Background

2.1	In 1997, a research report published by the Canadian Institute of 
Chartered Accountants (CICA) defined financial condition as a 
government’s “financial health as measured by sustainability, 
vulnerability and flexibility, looked at in the context of the overall 
economic and financial environment.”

Scope

2.2	The purpose of this chapter is to provide readers with useful 
information about the Province’s financial condition using the CICA 
research report as a guideline.

2.3	Though many potential indicators of sustainability, vulnerability 
and flexibility were considered in preparing the research report, only ten 
indicators were found which were relevant, necessary, measurable and 
clear to users of government financial information. Of these, our Office 
has concluded that six can be considered meaningful in the context of the 
Province of New Brunswick. They are:



Financial results used 
in analyses

2.4	In this chapter, our analysis is based on the current year 
financial statements as presented in the Public Accounts. Prior year 
numbers used in our analyses may include restated figures obtained from 
the Office of the Comptroller. 

2.5	The 31 March 2000 financial statement expenditure figures 
include $903.8 million relating to the capital cost of the Fredericton to 
Moncton Highway. This adjustment results in a one-time increase in 
expenditure and a corresponding increase in net debt of $903.8 million 
in 2000.

Results in brief

2.6	In general, the five-year trends in sustainability, flexibility 
and vulnerability show that the Province of New Brunswick’s 
financial condition has improved except for the proportion of federal 
government transfers to total provincial revenue (vulnerability).

2.7	The two-year trends in sustainability, flexibility and 
vulnerability are not as favourable as the five-year trends.

2.8	Some of the unfavourable impact on flexibility and 
sustainability shown by the two-year trend can be attributed to the 
adjustment in 2000 to record the capital cost of the Fredericton to 
Moncton highway.

Sustainability

2.9	Sustainability is the degree to which a government can maintain 
existing programs and meet existing creditor requirements without 
increasing the debt burden on the economy.

2.10	It is now well understood by the general public that increases in 
the cost of servicing the public debt can directly impact the quantity and 
quality of programs and services to which the public has access. 
Accordingly many provinces, including New Brunswick, are striving to 
reduce their debt in order to ensure an optimum amount of funding is 
allocated to programs and services.

2.11	There are circumstances when governments may tolerate 
increases in their debt load. For example, when revenues are increasing, 
a higher cost of servicing the public debt might be tolerated without 
impacting existing programs and services. However, the ability to 
generate such revenues (e.g. through taxes, user fees, or licenses) is 
closely linked to the performance of the economy.

2.12	Therefore, any growth in New Brunswick’s debt must remain in 
line with growth in the economy to ensure that our Province can sustain 
its programs and services. If debt is growing faster than the economy, 
New Brunswick will suffer reduced capacity for sustainability. Programs 
and services offered to the public may eventually suffer.

2.13	Gross Domestic Product (GDP) is the total value of all goods 
and services produced in the province during a specific period. GDP is 
often used to measure the growth of the economy.

Net debt as a percentage of 
GDP as a measure of 
sustainability

2.14	Net debt is an accounting measure of the extent to which total 
liabilities of the Province exceed financial assets. The net debt of the 
Province increases with deficits and decreases when surpluses are 
experienced. The financial statements for 2000 indicate that net debt 
stands at $6,807.7 million - $959.1 million more than its level five years 
ago. 

2.15	However, the New Brunswick economy has also grown. 
Exhibit 2.1 shows that the Province’s net debt to GDP ratio decreased 
(favourable) in the period 1996 to 1999 – showing the Province’s 
increasing ability to sustain existing programs and services. In 2000, 
however, the growth in net debt exceeded growth in the economy 
(unfavourable) after the adjustment for the Fredericton to Moncton 
highway is considered. Excluding the effects of the Fredericton to 
Moncton highway, the five-year trend for this indicator is favourable.

Exhibit 2.1	
Net debt as a percentage of GDP 
for the last five years



2.16	The 1999-00 provincial budget forecast called for nominal GDP 
growth to be 4.6% in 2000. Currently, the average of private sector 
forecasts of nominal 2000 GDP growth is 3.5%. Should these private 
sector forecasts be accurate the effect on our chart would be less 
favourable.

Change in net debt and 
GDP as a measure of 
sustainability

2.17	The Province can influence sustainability in two ways: by 
increasing surpluses (decreasing deficits) and by increasing growth in 
the economy. Though governments use various political, legislative and 
regulatory powers to stimulate the economy, the effect is neither 
guaranteed nor timely.

2.18	The rate of growth in the surplus or deficit and their impact on 
net debt is much more controllable. Exhibit 2.2 shows that the Province 
experienced economic growth in excess of growth in the net debt 
(favourable) from 1996 to 1999. In 2000 there is a reversal in this trend 
because of the effects of the Fredericton to Moncton highway.

Exhibit 2.2	
Change in net debt and GDP for 
the last five years



Flexibility

2.19	Flexibility is the degree to which a government can increase its 
financial resources to respond to rising commitments, by either 
expanding its revenues or increasing its debt burden.2

2.20	Funding for programs and services is provided by either revenue 
or borrowing during the year. It is a useful measure of flexibility to 
know to what extent the Province is able to raise revenue from existing 
and potential sources should new commitments arise.

Own source revenue as a 
percentage of GDP as a 
measure of flexibility

2.21	One could assume that any additional funding for new programs 
or services might not be possible from existing revenue sources. A 
reasonable alternative would be to raise revenue from new provincial 
sources. However, the Province is only able to extract a finite amount of 
dollars from the economy of New Brunswick before the economy begins 
to falter. Though the exact capacity of the economy to bear such a 
burden is not known, one can determine the relative increase or decrease 
over time.

