Contents

A word from the Premier...

...and from the Minister

Introduction

A Look Back
Average Debt Per Nova Scotian - graphic
Provincial Debt levels - graphic

The First Principle
Budgetary Deficit - graphic
Where Your Dollars Go - graphic

The Second Principle
Reductions in Federal Transfers - graphic

The Third Principle
The Growing Tax Burden - graphic

The Fourth Principle
Currency Exposure - graphic

The Fifth Principle

Security and Opportunity
Debt as a Per Cent of GDP - graphic
Debt Per Capita
Debt Servicing as a Per Cent of Revenue
Decline of Nova Scotia Tax Rate

Shaping the Future

Appendix A - Legislative Agenda

Appendix B - Policy Proposals

Some Key Questions

A word from the Premier...

To build a more prosperous Nova Scotia, with more jobs and real opportunities for Nova Scotians, where the public services we all care about are effective and secure for today and tomorrow -- those were the goals when our government came to office. They are still our goals today.

To achieve those objectives, and we have made real progress, the province must be on solid financial footing. Hard work and sacrifice helped bring Nova Scotians back from the brink of financial ruin. Today, for the first time in a generation, it can truly be said that the government of Nova Scotia is living within its means.

Now it is time to take the next step. To shape a future with lasting financial security. Financial security means a future for quality health care, education, and other vital services. It means greater economic opportunity and jobs for Nova Scotians, as investment and business are drawn to the competitive advantages a financially strong Nova Scotia will offer.

This paper proposes a direction, a path toward that brighter future. The government looks forward to hearing from Nova Scotians who want to help shape the future.

The Hon. John Savage
Premier

...and from the Minister

Since coming to office, a necessary preoccupation of the government has been the financial state of the province. In 1993 Nova Scotia was on the edge of bankruptcy. Our government set a clear goal -- to balance the budget -- and adopted a plan to take us there.

We have achieved that initial financial goal. The budget will be fully balanced in 1996-97. But we still suffer the legacy of all those deficits -- a $9 billion debt, and $1 billion-a-year in debt charges.

New financial goals and a plan to achieve them are offered to Nova Scotians on the pages that follow. We believe this plan can shape a more secure, prosperous Nova Scotia. That's a goal all Nova Scotians share. Now, let's talk about how to get there.

The Hon. Bernie Boudreau
Minister of Finance

Introduction

An enduring commitment to sound financial management

After just two years, the government's Expenditure Control Plan is about to achieve its goal -- elimination of the budget deficit. That objective will be met this spring when the government brings down a fully balanced budget. Now the question for government and for the people of Nova Scotia is "Where do we go from here?"

This paper proposes a direction -- an enduring commitment to sound financial management that takes up where the Expenditure Control Plan leaves off. Expenditure control was a short-term plan to bring Nova Scotia's finances back from the brink of disaster. We propose a long-range program -- a framework for legislation and policy that can guide the public finances of Nova Scotia for years to come.

The elements of the program we propose include lower taxes for individual Nova Scotians and businesses and long-term security and viability for essential public services.

Our primary goal remains consistent: to create an increasingly attractive climate for economic growth, investment, and new jobs for Nova Scotians.

We hope the proposals we offer will generate public debate. We realize that for many the finances of the province seem too dull to contemplate. But the discussion is really about much more. It's about the future of our province, the public services government will offer, the level of taxation Nova Scotians will pay, and the opportunities that, together, we can create. The public debate and suggestions that flow from this paper will shape the action government will take.

From the outset, the priorities of the provincial government have been fiscal recovery, economic renewal, social responsibility, and a government redesigned to deliver each of these effectively. The principles and the actions proposed in this paper are designed to further the province's economic and social goals.

A Look Back

Increased spending, bigger deficits, and higher taxes

To help us see where we should go as a province, we need to understand where we have been.

In late 1981, Canada slipped into a deep recession and for almost two years suffered economic decline, double-digit inflation, and rising unemployment. In Nova Scotia, income levels dropped and consumer spending plummeted. Government tax revenue shrank. At the same time, a weak national economy slowed growth in federal transfer payments.

In 1982, to offset declining revenues, the provincial government of the day imposed sweeping tax increases. Personal income, corporate income, sales, gasoline, and tobacco taxes all increased. The government's revenue levels were restored, but the tax burden on individual Nova Scotians and businesses had increased significantly.

The balance between spending and revenue did not return after the recession. As a result, deficits mounted and the province's borrowing swelled. Between 1980 and 1985, provincial spending on health, education, and social programs grew at an average annual rate of 12.6 per cent, and debt-servicing costs grew at a staggering 24 per cent annually. In 1979, the net debt of the province was $869 million. By 1986 it had multiplied fourfold to $3.5 billion.

Government spending continued to out-pace revenue, and in 1992-93 deficit financing reached its zenith when Nova Scotia recorded a single-year budgetary deficit of $617 million -- the largest on record. Between 1990 and 1996 the provincial debt grew from $4.9 billion to $8.7 billion -- roughly $9,200 for every man, woman, and child in the province.

Fifteen years of deficit financing left us with debt-servicing costs that severely limit government's ability to respond to pressing needs. High taxes imposed over the past 15 years eroded our economy and undermined our competitive position. The proliferation and expansion of public services increased demand for and dependence on those services.

Higher taxes and borrowed money paid for the unfettered growth of government in the '80s. Dealing with the damaging legacy of fiscal policy in those years has become the public policy challenge of the 1990s.

The First Principle

Fiscal stability -- keeping the budget balanced

This year the province will produce a balanced operating budget. It will be the first in 15 years. A fully balanced budget -- the ability to pay all the bills for ordinary operations and for capital projects, without having to borrow -- will be realized in 1996-97. That's the good news.

The years of borrowing to pay for government's operations have left a damaging legacy of debt -- $9 billion worth. That's the bad news. This year, debt servicing will cost the province almost $1 billion. That's 21 per cent of provincial spending. (Sixty per cent of the budget goes to health, education, and social services, leaving 19 per cent for all other programs and services.) Fifteen years ago, debt-servicing costs accounted for only nine per cent of government spending.

The tax dollars we must devote to debt servicing are lost. They can never be used for hospitals, home health care, schools, textbooks, roads, parks or to pay doctors, teachers, nurses, and other public servants. We need to capture future debt payments, so those dollars can be used to support the public services Nova Scotians care about. And, as we recapture that income, we can lower the tax burden on Nova Scotians, creating a more viable, self-reliant economy that will produce the jobs Nova Scotians need.

The expenditure control plan initiated in 1993 brought government spending in line with revenue. That was accomplished by cutting program costs, a difficult, but necessary process.

Improving the public services Nova Scotians care about is a priority. This plan provides government with the flexibility to increase spending responsibly, as revenues grow.

For more than 20 years the government of Nova Scotia has been living off borrowed money. That mistake must not be repeated. In fact, it's not necessary to fall back into that trap. We can ensure the programs and services Nova Scotians need are secure today and into the future by paying for them as we go.

---

Principle:

Government spending cannot exceed
government income.

We must be willing to pay as we go. The government actually needs to spend less than it takes in, so we can begin paying down debt and recapture money lost to debt payments. That is the only way to preserve vital public services and leave young Nova Scotians a financially secure province.

Action:

Annual percentage growth in expenditures will be restricted to percentage growth in ordinary revenues for the same year. Any deficit must be made up within the next two fiscal years. (A deficit could result from unpredictable circumstances, such as an unanticipated revenue decline, a major interest rate or currency fluctuation.)

The Second Principle

Social responsibility -- preserving core public services

Two years of strict spending controls have brought us to a budgetary balance. But breaking the 20-year government habit of continually spending more than it had, required difficult, often unpopular decisions. While Nova Scotians support fiscally responsible government, specific actions -- like closing hospital beds, amalgamating municipalities and school boards, and putting a toll on a new highway -- tend to shake public resolve.

Self-imposed fiscal responsibility is not a threat to our cherished health care, education, or social services. It is the only way we can hope to preserve them. The real threat to those vital services lies in a failure to act.

The government has begun a systematic, ongoing review of all programs and services the province provides. The review will result in a more effective government, able to serve the genuine needs of Nova Scotia today and into the future.

Adding to Nova Scotia's challenge are these new facts of life: severe cuts in federal contributions to our social programs and a significantly reduced federal presence in our economy. This year Ottawa will cut some $70 million from transfers to Nova Scotia's health, post-secondary education, and social services budgets. That's the tip of a very large iceberg. Further reductions are planned. That makes our task here in Nova Scotia more difficult. It also makes the effort, and its success, imperative. The unmistakable message from Ottawa is that the province will receive less.

Against that backdrop, we need to build a more self-sufficient province with a more self-reliant economy. Nova Scotia needs to commit to positive, long-term financial recovery and to aggressively pursue the economic and social benefits recovery can promote.

The new realities force Nova Scotia to examine all its services. An affordable efficient government is one that focuses its attention and energy on its core functions -- providing quality, essential services to Nova Scotians.

It is also prudent and timely to review the province's assets -- land-holdings and provincially owned businesses. The sale of non-essential assets, and the application of the proceeds against the debt, will accelerate our success in recapturing $1 billion in annual debt service costs.

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Principle:

The government must target its resources
to preserve and enhance core public services.

Action:

All new capital expenditures will be screened to determine their suitability for public-private partnering. Public consultation will determine what non-essential government assets, if any, may be suitable for sale. The proceeds from the sale of any government asset will be applied directly to the debt. Government reorganization and restructuring will continue, with priority attention to ending duplication of services among various levels of government and across the provincial government.

The Third Principle

Economic renewal -- reducing the tax burden

High taxes diminish the competitive position of our goods and services in the global marketplace and, by extension, deny Nova Scotians jobs. In the past 20 years, the tax burden has increased significantly; but as taxes increased, the financial state of the province continued to deteriorate. The experience of the past shows that increasing taxes to grow government only weakens the economy. Tax increases therefore, are often counterproductive over the long term.

The global trade barriers are down. In order to prosper -- in order to survive -- we must compete effectively. If we cannot compete, we cannot grow an economy that will deliver jobs to Nova Scotians.

Nova Scotia has competitive advantages in the global market. A highly educated workforce, an excellent location, high-tech industries, and quality telecommunications are but a few of the features that make Nova Scotia an enviable place to do business. Tax relief is a crucial contribution that government can make to this competitive world-class environment.

In the past two years, the province has provided proof that tax reduction is possible, while balancing the budget. Nova Scotia is starting to reap the benefits of fiscal stability in an increasingly competitive tax environment. Major international corporations, like Stora and Michelin Tire, are expressing confidence in Nova Scotia, tangibly, by investing in the province and creating new jobs for Nova Scotians. In its last two budgets the government has provided between $70 million and $80 million in strategic, targeted tax relief to both individual Nova Scotians and businesses in the province.

More broad tax reduction was not possible -- or at least, not responsible -- while the government was operating with a deficit. However, with a fully balanced budget and subsequent surpluses, tax relief is possible and, as a tool of economic development, it is essential.

Reducing the tax burden on Nova Scotian workers, consumers, business, and industry will put the province on a more competitive footing, fueling increased investment, growth, and jobs. This is a policy that attacks poverty and unemployment at the roots, rather than merely treating their symptoms.

Tax relief must be fair and be spread evenly across our economy. Tax relief for business will improve our competitive position, and thereby our economic strength. But tax relief will also benefit individuals, who will have more money to buy goods and services.

