Monday, June 28, 2010

Well Said Holman.... and Pamela to...

Not the eyes, it's the '000s that count
The Guardian

The provincial debt and the provincial deficit are like Pamela Anderson's eyes - nobody pays any attention to them.

Well, almost nobody. Nerdy accountants and bankers will enthusiastically examine them - the debts and deficits, that is. Who knows, they might also be keen observers of Ms. Anderson's eyes, and one wouldn't be surprised if they occasionally lowered their sights a bit.

While few on the Island, and seemly none of the politicians, give two hoots about the provincial debt (now nearing the two billion dollar mark) it should come as no surprise that during one of his rare visits to the Island, the governor of the Bank of Canada felt obliged to mention it.

While Mark Carney didn't feel it was his place to offer advice to the provincial government, he did say that all governments should recognize the need to have sustainable budgets and sustainable debt loads. As the man who sets the interest rates in Canada, Mr. Carney, knows better than most that in times of low-interest rates, such as right now, large debts maybe sustainable, but this can quickly change if rates increase, as they inevitably will.

One look at the financial carnage that occurred in the past two years in America and parts of Europe illustrates the negative impact of unsustainable debt. Major financial institutions, iconic corporations (General Motors) and even independent countries, Iceland and Greece, have suffered extreme setbacks that will take years, if not decades, to overcome. In Canada, we escaped the worst of the crisis, though the auto industry and other industrial manufacturers, mainly in southern Ontario, were stung pretty badly.

On the Island, the only visible effects of the financial crisis last year was a slight drop in tourism numbers and a dramatic drop in lobster prices because the export markets dried up. A spinoff effect of this has been the collapse of the Island boat-building industry.

P.E.I. is experiencing an era of record low-interest rates, but it has also rung up a record high provincial debt. With only 140,000 people, and not a lot of industry, Prince Edward Island has a narrow tax base, and sustainability is an issue we ignore at our peril. With a debt of some $2 billion, a rate increase of 25 basis points would add $5 million to the provincial budget. A rate hike of only one per cent would mean the province would have to find an additional $20 million a year just to service the debt.

Since Mr. Carney's visit last week there has been little or no comment about his cautionary remarks on our critically important debt load. But the province's decision to spend $1 million to try to increase tourist traffic by inviting the television stars Regis and Kelly to perform on the Island has seen The Guardian full of letters to the editor on that subject. Many of the letters decried the government decision to fund the television program and most suggested other ways to spend the money. There were also letters supporting the government's move. But there were very few to suggest the government shouldn't have spent the money in the first place.

In retrospect, with exception of the already mentioned fishing industry, Prince Edward Island may have actually benefited from the recent financial crisis. Much of our aerospace industry is involved in the overhaul and refurbishing sectors which tend to see an increase in sales as companies cut back on new purchases. The Island also has a number of companies that service the construction industry and Canada's construction industry was a major benefactor of the federal government's stimulus funding.

Last summer we saw streets and highways throughout the Island in a constant state of upheaval as new or replacement sewer mains were installed and road surfaces were upgraded. A number of Island villages now have wonderful new sidewalks where none were deemed necessary until the stimulus money flowed out of Ottawa. It looks like the construction activity will be much the same this summer. But in the fall, the stimulus program ends.

When it comes to government money, Islanders are spenders, not savers. This won't change in the near future. Also there will be a provincial election in October, 2011, and it's doubtful the government will curtail its spending during an election year. But what will change is the source of the money being spent, and in spite of Mr. Carney's warning, an increase in the provincial debt is the likeliest scenario.

Alan Holman is a freelance journalist living in Charlottetown. He can be reached at: