Background

2.1	The Auditor General Act requires us to examine the financial 
statements of the Province of New Brunswick and express an opinion as to 
whether they fairly present information in accordance with the stated 
accounting policies of the Province.

2.2	The Province’s audited financial statements are included in 
Volume 1 of the Public Accounts. Volume 2 provides supplementary 
unaudited financial information. The financial statements of Crown 
agencies and trust funds are contained in Volume 3.

2.3	We have three primary goals in this chapter of the Report:

•	To help the reader form an opinion on how the financial resources 
of the Province have been managed. We do this by reporting a series 
of indicators of the Province’s financial condition and by providing 
year-to-year comparisons where possible.



•	To help the reader interpret the Province’s financial statements. 
We explain key changes in the financial statements since the previous 
year. We also present additional information from an objective 
viewpoint which provides a clearer picture of matters reported in the 
financial statements. 



•	To focus on important issues related to the financial statements. 
There may be situations where we agree with the presentation 
followed but we feel there are other relevant facts which the reader 
should consider. In other cases, we may disagree with how an event is 
reflected in the financial statements. We will explain our point of 
view.



2.4	From time to time the Province makes major changes in 
accounting policies. For example, there was a major change in 1994-95 
with the introduction of consolidated financial statements for the first 
time. These changes make year-to-year comparisons of financial results 
difficult. Because it is not always possible to restate previous years’ data, 
comparisons to that data could be misleading and as a result should be 
done very carefully. We will attempt to make it clear when we have used 
data from previous years that was not restated for consistency with 
subsequent changes in accounting or disclosure.

Scope

2.5	In fulfilling our responsibility to carry out the audit of the 
financial statements of the Province of New Brunswick, we conduct audits 
in accordance with generally accepted auditing standards. Based on the 
results of our audits, we issue an opinion on the financial statements of the 
Province. This chapter of the Report presents an overview of the main 
issues arising from the 1997 audit of the financial statements. Matters that 
have arisen during the financial statement audits that relate specifically to 
departmental operations, government programs, Crown agencies and 
trusts are discussed elsewhere in this Report.

Results in brief

2.6	The Province issued its audited financial statements almost 
eight weeks earlier than the previous year.

2.7	Further changes have taken place in the composition of the 
reporting entity, but hospitals continue to be excluded.

2.8	There are a number of important accounting issues that the 
Province should be addressing.

2.9	The government is becoming more involved in leasing 
buildings instead of constructing them. The change carries 
accounting and financing implications. 

2.10	Costs of highway construction have been recorded as property 
held for resale at year end in anticipation of a highway lease.

2.11	Government borrowing cost and the net debt balance have 
fallen for the past two years.

2.12	The Province recorded its second consecutive annual surplus.

The Province met its 
target for early release 
of its financial 
statements 

2.13	The 1996-97 financial statements were issued on 13 August, an 
improvement of almost eight weeks over 1995-96 and an improvement of 
over eighteen weeks on the 1994-95 year. These are significant 
improvements!

2.14	For several years we have focused on the need for the earlier 
issuance of the Province’s financial statements to the public. We 
expressed concern that there was no commitment by the Province to 
complete its financial statements in a timely manner. We pointed out there 
are significant benefits not only to the users of the financial information 
but also to those involved in the preparation of the financial information if 
the financial statements are issued consistently on a timely basis.

2.15	The Province responded in 1996-97 by setting a deadline of 
31 August for the issuance of the audited financial statements. That 
deadline was surpassed by over two weeks.

2.16	The number of days between the end of the fiscal year and the 
issuance of the financial statements for each of the past five years is 
shown graphically below.

Exhibit 2.1	
Number of days between the end of 
the fiscal year and the issuance of 
the financial statements



2.17	 It is not a simple matter to advance the issue date of the financial 
statements, particularly in the year of change. Although the Comptroller’s 
Office has the responsibility for preparing the statements, a large number 
of people in the departments and agencies of government are also 
involved in the process which supports the preparation of the financial 
statements.

2.18	The changes made to facilitate the earlier release were significant. 
The procedures normally followed at year end were altered, leaving less 
time for preparing and adjusting the financial information used in the 
statements. Such changes undoubtedly had an effect on work plans and 
priorities of government staff.

2.19	The impact on our Office was also significant. In each of the last 
two years, as the deadline for the completion of the audit was set earlier, 
our audit plan for the Province had to be compressed into much shorter 
periods. A major effort was put forward by our staff to see that these 
important deadlines were achieved in spite of the reductions in the 
available time. 

2.20	None of the positive changes would have taken place without the 
will of government to either allow it or promote it. The government 
fulfilled its role by instructing staff to issue the financial statements no 
later than 31 August.

2.21	In our Reports of previous years, we pointed to a goal of issuing 
the financial statements within three months after year end. We continue 
to believe this is reachable and we are prepared to cooperate in any way to 
meet this date should government set this as its goal.

Comments on the 
composition of the 
provincial reporting 
entity

2.22	The term provincial reporting entity is used to describe the 
combination of organizations that are accountable for the administration 
of their financial affairs and resources either to a minister of the 
government or directly to the legislature, and are owned or controlled by 
the government. Note 1(a) to the financial statements lists the 
organizations included in the reporting entity and describes the method of 
accounting through which they are included.

2.23	Exhibit 2.2 provides an overview of the composition of the 
provincial reporting entity.

Exhibit 2.2	
Composition of the provincial 
reporting entity





2.24	The consolidation, transaction and modified equity methods of 
accounting are defined in Note 1(a) to the financial statements. The Board 
of Management criteria for consolidation establish a cut-off point for 
smaller organizations which, due to their size, are accounted for simply on 
the transaction basis rather than line-by-line consolidation.

Changes in the reporting 
entity

2.25	The New Brunswick Credit Union Deposit Insurance Corporation 
and NB Agriexport Inc. were both added to the list of government 
organizations included through consolidation. The operating results of 
these organizations are thus included in the reporting entity.

2.26	The New Brunswick Biotechnology and Technological 
Innovation Centre of Excellence Inc. is no longer classified as a 
government organization. This change results from a modification in the 
composition of the corporation’s board of directors such that the 
corporation is now independent of government.

New Brunswick school 
districts

2.27	Note 2 to the financial statements explains that during the 
1996-97 fiscal year, the method of accounting for New Brunswick school 
districts was changed from the transaction to the consolidation method. 
This change was due to the dissolution of publicly elected school boards, 
which resulted in the school districts being directly accountable to the 
Minister of Education. We reported last year that, although the effective 
date of the changes to the school boards was 1 March 1996, the 
administrative and financial structure of the school boards was retained 
and continued until 30 June 1996. For this reason, the change in reporting 
the school board accounts did not take effect until the 1996-97 year. 

2.28	This change means that all assets, liabilities, revenues and 
expenditures of provincial school districts are now included in the 
Province’s financial statements. In addition, an adjustment to opening net 
debt as at 1 April 1996 of $9.7 million was made. This reflects the 
difference between the school board expenditures recorded up to 1995-96 
and the estimated amount that would have been recorded using the new 
method of accounting.

Hospital corporations

2.29	Note 1 to the Province’s financial statements explains that 
hospital corporations do not meet the accounting criteria for inclusion in 
the provincial reporting entity.

2.30	Because only transactions between the Province and the 
corporations are reflected in the Province’s financial statements, any 
deficits or surpluses in the corporations (and the related borrowing or 
surplus funds) are not included. A review of the corporations’ financial 
statements shows total current liabilities exceed current assets by $35.2 
million at 31 March 1997. In addition there is total long-term borrowing 
of $6.9 million and capital lease commitments of $2.3 million. These net 
liabilities, amounting to $44.4 million, are not recorded or reflected in the 
Province’s financial statements or notes. Last year we reported that net 
liabilities of hospital corporations were $32.7 million, meaning an 
increase of 36% took place during the past year. The largest component of 
the increase was the Atlantic Health Sciences Corporation (Region 2). The 
amount by which its current liabilities exceeded current assets increased 
by $8.5 million. 

2.31	There are long-term investments of $26.4 million contained in 
five of the corporations’ financial statements, an increase of $2.7 million 
over last year. We understand the use of these investments is restricted. 

2.32	The governing boards of hospital corporations are responsible to 
the Minister of Health and Community Services who, in turn, is 
accountable to the Legislative Assembly. It is the responsibility of the 
governing board of each corporation to manage the resources allocated by 
the provincial government. These boards consist of approximately sixteen 
members of which one-quarter are appointed by the Minister of Health 
and Community Services.

2.33	The government has dealt with many important accounting issues 
over the past few years. A significant issue that has not been fully 
addressed is the accounting for New Brunswick hospital corporations.

2.34	As recently as June 1996 the Public Sector Accounting and 
Auditing Board (PSAAB) stated the following:

…most universities and hospitals - with the exception of those 
operating as part of a government department - would be 
excluded from the government entity.

2.35	These comments may have led to the hospitals being excluded 
from the provincial reporting entity in some jurisdictions. Later in 1996 
changes were made to the PSAAB recommendations. They no longer refer 
to the fact that most hospitals would be excluded from the reporting 
entity.

2.36	PSAAB offers some specific guidance for determining whether 
organizations should be included in the reporting entity. Organizations 
must be owned or controlled by government and they must be accountable 
to a minister of government or directly to the legislature.

2.37	Factors to be considered relative to hospital corporations are:

•	the hospital corporations must operate within the budget approved by 
the Minister of Health and Community Services;

•	hospital corporation bylaws have no effect until approved by the 
minister;

•	the hospital corporations are required to submit an annual report to the 
minister;

•	the Lieutenant Governor in Council may, where circumstances 
warrant, appoint a trustee to assume the responsibilities of a hospital 
board;

•	the Hospital Act refers to ownership by the Province of hospitals and 
hospital assets (although it acknowledges that not all existing 
hospitals are owned by the Province). Land, buildings and building 
service equipment are entrusted to the hospitals;

•	control may be implied by the fact that the hospitals derive more than 
80% of their revenue from the Province; and

•	ownership and control of the hospitals may have been established 
when the Minister of Health and Community Services directed the 
administration of the hospitals during a time of reorganization when 
there were no hospital boards.



2.38	We are not convinced that the present method of accounting for 
hospital corporations in New Brunswick is the most appropriate. We 
intend to continue discussions with the Comptroller on this subject over 
the coming year.

1996-97 approved 
spending

2.39	An appropriation is defined as an amount that is approved by vote 
of the Legislature. The appropriation for the 1996-97 year has several 
components. These components combine to show the total allowed level 
of spending for the departments and agencies for the year. The 
components include:

•	the main estimates;

•	supplementary estimates; and

•	special warrants.



Ordinary account spending

2.40	Over the past several years departments have received increasing 
flexibility to manage ordinary account spending. We have reported on 
these changes each year. Currently, departments may move their approved 
funding among ordinary account programs without seeking a 
supplementary appropriation. Therefore, ordinary account programs may 
be overspent so long as the total departmental spending on ordinary 
account falls within the budget.

2.41	This moving of funds is done at the discretion of the department 
unless the cumulative amount of such transfers exceeds $1,000,000 or 
15% of the budget for the program. When the need to make such a transfer 
occurs, the quarterly report submitted to the Board of Management must 
identify the amount of funds to be transferred and the implications of the 
transfers on the delivery of service. The Board’s approval of the quarterly 
report serves as the authorization for the funding transfer.

2.42	The following exhibit shows the number of departments and 
programs requiring transfers of funding approval, together with the 
amount (in millions of dollars) of the transfers on a comparative basis.

Exhibit 2.3	
Funding transfers





Capital account spending

2.43	Last year we reported the change in capital spending approval 
which allowed departments to move funds between programs for the first 
time in 1995-96. Two departments used this provision in the current year 
to transfer funding approval of $4.3 million between programs. This 
compares to the prior year where three departments transferred funding 
approval totalling $5.4 million between programs.

Total spending

2.44	The following exhibit shows the components of the year’s 
expenditure appropriations on a comparative basis.

Exhibit 2.4	
Expenditure appropriations
(millions of dollars)







2.45	At the time of drafting this Report expenditure totalling $26.8 
million has not yet been approved either by way of a special warrant or 
supplementary estimates. We are therefore required to report that 
appropriations have been exceeded by this amount.

Net budgeting

2.46	The Financial Administration Act gives the Board of Management 
the authority to allow net budgeting. Net budgeting is a tool which allows 
more flexibility in managing programs where services are provided on a 
cost-recovery basis. Departments are permitted to budget for the net 
amount of expenditure or revenue for those revenue-generating programs 
that have received Board of Management approval. Net budgets are 
approved as part of the annual budget process and are monitored by the 
Office of the Comptroller on a quarterly basis.

2.47	The Main Estimates provide details regarding the source and 
amount of the revenue for each net-budgeted program. As well, for 
reporting purposes, both the revenue and expenditure of these net-
budgeted programs is included in the financial statements, ensuring they 
are properly reflected in the Public Accounts.

2.48	The following list includes all approved net budgeted programs as 
of 31 March 1997 and provides a comparison of the amounts expensed 
within each program.

Exhibit 2.5	
Net budgeting
(millions of dollars)





Carry-over of unspent 
appropriations

2.49	The Financial Administration Act gives authority to the Board of 
Management to approve the carry-over of unspent appropriations from 
one fiscal year to the next without further authorization by the Legislature. 
Departments are eligible to apply for approval to spend their unused fiscal 
year budget in the following fiscal year.

2.50	Board of Management approved an expenditure rollover of $6.0 
million in total from 1996-97 to the 1997-98 fiscal year for the four 
Special Operating Agencies described in Note 5(e) of the Province’s 
financial statements. The Board also approved the carry-over of 
unexpended capital funds in the amount of $21.6 million for the 
Department of Transportation.

Unresolved issues 
affecting accounting 
policies

2.51	There are several matters relating to the Province’s accounting 
policies which are unresolved and have not been satisfactorily addressed 
in the financial statements of the current year. In most cases 
recommendations of the Public Sector Accounting and Auditing Board 
(PSAAB) of the Canadian Institute of Chartered Accountants (CICA) 
have been in place for some time. In one case there is an issue on which 
there has recently been a pronouncement by PSAAB. Although, as 
explained below, we have provided a positive opinion on the financial 
statements, we believe collectively these are significant issues which 
should be dealt with by the Province in the preparation of its annual 
financial statements.

Retirement allowances

2.52	As we stated last year, the failure to properly account for 
retirement allowances represents the most significant issue still 
outstanding. These allowances are not payable by the Province at 
31 March 1997. However, the liability for these allowances is incurred as 
the employees of the Province work each year towards their retirement. 
The logic for recording the liability and the expense each year for these 
allowances is similar to that for recording the Province’s pension 
liabilities. In the past we were informed that the primary reason for not 
recording the liability for retirement allowances was the lack of accurate 
data to support its calculation. 

2.53	We discussed this with the Comptroller. He indicated that during 
the 1997-98 year he hopes to assemble the information which could be 
used in support of a possible adjustment to the Province’s financial 
statements.

Accrual of teachers’ 
salaries

2.54	Note 2 to the financial statements explains that during the year 
ended 31 March 1997 the Province changed its method of accounting for 
New Brunswick school districts from the transaction method to the 
consolidation method. This followed the dissolution of the public school 
boards on 1 March 1996. The former school districts are now accountable 
to the Minister of Education. 

2.55	School teachers have an agreement with the Province which 
allows them to be paid in every month of the year, despite the fact that the 
school year covers only ten months. This is made possible by dividing the 
salary earned, in the ten months, into amounts that can be paid to the 
teachers over a twelve-month period. 

2.56	Based on our review of the agreement between the teachers and 
the government, the amounts paid to the teachers are in fact earned in the 
ten-month period. As a result, the salaries earned by the teachers exceeds, 
by a significant amount, the salaries paid as at 31 March of each year.

2.57	In our opinion, the Province’s financial statements should record 
the amount of salaries earned to 31 March rather than the amount of 
salaries paid out to that point in time.

2.58	Given the changes to the accounting for the former school 
districts in 1996-97, we expected an accrual to be made for salaries earned 
but unpaid at 31 March 1997. This was not done.

2.59	The matter has again been discussed with the Comptroller. 
Because of the nature of the teachers’ salaries that are paid in the summer 
months, the Comptroller is currently considering them to be of a similar 
nature to vacation entitlements. At the present time no accrual of salary is 
expected to be recorded in the 1997-98 year. 

2.60	The Comptroller is looking at the whole area of unrecorded 
employee benefits.

Vacation entitlements

2.61	Government employees earn vacation entitlements for each month 
of employment. At 31 March each year there are vacation entitlements 
that have been earned but that have not been taken by the employees. Such 
entitlements have a value but, as explained in Note 1, no accrual of the 
expenditure has been recorded. 

2.62	We have discussed this with the Comptroller and he indicated that 
during the 1997-98 year he hopes to assemble the information, which 
could be used in support of a possible adjustment. However at the present 
time no accruals are expected to be recorded in the 1997-98 year. 

Liability to injured workers

2.63	The Workplace Health, Safety and Compensation Commission of 
New Brunswick assumes the responsibility for payments to injured 
workers. Only a portion of the liability for future benefits to workers who 
are currently injured has been recorded in the financial statements of the 
Province.

2.64	The Comptroller indicated he would review this issue in the 
1997-98 year.

Summarizing the impact of 
the preceding four issues

2.65	The estimated impact on the financial statements of these matters 
is as follows. 

Exhibit 2.6	
Estimated impact of unresolved 
issues on provincial financial 
statements





2.66	Adjustment for all of these issues on the 1997 financial statements 
(using the estimated amounts shown above) would have a large impact on 
net debt. However the effect on the expenditures of the 1996-97 year 
would be small.

2.67	The Province’s method of accounting for each of the preceding 
four issues has been explained in Note 1 to the financial statements.

2.68	It is our opinion that the each of the four matters should be 
properly reflected in the Province’s financial statements and we 
recommend that the information necessary to make the adjustments 
be obtained as soon as possible. We would like to see the appropriate 
entries made in the 1997-98 year.

Concessionary loans

2.69	For the past two years we raised the issue of concessionary loans. 
These are defined as loans which have low interest rates, extended 
repayment terms or forgiveness clauses. When a loan is not required to be 
fully repaid, including interest charged at market rates, there is a cost 
incurred by government. The cost must be recognized and accounted for 
in the proper accounting period and the loans must be correctly valued.

2.70	We reported that the Province does not account for the 
concessionary loans in compliance with PSAAB recommendations.

2.71	Following our meeting with the Comptroller last year we were 
informed that finalizing the Province’s policy at that time would be 
premature and we reported that the Comptroller would be addressing the 
issue in 1996-97.

2.72	The progress in this area was discussed with the Comptroller. He 
indicated that his staff continues to work on this issue. We would like to 
see the issue resolved in the 1997-98 year. 

Tangible capital assets

2.73	PSAAB has recently approved accounting and reporting standards 
for the tangible capital assets held by provinces. These assets include land, 
buildings, equipment, roads, bridges etc. They are defined by PSAAB as 
non-financial assets having physical substance that are acquired, 
developed or constructed and:

•	are held for use in the production or supply and goods and services;

•	have useful lives extending beyond an accounting period and are 
intended to be used on a continuing basis;

•	are not intended for sale in the ordinary course of operations.



2.74	The implications of these standards are significant for the 
Province. Some of the changes that would take place in the Province’s 
financial statements are as follows:

•	A new financial statement called the statement of tangible capital 
assets would be prepared and included with the three financial 
statements currently issued by the Province. The new statement would 
account for the asset balance and the changes to the net asset balance 
in the year. The year’s amortization of the cost of the assets would be 
disclosed, as would the accumulated amortization to the end of the 
year.



•	Disclosure requirements will include the amortization method used, 
the net book value of assets being amortized and the amount of 
interest capitalized.



2.75	PSAAB recommends the adoption of the standards as soon as 
practicable. It indicates that both new and existing assets should be 
accounted for in this manner. The standard was issued after the release of 
the Province’s statements for the 1996-97 year so the first opportunity to 
release a financial statement under the new format would be the 1997-98 
year.

2.76	This was discussed with the Comptroller. He indicated he fully 
supports PSAAB’s recommendations about tracking and recording 
tangible capital assets. However, because PSAAB’s recommendations on 
tangible capital assets do not affect annual results, the Comptroller 
indicated that work on this issue will be deferred until the issues of 
concessionary loans and employee benefits have been resolved. 

Government has leased 
a school and a 
correctional facility

Traditional approach to 
real estate leases

2.77	Real estate leases are not new to the Province. They have been 
used for years as a means of providing office space. The nature of the real 
estate leases in which the Province has become involved, however, has 
changed.

2.78	The Province extensively leases space in buildings owned by the 
private sector as a means of providing the office space needed for its 
employees. The terms over which these leases run vary from just a few 
years to twenty years. Some of the leases are for entire buildings while 
others are for portions of buildings. The lease costs are normally 
calculated on a per square foot per year basis.

2.79	Until recently, hospitals, schools and correctional facilities were 
not among the types of buildings leased by the Province. The Province 
was directly involved in both the design and the construction of all new 
facilities of this nature. The costs of construction were recorded as 
expenditures when they were incurred.

How the leasing practices 
have changed

2.80	In our last Report we pointed to the fact that two major lease 
agreements had been signed. A lease for a public school facility was 
signed during 1995-96 and a lease for a correctional facility was signed 
subsequent to the 1995-96 year end. Both agreements featured twenty-five 
year lease terms with a purchase option at the end of the twenty-five year 
period. The Province must renew the leases for a further ten years at the 
conclusion of the initial term if the purchase option is not exercised.

2.81	These two new leases differ from those signed in the past:

•	the terms of these leases are longer;

•	the Province has the opportunity to purchase the facility as part of the 
lease agreement; and

•	the Province plays a greater role in determining how the facilities will 
be constructed.



Impact of leasing versus 
constructing

2.82	Leasing rather than constructing these types of facilities results in 
significant changes to the Province’s finances and accounting.

•	Recognition of the cost - the cost is recorded over the lease term 
rather than recording the cost in the period of construction.



•	Cash flow - the funds required to pay for the use of the facility are 
paid out over the term of the lease rather than during the period of 
construction. This has an impact on the borrowing requirements of the 
Province. The immediate need for cash is eliminated and the required 
funds can be raised or borrowed over the number of years specified in 
the lease agreement. 



•	Commitment - expenditures of future years are being locked in place 
by signing the lease agreements.



Impact of the leases on 
government expenditure

2.83	Early in the 1996-97 year another lease agreement was signed. It 
related to a psychiatric facility that is to be constructed by the private 
sector and leased to the Province.

2.84	Recording these leases as operating leases rather than capital 
expenditure has the following impact on the Province’s expenditures. This 
table considers the three lease agreements signed by the end of July 1997. 

Exhibit 2.7	
Impact of leases on the Province’s 
expenditures
(millions of dollars)





2.85	For the purposes of the table, the capital expenditure was assumed 
to be incurred at the point where lease payments began.

2.86	The table shows the trend towards lower costs initially and larger 
amounts expensed in later years with the operating lease classification.

Accounting issues

2.87	The differences between constructing and leasing these facilities 
would have less significance from an accounting perspective had the 
leases been recorded as capital leases. For capital leases, the cost of the 
assets would be expensed at the beginning of the lease term. However, 
they have been classified as operating leases which means that the costs 
are recorded over the term of the lease. 

2.88	There are several important considerations in relation to the 
classification of these leases for accounting purposes.

•	Using the recommendations of the Canadian Institute of Chartered 
Accountants (CICA), the leases would be classified as capital leases. 
However the CICA refers governments to the Public Sector 
Accounting and Auditing Board (PSAAB) for direction in 
determining their appropriate basis of accounting.



•	PSAAB accounting recommendations do not address the issue of 
leases.



•	The effects of lease accounting may be less significant for private 
sector organizations covered by the CICA recommendations. This is 
because they generally depreciate the cost of their capital assets. 
Whether it is annual depreciation cost or annual lease cost that is 
recorded, the impact on the surplus or deficit is normally similar. The 
impact on the provincial government is very different, as we have 
explained.



•	The Province has an accounting policy that permits the classification 
of real estate leases as operating leases. This policy is explained in the 
financial statements and it has been in existence for a number of 
years.

 

•	The Province’s financial statements have been prepared on a basis 
disclosed in Note 1 to the financial statements. Our auditor’s report 
refers to the accounting policies disclosed in Note 1.



2.89	Note 1 to the financial statements states that long-term leases 
under which the Province, as lessee, assumes substantially all of the 
benefits and risks of ownership of leased property, are classified as capital 
leases. The benefits and risks of ownership of real property leases are 
considered to have been assumed by the Province if ownership transfers 
during the lease term or if the lease term is extremely long. Based on this 
policy, the Province has classified the leases referred to above as 
operating leases.

2.90	The leases in question are for a term of twenty-five years. At that 
point they will be either renewed for another ten years or the facilities will 
be purchased by the Province. However, there are no incentives or bargain 
purchase options available which would indicate a transfer of ownership 
is likely. At the end of the renewal period there is no requirement for the 
Province to purchase.

2.91	The effective lease terms are thirty-five years. The Province 
indicates that this is not considered to be extremely long for leases of this 
nature.

2.92	If we found that the accounting policy adopted by the Province 
was inappropriate or misleading we could not support its use and would 
take the necessary action to bring this to the attention of the reader of the 
financial statements. There is no basis on which to definitively say that the 
accounting is incorrect. In fact, the accounting treatment given to these 
transactions is consistent with the Province’s accounting policy which is 
disclosed in the notes to the financial statements. The Province freely 
admits that under the CICA policy they would be forced to record the 
arrangements as capital leases.

2.93	The uncertainty over accounting for leases is not confined to New 
Brunswick. The issue is of concern in a number of provinces and without 
action by PSAAB, the potential for inconsistency and misinterpretation 
will continue.

The government is 
planning to lease a 
highway

2.94	The Province has plans in place to have a toll highway constructed 
from Fredericton to Moncton, a distance of 195 kilometres. This is a very 
large project. The total cost of constructing the highway is expected to be 
$600 million.

2.95	This highway will not be built by the Province or by contractors 
dealing directly with the Province, as has been the norm for highway 
construction in the past. Negotiations are under way to select a successful 
bidder to assume responsibility for the construction and operation of the 
highway. The successful bidder will lease the completed highway back to 
the Province. 

2.96	The project to find a builder for the highway commenced with a 
feasibility study that was approved in June, 1996.

2.97	Three companies were then chosen to submit proposals following 
a call for qualifications. The technical and financial proposals from these 
three companies have now been received. These proposals are being 
subjected to extensive review before deciding on the successful bidder.

2.98	As disclosed in the notes to financial statements, the Province 
intends to complete a contract with one of the bidders during the fiscal 
year ending 31 March 1998.

Accounting implications

2.99	The Province has already incurred costs in constructing portions 
of this highway. The successful bidder will be required to purchase these 
completed portions from the Province and undertake to construct the 
remainder. In 1996-97 the Province spent $38.9 million on construction 
and pre-construction activity related to the highway. The intention is that 
the successful bidder will reimburse the Province for these costs.

2.100	As a result, costs incurred by the Province in the 1996-97 year 
have not been expensed. Rather, they have been set up as an asset of the 
Province called property held for resale. When the property is sold to the 
successful bidder, cash will be received and this property held for resale 
account will be reduced to zero.

2.101	There were contributions from the Government of Canada which 
would normally have been recorded as revenue in the 1996-97 year. Since 
these funds were used to construct a portion of highway that is to be sold, 
it is not appropriate to record the funds as revenue in the 1996-97 year. 
They have been deferred and will be recognized as revenue as the 
Province recognizes the corresponding expenditure.

2.102	When the highway lease agreement is signed it is expected to set 
out a lease arrangement that will qualify as an operating lease. There are 
two major implications to this method of accounting.

•	The first relates to when the costs are recognized in the financial 
statements of the Province. The operating lease classification means 
that the costs will be recorded over the term of the lease. Traditional 
methods of financing would see the costs shown as expenditure in the 
year when the construction takes place. The impact on the surplus or 
deficit will be significant.



•	The second relates to the borrowing. If the lease is accounted for as an 
operating lease the cost of the project will not be paid for by the 
Province before it begins to use the facility, rather it will be paid for 
over the term of the lease. Therefore there will be no major borrowing 
required by the Province, and perhaps no borrowing at all if the lease 
costs can be covered by future annual surpluses. The impact of this 
will be that a major financial commitment will not be recorded in the 
liabilities of the Province.



2.103	We will be monitoring the development of this project in the 
1997-98 year.

Surpluses, deficits, 
borrowing and net debt

2.104	The purpose of this section is to provide readers with useful 
information and analysis on which to draw their own conclusions about 
the status of the Province's surplus or deficit, borrowing and net debt. It is 
not the purpose of this section to provide a conclusion about the financial 
stability or solvency of the Province or any of the other organizations 
which make up the provincial reporting entity.

Definitions

2.105	The following definitions explain terms used in the Province’s 
annual financial statements. These terms together with the corresponding 
balances constitute important financial information. Our annual Reports 
attempt to place some of this data in perspective by providing comparative 
information. Such comparisons are useful in that the reader may better 
understand the Province’s financial history, current status and future 
goals.

2.106	To understand the current financial situation of the Province, it is 
necessary to be familiar with the terminology often used: surplus 
(deficit), cost of servicing the public debt, funded debt, bank advances 
and short term borrowing, sinking fund and net debt.

2.107	The surplus in a fiscal year is the excess of the Province’s total 
revenue over its total expenditure. (A deficit is the excess of total 
expenditure over total revenue.) Total revenue consists mainly of taxes 
and federal transfer payments. Total expenditure includes the cost of 
administering the government and its programs, the acquisition of assets 
which will provide benefits over future periods and the cost of borrowing.

2.108	The cost of servicing the public debt is a major component of 
annual expenditure. It is mainly comprised 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 which have not yet been realized, and the amortization of discounts 
and premiums which were incurred on the issuance of provincial debt.

2.109	Funded debt is the total long-term borrowing by the Province. 
Funded debt for provincial purposes excludes borrowing on behalf of 
NB Power Corporation and usually occurs when the Province’s cash 
inflows are not sufficient to meet its obligations. Long term borrowing 
usually takes the form of provincial bonds, but it may also include debt 
issued to the Canada Pension Plan. The debt issued to the Canada Pension 
Plan accounts for fifteen percent of the Province’s debt. This level is 
consistent with prior years.

2.110	The Province must often incur another form of debt to meet its 
current obligations. Bank advances and short-term borrowing are a 
form of financing used when the Province’s immediate cash requirements 
do not coincide with its current cash inflows.

2.111	The Province plans for the repayment of its funded debt through 
the use of a sinking fund. This fund is a separate accounting entity which 
is maintained by the Minister of Finance. The sinking fund receives 
annual cash instalments from the Province with which it purchases 
investments. The value of the investments, plus future earnings, is 
expected to be sufficient to repay the principal portion of the funded debt 
when it matures or is redeemed.

2.112	Annual surpluses and deficits accumulate in the account called 
net debt. It is important to understand the difference between net debt and 
funded debt. Funded debt refers to the gross amount of long-term 
borrowing undertaken by the Province. Net debt is comparable to an 
accumulated deficit balance which private sector companies would 
disclose in the owners’ equity section of their balance sheet. Net debt is 
the funded debt and other liabilities of the Province minus assets which 
can be used by the Province to fulfill its obligations. Therefore, net debt 
shows the shortfall in resources should all the liabilities of the Province 
come due at the fiscal year end. It represents the amount of future revenue 
required to pay for past transactions.

2.113	This chapter of our Report provides the following financial 
indicators on a comparative basis:

•	surplus (deficit) per person and employed person in New Brunswick;

•	cost of borrowing per person and employed person in New 
Brunswick;

•	proportion of provincial revenue consumed by cost of servicing the 
public debt;

•	comparison of the change in net debt to the change in funded debt; 
and

•	net debt in proportion to GDP.



Surplus for the year ended 
31 March 1997

2.114	The Province had a surplus for the year ended 31 March 1997 of 
$125.4 million. This amount includes the surpluses and deficits of the 
government enterprises described in Note 1 of the Province’s financial 
statements. Exhibit 2.8 shows the amount of the Province’s surplus or 
deficit for each of the last five years. The prior years’ figures have been 
restated to conform with the current year’s financial statement 
presentation.