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Principle:

The tax burden on Nova Scotians
must be reduced.

Tax relief will attract investment, improve our competitive position and help create the jobs that Nova Scotians need.

Action:

If there is a budgetary surplus after allowing for responsible program growth, it will be used only to reduce debt and lower taxes. Tax reductions to businesses to improve our competitive position will be accompanied by tax relief to individuals, to improve personal financial well-being and foster consumer confidence.

The Fourth Principle

Financial responsibility -- solid investment

Having achieved a measure of fiscal stability -- a balanced budget -- the province must safeguard itself, as much as possible and practical, against the unpredictable rise and fall of foreign currency. The only way to achieve that objective is to reduce the province's foreign currency exposure -- the amount of Nova Scotia public debt held in non-Canadian currency.

To reduce debt servicing costs in the short term, Nova Scotia took advantage of lower interest rates in foreign markets. Foreign exchange exposure increased to some 70 per cent. Over the long term, and with a balanced budget, we should avoid the volatility and uncertainty of foreign markets, in favour of one more predictable debt servicing costs. That means keeping more of our debt at home in Canada.

In the past 24 months, our currency exposure has been reduced to about 56 per cent, and the government intends to reduce it to less than 50 per cent by the end of the fiscal year.

Now, from the perspective of a long-term financial plan, it is important to place a maximum on foreign currency exposure. The government has set a target of 20 per cent as a manageable level of debt held offshore.

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Principle:

In managing the public debt, the government should avoid the volatility and uncertainty of foreign markets, in favour of more predictable debt servicing costs.

Action:

No more than 20 per cent of Nova Scotia's debt shall be held in foreign currency, unless that debt is fully protected from currency fluctuations. Until the 20 per cent level is achieved, no further foreign currency exposure will be permitted.

The Fifth Principle

Redesigning government -- a public accounting

Nova Scotians are coming to realize that they have a personal stake in the financial position of their province. How government administers the public finances determines the level of public services we enjoy and the level of taxation we endure.

Government has an obligation to conduct the people's business in public and to make every effort to ensure the people understand the consequences of government decisions.

In matters of public finance, accountability and credibility are essential. In the budgetary process, the government is accountable to the people through the House of Assembly. In the past, too many financial decisions were taken outside the open budgetary process, through additional spending approved by cabinet alone. Decisions taken behind the locked doors of the cabinet room helped plunge Nova Scotia into a downward spiral of deficits and debt. We have to ensure, as best we can, that this does not happen again.

Any legislation or lasting policy for sound financial management should build in every reasonable assurance that no government, present or future, can ever again take this province into financial jeopardy, without exposing that jeopardy fully to the people.

Measuring performance and reporting results, simply, clearly, and accurately, will enhance public awareness. The people of Nova Scotia should clearly understand the extent to which government has overspent in any given year or has achieved greater savings than originally planned. A strict accountability framework will dampen the political temptation to spend irresponsibly, keeping governments honest and on the right financial track.

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Principle:

Government's fiscal decision making must be visible, and the government must be accountable to the people for its decisions, through the House of Assembly.

Action:

Total expenditures for any given year, including additional appropriations, cannot exceed expenditures approved by the House of Assembly by more than 1 per cent. The province will issue quarterly financial and economic updates. All Crown corporations and agencies will be required to present estimates for approval and financial reports annually to the legislature.

Security and Opportunity

The rewards of financial strength

The legislation and policy proposed in this paper provide an action plan to stabilize and reduce the province's massive debt. This plan offers Nova Scotia relief from taxes that are too high and from debt-servicing costs that undermine government's ability to provide essential public services.

This plan proposes legislated measures. That means present and future governments would be tied to this program, unless and until they sought changes to the law in the House of Assembly.

