construction.
Over $7 billion on healthcare, including towards service delivery, and recruiting and training healthcare professionals.
A $579 million capital budget with spending largely targeted to healthcare infrastructure.
Borrowing program of $2.6 billion in FY24/25.

Nova Scotia saw strong revenues through the past fiscal year, which will leave the FY24/25 total well above prior plans. Total revenue (including Government Business Enterprises) is projected to rise a modest 2% to $15.8 billion in FY24/25, but that follows an upward revision of $1.4 billion (+9.6%) in F23/24 compared to last year's budget plan. Provincial personal income and sales tax revenues have been strong (including some prior-year adjustments that flowed into the fiscal year), while federal transfers continue to rise.

The Province's economic growth assumptions are reasonable from our perspective, with real GDP growth pegged at 1.7% this year and 1.9% in 2025 (our call is 1.4% and 1.6%, respectively). Similarly, nominal growth is estimated at a solid 3.9% this year (vs. our call of 3.7%) but moderates to 3.3% in 2025 (we're a bit stronger at 3.5%). The province's economic outlook continues to be supported by robust residential investment, tourism, and ongoing population inflows in the medium term.

Total spending continues to rise at a strong pace, up 5.6% in FY24/25. That includes firm 6.0% growth in departmental spending, including key priority areas such as health care. Nova Scotia hasn't been shy about its intention to spend, with growth now running above 6% for three straight years. But, to be fair, combined inflation and population growth has run at more than 7% over that period. Further ahead, departmental spending growth is expected to slow to below 2% per year in the three out-years of the fiscal plan.

Total borrowing requirements are pegged at $2.6 billion in FY24/25, almost $600 million more than in FY23/24. The historically high level includes funding of the deficit, as well as capital assets and various infrastructure spending priorities. Total borrowing is expected to rise further to $3.4 billion in FY25/26 before ebbing through the remainder of the forecast horizon. Note that the Province maintains an almost $1 billion discretionary fund to manage interest rates and short-term liquidity, and assist in the refunding of maturing debt—it does not expect to draw on this in FY24/25.

Net debt is expected to rise to 34.6% of GDP in FY24/25, up from 33.3%, as the deficit and robust capital spending program lift borrowing. While pushing higher, the ratio for FY24/25 was pegged at 34.8% at this time last year, so the upside surprise over the past year has at least helped keep the deterioration in check. The ratio will continue to increase steadily until it reaches 38.4% of GDP by FY27/28. This continues to run counter to the pre-pandemic trend, when Nova Scotia was improving steadily relative to some of its closest peers.

The Bottom Line: Strong upside revenue momentum in Nova Scotia is almost entirely getting funneled back into increased spending, leaving the string of deficits unchanged through the forecast horizon. This, and capital spending plans, will keep borrowing robust and the debt burden on the rise. Of course, it's hard to argue against the need when population growth demands have never been stronger.