Exhibit 2.8	
Provincial surplus or deficit for the 
last five years





2.115	The 1996-97 surplus translates to a $164 share for each person 
living in New Brunswick. This is in contrast to last year’s surplus of $67 
per person.

2.116	Examining the surplus from the perspective of an average 
employed New Brunswicker might provide a better measure of its size. 
Exhibit 2.9 shows the amount of the surplus or deficit per person and per 
employed person in each of the last five years. 







Exhibit 2.9	
Provincial surplus or deficit per 
person for the last five years





Cost of servicing the public 
debt

2.117	Exhibit 2.10 shows the cost of servicing the public debt by year 
for the last ten years.

Exhibit 2.10	
Cost of servicing the public debt for 
the last ten years





2.118	During this period the cost of servicing the public debt has risen 
from a low of $415 million to a high of $645 million in 1994-95. This 
represents an increase of 55.4% over seven years. For the second 
consecutive year the cost of servicing the public debt has decreased. It fell 
to $564 million in 1996-97, a decrease of 5.2% from 1995-96 and a 
decrease of 12.6% from the 1994-95 level.

2.119	Exhibit 2.11 shows the portion of provincial revenue consumed 
by the cost of servicing the public debt for the last five years.

Exhibit 2.11	
Portion of provincial revenue 
consumed by the cost of the public 
debt for the last five years



2.120	The decrease from 13.4% in 1995-96 to 12.6% in 1996-97 is the 
net result of a decrease in borrowing costs of $31 million combined with 
an increase in revenue of approximately $44 million. The lower 
borrowing costs resulted from a decrease in both interest and foreign 
exchange expenses. The higher revenue was mostly due to an increase in 
income tax revenue. If 1996-97 revenue had remained at the prior year’s 
level, the percentage consumed by the cost of borrowing would still have 
decreased to 12.7%.

2.121	This year’s cost of borrowing translates to $740 for each person 
living in New Brunswick. Expressed another way, the Province’s cost of 
borrowing for 1996-97 averages $1,808 for each employed New 
Brunswicker. Exhibit 2.12 shows this relationship for the last five years.

Exhibit 2.12	
Provincial cost of borrowing per 
person for the last five years





2.122	If the Province had not been required to borrow funds in previous 
years, then there would not exist either the significant cost of servicing the 
public debt nor interest revenue from the Province’s sinking fund. If these 
items were excluded (other factors remaining the same), the current year 
would have shown a surplus of approximately $509 million. 

2.123	 Exhibit 2.13 demonstrates that the Province would have shown 
significant surpluses in each of the past five years had there been no cost 
of servicing the public debt or sinking fund earnings.

Exhibit 2.13	
Provincial surplus or deficit for the 
last five years excluding cost of 
servicing the public debt and 
sinking fund earnings





Funded debt for provincial 
purposes

Surpluses and repayment of 
long and short-term 
borrowing

2.124	There is not always a direct relationship between the level of 
annual surpluses or deficits and the ability of the Province to repay or 
incur debt. Surpluses and deficits are accounting terms used to describe 
the difference between a current year’s revenue and expenditure. Revenue 
is recorded in the financial statements when earned, expenditure when the 
obligation arises. However, the related cash receipts or payments may not 
occur in the same fiscal period.

2.125	These actual cash flows, as disclosed in the Province’s Statement 
of Cash Flows, dictate the extent to which the Province is able to repay 
funds during the year. Note 18 to the Province’s financial statements 
focuses on both long and short-term borrowing. It explains that the 
Province was able to reduce borrowing by $373.6 million in 1996-97 
despite a surplus of only $125.4 million.

2.126	The components of this $373.6 million decrease in borrowing are 
bank advances and short term borrowing (which decreased by $315.5 
million), long-term borrowing (which increased by $164.7 million) and 
sinking fund investments (which increased by $222.8 million). Short-term 
borrowing was reduced due to the receipt of Harmonized Sales Tax 
Adjustment Assistance. This totalled $364 million and was received from 
the federal government. According to the federal-provincial agreement, 
this assistance reflects the foregone provincial revenue due to 
implementation of the harmonized sales tax system.

Long-term borrowing activity 
in the current year

2.127	In the past year, provincial bonds were sold with ten-year 
maturities. Exhibit 2.14 summarizes the activity in the funded debt for 
provincial purposes account during the last five years.

Exhibit 2.14	
Funded debt for provincial 
purposes for the last five years
(millions of dollars)





2.128	The increase in total funded debt for provincial purposes during 
the year is more than offset by an increase in investments of the sinking 
fund. During the year ended 31 March 1997 long-term debt increased by 
$164.7 million while the compensating increase in the sinking fund 
investments was $222.8 million. Where the sinking fund has grown by an 
amount exceeding the year’s long-term borrowing, this could be 
considered to be a ‘principal repayment’. As long as this trend continues, 
the Province will make significant progress in reducing the balance of 
funded debt outstanding.

Exposure to foreign currency 
exchange rate fluctuations

2.129	Debt repayable in foreign currencies is denominated in US 
dollars, Japanese yen and Swiss francs. Such debt usually requires that 
annual interest be paid in the same currencies as the original issue. 
Between 1 April 1996 and 31 March 1997 the Canadian dollar increased 
in value against all of these currencies. The net result was a favourable 
adjustment for the Province of $53.1 million. This gain will be recorded in 
the accounts of the Province as a reduction in expenditures over the 
remaining life of the related debt. This is the second consecutive year 
during which the adjustment for the change in exchange rates has reduced 
the amount of the provincial debt. The adjustment for exchange rate 
fluctuations increased the amount of the provincial debt in each of the 
three years preceding 1996.

2.130	Exhibit 2.15 demonstrates the change in the Province’s net 
exposure to foreign exchange rate fluctuations over the past five years.

Exhibit 2.15	
Net exposure to foreign exchange 
rate fluctuations over the past five 
years





2.131	Exhibit 2.16 demonstrates the change in the components of the 
Province’s net exposure to foreign currencies over the last five years. For 
the purposes of this chart, investment in a foreign currency has been 
deducted from debt payable in foreign currencies.

Exhibit 2.16	
Changes in debt payable in foreign 
currencies for the last five years



2.132	The previous table shows that exposure to gains and losses due to 
foreign currency exchange rate fluctuations at 31 March 1997 has 
decreased by $199 million from 31 March 1996. This is the second 
consecutive year that the Province’s exposure has decreased.

