New Brunswick is fighting tough times by cutting taxes and possibly making it one of the most attractive provinces in which to do business

Shawn Graham will never forget seeing a story in the Australian newspaper The Age complaining that Umoe Solar AS of Norway had bypassed the sunny continent to set up a solar-powered cell factory in "cloudy Canada." Umoe searched around the world before settling on the site of a shuttered pulp mill in Miramichi, N.B., in January of 2009.

What brought a smile to the New Brunswick premier's face is that the Norwegian company based its decision, in part, on the fact that the province was poised to lower its business taxes. Umoe told the premier that corporate taxes are higher in Norway than they are in New Brunswick. In fact, the province's corporate taxes will soon be lower than a lot of places, including the rest of Canada.

In its 2009-10 budget, Graham's government unveiled a supply-side fiscal revolution rarely seen in this country. It cut corporate and personal income taxes worth $1.1 billion over four years, slashed 700 government jobs, and increased infrastructure spending. Though the tax review had been in the works for more than a year, the final budget was shaped by the fact that the world was undergoing the worst financial crisis in a generation.

All four Atlantic provinces were forced to respond to the recent financial crisis with extreme fiscal measures. Responses varied widely. Whereas New Brunswick chose lower taxes and smaller government, Nova Scotia, Newfoundland and Labrador, and P.E.I. accelerated spending to soften the recessionary blow. By late summer the new Nova Scotia government was realizing how much budgetary trouble it was in, while the Newfoundland government was saying things might be better than originally feared.

The drastic nature of the downturn was seen in the Newfoundland and Labrador budget, in which the new energy superpower went from a $2.4-billion surplus to a $750-million deficit, mainly because of a projected $913.5-million reduction in oil royalties as prices fell and production declined. "We'd been in a state of preparation for a global economic downturn for some time," says Premier Danny Williams. "Fortunately, we'd been doing all the right things—we've been paying down our debt and building up our infrastructure."

Williams is upbeat. His government based its projection on an average oil price of $50 a barrel, and the price had already risen to about $70 by late summer. That means the projected 2009-10 deficit project could be narrowed by almost 50%.

That contrasted sharply with the alarm bells being sounded in Nova Scotia. Earlier in the year, then premier Rodney MacDonald had planned to spend his way out of the recession, tapping the federal government for as much help as possible. His government fell in the spring election, and the incoming NDP government of Darrell Dexter commissioned a private study by Deloitte & Touche that, in August, revealed the province's finances were in worse shape than anyone had let on.

The report projects deficits of $809 million in fiscal year 2010-11 and almost $1.4 billion in 2011-12, unless the government can increase revenue or slash spending. "The previous government was on an unsustainable path, and that is going to change," Finance Minister Graham Steele told a news conference in Halifax.

The Deloitte report was followed by Steele's budget in September, which came in with $9 billion in spending and a $592 million deficit. Most worryingly, it revealed the provincial debt, which had been trending down from the $12.4 billion peak in recent years, would rise to about $13.4 billion.

The feeling in Nova Scotia contrasts markedly with the triumphant note being sounded by its next-door neighbour. The New Brunswick government had signalled that its budget would be an important one, because it represents a fundamental shift in policy and comes at the end of a landmark review of taxation. Then finance minister Victor Boudreau, who was later shuffled out of the portfolio, brought in the budget at the conclusion of a four-year tax review that included a discussion paper proposing a flat personal income tax. Premier Graham said the government rejected that proposal because it wanted to avoid a protracted ideological debate.

In the end, however, Graham's cabinet did opt for a two-band tax system, the second-flattest personal income tax system in Canada behind Alberta's. The tax system will be implemented over four years and by 2012 will impose a 9% tax on income of less than $37,893 and 12% on amounts above that. By contrast, Nova Scotia now has four tax bands with rates between 9.65% and 17%. Graham is also reducing corporate income taxes, so that by 2012 the province will have an 8% tax rate—the lowest in Canada.

New Brunswick has caught the attention of business groups because the budget marks a new direction for an Atlantic province. "People have noticed the bold groundbreaking moves in New Brunswick," says Leanne Hachey, the Atlantic vice-president of the Canadian Federation of Independent Business. "It's not just being seen for its leadership on a regional basis but on a national basis."

Conservatives across the country took notice of what was happening in a region usually associated with big government and high taxes. "Bravo to the Liberal government of New Brunswick Premier Shawn Graham," trumpeted an editorial in the National Post. "Almost alone in the Western world, the Graham government has chosen to make personal and corporate tax reduction a pillar of its economic stimulus plan amidst the current global downturn."

Graham denies that his government's tax strategy takes aim at Nova Scotia but he has noted publicly that New Brunswick's corporate tax rate will soon be half that of Nova Scotia, unless the new government of Darrell Dexter makes big changes.

So will Nova Scotia follow New Brunswick's lead? Don't count on it. Darrell Dexter has been candid in his rejection of the New Brunswick model as a solution for Nova Scotia's problems. "The tax proposal in New Brunswick will add to their debt by $2.2 billion over the next couple of years," he says. "We're just not in a position to add to our debt in that fashion."

When told his counterpart's comments, Graham said New Brunswick is in a better position to cut taxes than Nova Scotia because it has lower debt levels, having curtailed its deficit financing earlier than Nova Scotia. What is obvious is that debt loads will rise in all four provinces as they respond to the crisis with the classic Keynesian strategy of increasing government spending to compensate for falling private demand.

Nova Scotia's debt is forecast to rise to $13.4 billion in 2009-10, while New Brunswick's net debt will rise about $360 million to $8 billion. Prince Edward Island will add about $200 million to its debt, bringing it up to $1.6 billion, while Newfoundland and Labrador, which trimmed its debt from $12 billion to $7.9 billion in 2008, will see its net debt rise to $9 billion in 2010. Prince Edward Island doubled its shortfall with its budget estimating a deficit of $85.3 million, almost $40 million of which came from choosing to cover the gap in the civil service pension plan.

Though Graham and Williams are both optimistic that their provinces are prepared to benefit from a recovery, there is the realization among all the leaders that money borrowed to fight the recession will have to be repaid. It could also be a drag on the recovery.

"What we all have to do is look down the road three, four, or five years," says Williams, "and realize that this significant debt that governments have taken on has to be paid back."