While balancing the budget will not pay off Nova Scotia's debt, it means we aren't adding any new debt. The measures we have outlined here will result in a sustained budgetary balance over the medium term -- three to four years. That is the period of planned, concentrated federal funding reductions for health, education and social services. At the end of that period, budgetary surpluses will be possible. At that point, the government will have real financial flexibility, and faces decisions on how to best use surplus funds -- to lower taxes, pay debt and reduce debt costs, or grow and enhance public programs.

If the province chose to apply the surplus equally, to reducing debt and lowering the tax burden, the net direct debt of the province could decline 45 per cent over the next 18 years. Over the same period Nova Scotians could look forward to cumulative tax savings in excess of $1.8 billion. That could mean a reduction in our personal income tax rate of 11.5 percentage points, or roughly 19 per cent.

A significant reduction in the tax burden will boost investment in the province, and new jobs will be a reality rather than a dream. Nova Scotians will have the opportunities that too many are denied today. Lower debt and debt payments will give the province the financial strength to protect and sustain vital public services, offering security to Nova Scotians who depend on those services.

The choice is ours to make. Unless we act now, the debt Nova Scotia has amassed over the past 15 years will continue to grow. Our children and their children will carry the burden. Surely we have a moral obligation to pay for the public services we use, not pass that cost on to the next generation of Nova Scotians.

None of the goals we set in this paper can be accomplished easily. Difficult choices are required. A financially sound government cannot be all things to all people. But the rewards of financial stability are great, and they are now within our grasp. We can have a strong, self-reliant economy. We can have one of the most competitive tax climates in the country. We can attract business and investment and create the jobs Nova Scotians need. And, above all, we can leave our children a legacy of opportunity and security built on a solid financial foundation.

Shaping the Future

It's up to all of us

In the days and weeks ahead, the government is asking Nova Scotians to take the time to consider the future of their province. Individually, Nova Scotians can let the government know how they feel simply by responding to questions in the back of this paper, or by writing us a letter. Groups and organizations will be asked to participate in more formal meetings. Leading to the next provincial budget and before passing legislation proposed in this document, the government will make every effort to accommodate every Nova Scotian who wants to be heard on the issues we raise.

Public finance, as a topic of discussion, doesn't usually hold great interest. But this debate is about more than dollars and cents. It's about our public services, like health, education, and welfare; it's about jobs and our economic future; and it's about our children and the kind of province we will leave to them. That's a debate Nova Scotians care about.

Appendix A -- Legislative Agenda

This paper proposes more than policy, it proposes to entrench in law certain measures and financial controls. These include:

• Annual percentage growth in program spending will be restricted to percentage growth in ordinary revenues for the same year.

• Any single-year deficit will be recovered within the next two fiscal years.

• The proceeds from the sale of any assets will be applied directly to debt reduction.

• If there is a budgetary surplus after allowing for responsible program growth it will be used only to reduce debt and lower taxes.

• No more than 20 per cent of Nova Scotia's debt shall be held in foreign currency, unless that debt is fully protected from currency fluctuations.

• Until the 20 per cent level is achieved, no further foreign currency exposure will be permitted.

• Total expenditures for any given year cannot exceed the spending levels approved by the House of Assembly by more than one per cent.

• The province will issue mandatory quarterly financial and economic updates.

• All Crown corporations and public agencies will present estimates for approval and annual financial reports to the legislature.

Appendix B -- Policy Proposals

Other proposals in this document would be adopted as government policy, but would not be entrenched in law. These include:

• All new capital expenditures will be screened to determine their suitability for public-private partnering.

• Public consultation will determine what non-essential government assets, if any, may be suitable for sale.

• Continued government reorganization and restructuring, with the priority being to end duplication of services among various levels of government and across the provincial government.

• Tax reductions to businesses to improve our competitive position, to be accompanied by tax reductions to individuals, to improve personal financial well-being and foster consumer confidence.

Some Key Questions

Please respond to each of the following questions, and mail, or fax your response to us, or, select our inter-active form to submit your answers.

