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Better financial literacy can help control public debt. Newfoundland, take note
Given its perennial deficits, the province should not underestimate the payoff from raising the economic literacy and numeracy skills of its people. (Photo: François Legault @francoislegault/X)
Newfoundland and Labrador’s finance minister painted an encouraging picture of the province’s outlook in a recent fiscal update in terms of growth, inflation and unemployment. But projections for an alarming widening of its fiscal deficit for 2024-25 tell a different story.
That number is set to rise to $218 million rather than the original forecast of $152 million. The $66-million increase is a 40-per-cent rise. Siobhan Coady downplayed the growing shortfall, but the fiscal reality remains dire for the province, which has had years of perennial deficits.
Net debt is set to climb by $500 million to reach $18.3 billion. The ratio of net debt to GDP is projected to rise to 44 per cent, the highest of any province.
What can N.L. do to keep its fiscal house in order?
Balanced budgets are an obvious start. The province did start considering legislation to require them. But a bill for a Balanced Budget Act has been stalled since its first reading in October 2022.
N.L. and Prince Edward Island are the only two provinces without balanced-budget legislation. (Territories operate differently, with borrowing limits set by the federal government.) The other eight provinces passed legislation successively between 1993 and 2000 to tame their escalating public debts.
Over time, an interesting connection has developed. People in provinces with lower ratios of public debt to GDP tend to have stronger financial literacy skills. Higher public debt has become associated with lower levels of literacy and numeracy. The finding has emerged from proficiency assessments done in 2012.
The connection holds for Newfoundland and Labrador. Of all the provinces, it has the lowest literacy and numeracy rates, the highest unemployment rate and the highest debt ratio.
Literacy and numeracy are essential in the workplace. They are vital in helping people be active and good citizens. But their potential to help keep public debt down is largely overlooked.
Higher literacy and numeracy rates are the start of a virtuous cycle. They make a more employable labour force, which can raise employment rates, which can raise income-tax revenue. That revenue can reduce a budgetary deficit, if not generate a fiscal surplus, lowering government borrowing requirements and interest payments on public debt. Having more people working also lowers government expenditures on welfare programs to support the unemployed or the lower-income groups.
In sum, it can all combine to keep public debt in check. It’s something N.L. needs to devote more resources to.
Province by province
Looking across the country, figure 1 divides the provinces into three groups. Starting with the two provinces without balanced-budget laws, P.E.I. comes out ahead of N.L. on literacy, numeracy and debt levels.
Among the four provinces that are more resource-based with smaller GDP, the pattern holds for three: New Brunswick, Nova Scotia and Manitoba. The scenario is different for Saskatchewan: it has a dramatically lower debt ratio than its neighbour Manitoba because of reforms it enacted to clean up its fiscal mess of the 1990s.
Among the four largest provincial economies, the pattern is re-established.
An alarming decline in reading and math skills
Higher literacy and numeracy benefit the economy as a whole. This is particularly true for economic and financial literacy, now globally recognized as an essential life skill.
Equipped with these skills, citizens are in a better position to assess the long-term economic consequences of fiscal policies and make wiser political and economic choices rather than to be fooled or misled by populism or other political propaganda.
In many provinces, financial education has been part of the school curriculum for many years. N.L. was a latecomer, though, adding it only in 2021 at the high-school level.
To keep up with other provinces and Ottawa’s National Financial Literacy Strategy, it will need to spend more on financial and economic literacy as part of larger investment in education.
In the OECD’s latest global measure of 15-year-olds in reading, mathematics and science, Canada ranks above the averages for each. Those levels, from 2022, are more or less in line with the data in figure 1.
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But, alarmingly, all these skill categories have been trending downward for more than two decades. And N.L.’s scores rank below Canadian averages in the OECD list. It is worrying that they, too, have declined over the years.
Among participating Canadian provinces, Alberta is above the Canadian average across the board. And yet N.L. spends more than Alberta on education per student in public school. N.L.’s spending is below the national average and declined by 9.8 per cent over 2012-2022 after adjustment for inflation.
Spending on education is important, but how it is spent is more important.
Not a cure, but a tool
Financial and economic literacy is not a panacea for government problems. But it could certainly help prevent more of the kind of major fiascos the province has endured. The two hydroelectric megaprojects of Churchill Falls and Muskrat Falls are painful cases in point.
Legalities, politics and economics combined to complicate the outcome of Churchill Falls, a power-generating station in Labrador near the Quebec border. It is a legendary 1969 blunder that rankles residents to this day. Muskrat Falls was approved in 2012.
With Churchill Falls, the province failed to properly account for inflation, risk and sunk cost when it signed a long-term deal to sell electricity to Quebec. These are basic economic and financial concepts.
As a result, the agreed-upon fixed price was extraordinarily low even for the late 1960s with a renewal clause that automatically extended the price in 2016 for another 25 years.
But for four decades, the looming prospect of the extension received no public attention. Last year, Quebec Premier François Legault acknowledged the terms were bad for N.L. and apologized for them.
Muskrat Falls generated much more public discussion and debate when it was announced, with critics arguing it was economically unnecessary. It proceeded anyway and has been plagued by delays, mechanical problems and a price tag that has nearly doubled from original estimates. By 2020, a provincial inquiry had declared it a misguided project.
Both projects show the need for close scrutiny of government decision-making to be able to hold politicians responsible for mistakes and wrongdoing. Scrutiny is more likely to come from a more financially and economically literate population.
Nobody knows when or if the Balanced Budget Act will become law in Newfoundland and Labrador. But dedicating more resources to education in general, and financial and economic education in particular, could help the province grow and transform its economy.
Knowledge is power.
This article first appeared on Policy Options and is republished here under a Creative Commons license.
