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The Quick Take: April 9, 2018

Balanced Budget Streak Continues for Prince Edward Island

Daniel Fields
Economist
National Forecast

“With a booming economy and an influx of federal transfers bolstering revenues, the 2018 Prince Edward Island budget had some fiscal wiggle-room to increase spending and provide some minor tax relief—all while maintaining a balanced budget over the forecast period.”

The 2018 Prince Edward Island budget, released on April 6, focused on maintaining a surplus position while providing some modest increases in spending. Additionally, the province had room to lower taxes on personal income (by increasing the basic exemption) and on small businesses (dropping the small-business rate by 0.5 per cent with plans to lower more in the future).

Areas that saw a sprinkling of new cash were social services and education. The budget increased investment for affordable housing and added more classroom teachers and childcare spaces.

With the influx of new cash, total program spending is expected to grow at a steady pace of 3.1 per cent between 2018–19 and 2021–22.

The 2018 Prince Edward Island budget is based on a real GDP forecast of 1.7 per cent in 2018 and 1.2 per cent in 2019. This is slightly weaker than the Conference Board’s current economic outlook.

The budget projects revenues to grow by 3.1 per cent between fiscal year 2018–19 and 2020–21 thanks to decent nominal GDP growth of 3.0 per cent over the same period.

We expect that there may be some upside risk to these numbers. Our own forecast includes a stronger outlook for total revenues based on higher equalization payments, the result of strong economic growth in Ontario and the phasing out of equalization payments to that province.

Overall, the government expects to maintain small surpluses throughout the forecast period, which is in line with last year’s budget expectations.

Despite maintaining surpluses over the forecast period, net debt is expected to grow by $101 million by 2021–22 due to capital spending. However, net debt as a share of GDP will fall according to budget estimates, from 33.1 per cent in 2017–18 to 31.6 per cent in 2021–22.

Overall, with solid revenue growth—which has upside risks thanks to higher equalization payments—and a realistic spending plan, Prince Edward Island is on a sustainable fiscal path going forward.

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