2.133	The Province has several alternatives to reduce the risk associated 
with debt repayable in foreign currencies. Each of the following will act 
as a hedge to fluctuations in foreign currencies:

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

•	entering into debt swap agreements (which in most cases 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).



2.134	Note 11 of the financial statements of the Province discloses the 
debt that is repayable under swap agreements. This debt is excluded from 
the above chart and previous table except where the debt was payable in 
US dollars under a swap agreement.

2.135	At 31 March 1997, the Province had four outstanding forward 
contracts fixing exchange rates on an exposure of approximately $34 
million. 

Net debt at 31 March 1997

2.136	As noted previously, net debt decreased by $125.4 million during 
the 1996-97 year. The amount of net debt at 31 March 1997 stands at 
$7,137 per person living in New Brunswick or approximately $17,441

for each employed person in New Brunswick. The average wage of a 
New Brunswicker was $26,743 during 1996-97.

2.137	Net debt as a percentage of gross domestic product (GDP) is 
frequently used to measure a government’s ability to sustain its debt. GDP 
is a measure of the current market value of all goods and services 
produced in the Province during a year. The market value used in the 
calculation includes taxes (less subsidies) which make up part of the 
market price. A decreasing ratio of net debt to GDP would indicate that 
the Province’s economy is growing at a greater rate than the debt. This 
implies that the Provincial economy has more resources available with 
which it can maintain its debt.

2.138	The following chart shows the relationship between the 
Province’s net debt as a percentage of both real and nominal GDP for the 
last five calendar years. Both calculations are commonly used to describe 
the financial status of the Province. Real GDP refers to a calculation of 
GDP that adjusts for the effect of inflation. Nominal GDP has not been so 
adjusted. They have both been included in the following chart to facilitate 
readers’ comparison with other sources of information.

Exhibit 2.17	
Provincial net debt and GDP for 
the last five years



Note:  1997 GDP estimate and historical GDP information obtained from N.B. Statistics            
   Agency





2.139	In real terms, the Province’s current net debt to GDP ratio is 
approximately 42%. The net debt to nominal GDP results in a ratio of 
33%. Real GDP is expected to increase by 2.5% in 1997 while nominal 
GDP is expected to increase by 3.5%.

2.140	Last year we reported a modest decrease in the net debt to nominal 
GDP ratio between calendar 1995 and 1996. This was based on an 
assumption of 2.75% growth during 1996. However, that level of growth 
did not materialize. Rather, GDP declined slightly during 1996. This 
caused the net debt to GDP ratio to remain stable for 1996. 

2.141	It is important to recognize that while the net debt may decrease in 
any given year, funded debt could still increase. This occurred during 
fiscal 1995-96 when net debt decreased by $51 million. During the same 
year, funded debt for provincial purposes increased by $19 million.

2.142	This is because there is a difference between the annual surplus or 
deficit and the annual cash requirements of the Province. Note 18 to the 
Province’s financial statements provides information on the various 
components which combine to effect a change in provincial borrowing 
during the year.

2.143	The following chart shows the changes in the Province’s net debt 
as well the changes in total borrowing for provincial purposes during the 
last five years:

Exhibit 2.18		
Changes in borrowing and net debt 
for the last five years





2.144	Exhibit 2.18 shows that while there may be a correlation between 
net debt and total borrowing, it is by no means a direct relationship. 

Eliminating the net debt

2.145	All levels of government in Canada are trying to come to terms 
with the problems raised by years of deficits. The Province of New 
Brunswick is no exception. A plan to reduce the $5.5 billion net debt of 
the Province was introduced for the first time this year.

Long-Term Net Debt 
Reduction Plan

2.146	The government introduced a long-term net debt reduction plan in 
May 1997. The government believes this reduction in the net debt is a 
crucial factor in New Brunswick becoming a self-sufficient province. The 
stated benefits of debt reduction include reduced spending on debt service 
“which would free money to reduce taxes or to provide more or better 
services to New Brunswickers”.

2.147	The goals of the long-term debt reduction plan are as follows:

•	eliminate over eighteen years the $2.5 billion in net debt incurred 
from previous ordinary account deficits and unfunded pension 
liabilities, by using surpluses to pay down the debt; and

•	reduce net debt as a percentage of New Brunswick’s Gross Domestic 
Product from 34.9% to 9.5% by 2013-14.



2.148	The plan requires gradually increasing annual surpluses over the 
eighteen-year period beginning with the 1996-97 year and ending in 
2013-14. Period benchmarks are set every fourth year. In order to achieve 
the desired reduction in net debt, a surplus of approximately $50 million 
per year for the first four-year period is required. This must then 
accelerate by $50 million for each four-year period thereafter.

2.149	The government first introduced balanced budget legislation in 
1993. The first period covered by this legislation was 1993-94 through to 
1995-96. Ordinary account expenditure could not exceed ordinary account 
revenue for the three-year period. The second period covered by the 
legislation is from 1996-97 to 1999-2000 and it covers total expenditure 
and revenue. Note 6 to the Province’s financial statements discloses the 
details of this legislation.

2.150	The government plans to amend the Balanced Budget Act to state 
that revenue must exceed expenditure by the scheduled amount as 
outlined in the debt reduction plan over each four-year period. The 
Minister of Finance will present a progress report on the debt reduction 
plan annually in the Legislative Assembly.

Comments on the plan

2.151	The government has taken a first important step toward reducing 
the net debt by committing itself to a course of action as defined in the 
plan. We have not studied the plan in detail. Our comments are based on 
our initial observations and discussions.

2.152	The long-term debt reduction plan is based on a number of 
economic assumptions including growth in the Province’s GDP as well as 
inflation and interest rate projections. The government proposes to 
legislate the achievement of the plan benchmarks regardless of the affect 
future economic performance has on the assumptions contained in the 
plan. The plan does not contain detailed information on contingency plans 
should actual results fall short of expectations. It simply states that annual 
results may deviate; however surpluses will be averaged over each 
four-year period.

Summary

2.153	Exhibit 2.19 summarizes the impact of the Province’s current 
financial results from the perspective of a resident of the Province of 
New Brunswick.

Exhibit 2.19	
Summary of provincial financial 
results







2.154	We will continue in our attempt to provide understandable 
information on the Province's surpluses, deficits, borrowing and net debt 
on a consistent basis in our annual Reports. This will help the reader to 
understand the issues surrounding the management of the Province's 
finances.