Mailing address:
N.S. Department of Finance
1723 Hollis Street
Halifax, Nova Scotia
B3J 2N3

e-mail address:
fina.wpaper@gov.ns.ca

Fax:
(902) 424-0714

If you have more to say about any of the topics or proposals contained in the paper "Shaping the Future", please send us those comments/opinions/proposals.

1.) Shaping the Future proposes a plan for the province's long-term financial security. Debt reduction is an element of this plan. Our debt now costs Nova Scotians $1 billion a year to service. How important is debt reduction, and the consequent reduction in these debt-servicing costs, to the future of Nova Scotia. Would you say it is: (check one)

____ Critically important
____ Important, but not critical
____ Not very important
____ Not important at all

2.) The long-term financial plan proposed in Shaping the Future is based on the province's ability to consistently balance its budget and eventually run a surplus -- that is, take in more money than it spends. Which of the following should be the highest priority when those surplus funds are allocated: (Rate each: 1 - highest priority; 2 - lower priority; 3 - lowest priority)

____ Reduce the debt and debt-service costs
____ Spend more on government programs
____ Reduce taxes paid by Nova Scotia businesses and individuals
or
Would you favour a combination of all three____

3.) This plan proposes a law that would force governments, present and future, to live within their means. As long as the law is on the books, government spending would be restricted to government income. Borrowing to pay for programs and services would not be an option. Do you favour or oppose such a law? (Check one)

____ Favour
____ Oppose

4.) In order to maintain a balanced budget, and run a surplus, the government may need to become smaller and more efficient. To what extent do you believe it is possible to further reduce the size and cost of government before these reductions substantially harm programs and services. Do you think there can be: (check one)

____ Significant reductions
____ Moderate reductions
____ Minor reductions (see question 4a)
____ No further reductions (see question 4a)

4.a) Would your opinion change if health and education were excluded from these reductions?

____ No
____ Yes

5.) Partnerships between the public and private sector may be one way to reduce the cost of providing some government services. Would you support greater private sector involvement in providing the following: (indicate yes or no for each)

Corrections (jails)	____ Yes	____ No
School bus service	____ Yes	____ No
Non-medical hospital services	____ Yes	____ No
Parks	____ Yes	____ No
Transportation (toll roads)	____ Yes	____ No

____ No opinion
or
Other (please explain)________________________________________________
__________________________________________________________________

6.) One way to reduce the cost of government, pay off some debt and reduce debt payments is to sell provincially-owned assets. Would you favour or oppose the sale of the following provincial assets: (indicate yes or no for each)

The Nova Scotia Liquor Commission	____ Yes	____ No
The Halifax-Dartmouth bridges	____ Yes	____ No
Provincial office buildings	____ Yes	____ No
Crown-owned forest land	____ Yes	____ No
Loan agencies of government	____ Yes	____ No

____ No opinion
or
Other (please explain)________________________________________________
__________________________________________________________________

7.) Tax reductions to stimulate economic growth and make Nova Scotia more competitive are a central element of the government's proposed long-term financial plan. Which one do you believe would be better for Nova Scotia's economy: (check one)

____ Reducing business taxes to stimulate investment, create jobs and improve our competitive position; or
____ Reducing personal taxes (income, sales taxes) to stimulate spending and consumer confidence.
____ Both equally important.
____ Tax reductions would have no impact on job creation.

8.) How confident are you that the government of Nova Scotia can:
(1 - not at all confident; 2 - not very confident; 3 - somewhat confident; 4 - very confident)

1	2	3	4		Maintain a balanced budget
1	2	3	4		Lower taxes to promote economic growth, job creation
1	2	3	4		Secure the future of important public services

We encourage more detailed submissions on the white paper. Responses to these questions, and all written submissions will be considered. We will prepare and release a report to Nova Scotians on the results of all consultation, prior to acting on these proposals.

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