2.22	Exhibit 2.3 shows the extent to which the Province has removed 
dollars from the provincial economy through taxes and user fees/licenses 
during the last five years.

2.23	This exhibit shows that the dollars extracted by the Province 
from the New Brunswick economy as a percent of GDP gradually 
decreased (favourable) from 1997 to 1999. This indicates an increase in 
flexibility. In 2000 this trend in provincial own-source revenue reversed 
(unfavourable) and in 2000 it stands at 15.9% of New Brunswick GDP. 
However, the percentage in 2000 remains lower than in 1996 through 
1998 (favourable).

2.24	The large reduction in own-source revenue in 1999 was due to a 
$450 million one-time write-down in the Province’s investment in the 
New Brunswick Power Corporation. 

Exhibit 2.3	
Own source revenue as a 
percentage of GDP1 for the last 
five years





Cost of servicing the public 
debt as a percentage of 
total revenue (or
“interest-bite”) as a 
measure of flexibility

2.25	One of the most publicized factors which affects the flexibility of 
governments is the cost of servicing the public debt. 

2.26	The cost of servicing the public debt is comprised mainly of 
interest on the funded debt of the Province. It also includes foreign 
exchange paid on interest and maturities during the year, the 
amortization of foreign exchange gains and losses, and the amortization 
of discounts and premiums which were incurred on the issuance of 
provincial debt. It does not include principal repayments on the funded 
debt of the Province.


1.	GDP information provided by N. B. Department of Finance.

2.27	Exhibit 2.4 shows debt servicing costs as compared to total 
provincial revenue for the last five years.

Exhibit 2.4	
Cost of servicing the public debt as 
a percentage of total revenue for 
the last five years



2.28	This exhibit shows the cost of servicing the public debt 
decreased in 2000 over 1999 but is only $6 million lower than its 1999 
peak of $616.4 million. It also shows that the Province has decreased its 
overall “interest-bite” percentage from its 1996 level of 13.4% to its 
current level of 12.6%. This indicates that the Province has more of its 
total revenues available for current needs today than it did five years 
ago. Since 1998 there has been a decrease (favourable) in the cost of 
servicing the public debt as a percentage of total revenue. 

Vulnerability

2.29	Vulnerability is the degree to which a government becomes 
dependent on, and therefore vulnerable to, sources of funding outside its 
control or influence, both domestic and international.1

2.30	Funding for programs and services can only come from two 
sources: revenue or borrowing.

Federal government 
transfers as a percentage of 
total revenue as a measure 
of vulnerability

2.31	In 2000, 38% of the Province’s total revenue came from federal 
transfers. This is significant because revenue from federal sources is not 
considered to be as controllable as revenue generated in the Province.

2.32	Own-source revenue is more controllable because the 
government can directly impact the amount generated using tax

1.	Indicators of Government Financial Condition, 1997 published by the Canadian
Institute of Chartered Accountants.

legislation as well as implementation or adjustment of user-fees/licensing 
rates. Federal transfers are subject to very different variables - few of 
which are under the jurisdiction of the provincial government. Federal 
fiscal policy decisions can severely impactprovincial governments by 
determining the amount and timing of future transfers.

2.33	Increasing New Brunswick’s reliance on federal transfers will 
leave the Province more vulnerable to variables outside of its own 
control. Exhibit 2.5 details the Province’s reliance on federal transfers 
over the last five years.

Exhibit 2.5	
Federal government transfers as a 
percentage of total revenue for the 
last five years



2.34	This exhibit demonstrates that approximately 38 cents of each 
dollar of revenue received by the Province comes from the federal 
government. Though fluctuations have occurred over the last five years 
the trend has been generally unfavourable. In 2000 there has been a 
decline (favourable), although the percentage remains higher than in 
1996 through 1998.

Foreign currency debt as a 
percentage of total debt for 
provincial purposes as a 
measure of vulnerability

2.35	When borrowing is required, there are choices to be made by the 
Province. For instance, if the Province chooses to issue its debt in a 
foreign currency instead of Canadian dollars, the Province will assume 
the risk of foreign exchange fluctuations. Such fluctuations can increase 
or decrease the amount ultimately payable in Canadian dollars for 
interest, and later, redemption of foreign currency debt.

2.36	Exhibit 2.6 shows the relationship of foreign currency debt to 
total debt for provincial purposes over the last five years. The Province 
has several alternatives to reduce (hedge) the risk associated with debt 
repayable in foreign currencies:

•	purchasing assets denominated in foreign currencies for the 
Province’s sinking fund;

•	entering into debt swap agreements which allows repayment of the 
debt in Canadian dollars; and 

•	entering into forward contracts (which allow the Province to 
purchase foreign currency at a stipulated price on a specified future 
date).

Exhibit 2.6	
Exposure to foreign currency risk 
for the last five years



2.37	The exhibit reflects the Province’s exposure to foreign currency 
risk after eliminating the effect of hedges against foreign currency 
fluctuations.

2.38	The above exhibit demonstrates that the Province’s vulnerability 
to foreign currency risk has declined (favourable) over the last five 
years. The overall exposure has decreased (favourable) from its 1996 
level of 24% to 18% in 2000.

Summary

2.39	Exhibit 2.7 summarizes the financial indicators used in this 
chapter and outlines the impact of the two and five-year trends on the 
financial condition of the Province.

2.40	In general, the five-year trends in sustainability, flexibility and 
vulnerability show that the Province of New Brunswick’s financial 
condition has improved. The only exception is federal government 
transfers as a percentage of total revenue.

2.41	The two-year trends for all of the indicators are not as 
favourable as the five-year trends. Some, although not all, of this impact 
is attributable to the required adjustments to net debt for the Fredericton 
to Moncton highway.

Exhibit 2.7	
Summary of financial indicators