Revenue and 
expenditure

2.155	The purpose of this section is to provide readers with useful 
information and analysis on which to draw their own conclusions about 
the Province’s revenue and expenditure. It is not the purpose of this 
section to provide a conclusion about the appropriateness of individual 
types of revenue or expenditure. Such issues are matters of policy which 
are more appropriately dealt with by the Legislative Assembly. 
Accordingly, they do not fall within our mandate at the Office of the 
Auditor General.

2.156	The Statement of Revenue and Expenditure is a key financial 
document for the Province. The public, the government, and the media 
frequently quote facts and figures from this statement. This is because it is 
one of the timeliest tools available for assessing government’s 
performance and stewardship. 

2.157	For instance, one of the chief financial indicators of performance 
and stewardship is the annual surplus or deficit. This figure has taken on a 
significantly higher profile in recent years. This is due to the widespread 
recognition that governments cannot continue to borrow without 
significant consequences for the future. This principle has been translated 
into provincial initiatives such as the balanced budget legislation. The 
Province’s current financial success or failure is often measured by the 
amount of the annual surplus or deficit.

2.158	The financial statements go to considerable length in explaining 
the accounting policies, the activities and the entities which comprise the 
Statement of Revenue and Expenditure. Additional details can be found in 
the notes and schedules to the financial statements. However, some 
readers may find this amount of detail overwhelming. For this reason, our 
Report has traditionally provided a brief analysis of revenue and 
expenditure. It is hoped that by providing objective information on a 
consistent basis, readers will gain insight into financial patterns, trends, 
and issues.

Revenue

2.159	Overall, provincial revenue increased by $44.2 million (or 1%) in 
1996-97 over the prior year. However, Exhibit 2.20 shows that the 
Province anticipated more revenue than it received in 1996-97. The 
shortfall in revenue was $67.4 million. A similar shortfall occurred only 
one other time in the last five years. 

Exhibit 2.20	
Comparison of budgeted revenue to 
actual, by year





2.160	Though a $44.2 million increase in revenue is not a large 
increase, it may have been a surprise to some readers. The Minister 
of Finance predicted a reduction of $150 million in federal transfers 
during

1996-97 and 1997-98. This expectation materialized, at least in part, 
during 1996-97. Federal transfers decreased by $102.2 million (or 6.3%) 
from the prior year.

2.161	Federal transfers have been an area of considerable 
uncertainty for the Province during its recent history. If the 
provincial government is to meet its goal of making New Brunswick 
‘self-sufficient’, it must reduce the degree of uncertainty associated with 
these federal transfers. Continued uncertainty makes New Brunswick 
vulnerable to future federal transfer fluctuations. 

2.162	New Brunswick’s vulnerability would decrease if federal transfers 
were to stabilize in both the short and long term. Vulnerability would also 
decrease if New Brunswick reduced its dependence on these federal 
transfers. One measure of provincial dependence is shown in Exhibit 2.21.

Exhibit 2.21	 
Sources of revenue







2.163	The Minister of Finance predicted in the 1996-97 Budget Speech 
that the percentage of total provincial revenue represented by federal 
transfers will fall to 34% by 1997-98. As Exhibit 2.21 shows, our Office 
calculates this percentage at 34% in 1996-97 (last year 37%). In this 
regard, New Brunswick appears to be succeeding. It is important to note 
that the Province enjoyed a surplus in 1996-97 despite this decrease in 
federal transfers.

2.164	Overall, there has been a decrease in federal transfer revenue of 
almost $222 million over the last five years. This translates into a 12.7% 
decrease in total provincial revenue (using 1993 as a base.) Exhibit 2.22 
shows federal transfers as a percentage of total provincial revenue for the 
period 1993 to 1997.

Exhibit 2.22	
Federal transfer revenue and 
percentage of total provincial 
revenue, by year



2.165	It is useful to consider these revenues from the perspective of 
the average New Brunswicker. In 1996-97, the Province recorded 
revenue of approximately $1,994 per person from the federal 
government to fund provincial programs and services. This is down from 
the $2,130 per person that was received in 1995-96.

2.166	To compensate for such a reduction in federal revenue, the 
Province needs to generate a higher level of provincial own-source 
revenue. However, this type of revenue is largely dependent on the 
economy. For instance, about 50% of total revenue of the Province in 
1996-97 took the form of taxes. When the economy is strong, more people 
purchase goods and services, more people buy land for homes and 
business, and more people or businesses are working profitably. These 
factors will increase consumption taxes, property taxes and income taxes.

2.167	Taxes on consumption and property increased by a moderate 
amount in 1996-97. Taxes on income increased by $155.4 million or 17%. 
This was $125.7 million more than predicted by the Minister of Finance’s 
Main Estimates. This large increase is due, in part, to the settlement of 
outstanding claims by certain corporate taxpayers.




2.168	In New Brunswick, combined taxes per person totalled $2,994 
in 1996-97. This is an increase from the 1995-96 level of $2,774 per 
person. An increase in combined taxes per person may reflect a slowly 
improving economy. One indicator of a growing economy is the Gross 
Domestic Product (GDP) of New Brunswick. The Minister of Finance 
predicted a 2.5% increase in real GDP during the 1996 calendar year. 
Though the expected level of growth did not materialize, New Brunswick 
still demonstrated growth of 1.4% during that period. Exhibit 2.23 
compares real GDP growth in New Brunswick to growth experienced in 
other provinces and territories during 1996.

Exhibit 2.23	
Growth in the gross domestic 
product in real terms, by province 
and territory







2.169	Exhibit 2.24 shows the growth in real gross domestic product for 
New Brunswick over the last five years. It also shows the percentage 
growth expected by the Minister of Finance as detailed by the annual 
budget speeches. There has been actual growth which exceeded expected 
growth in two of the last five years.

Exhibit 2.24	
Comparison of budgeted growth in 
real GDP to actual, by year



2.170	Where growth in the economy does not meet expectations, 
government may need to increase taxes or implement higher user fees. 
Provincial own-source revenue consists mainly of taxes and user fees 
from the residents and businesses in New Brunswick. As a government 
increases taxes and user fees, the willingness and ability of the public to 
tolerate such increases diminishes. 

2.171	Exhibit 2.25 shows provincial own-source revenue over the last 
five years. It also shows the percentage of provincial own-source revenue 
to the gross domestic product. As the Province extracts more taxes and 
user fees from the economy, it becomes more challenging to encourage 
growth, which in turn, reduces the potential for future provincial revenue.

Exhibit 2.25	
Provincial own-source revenue and 
percentage of GDP, by year



2.172	In recent years, the Province has committed to reducing its 
reliance on federal revenue. To become less dependent on federal 
revenue, the Province must inevitably resort to increasing its own-source 
revenue. The government has succeeded in generating sufficient own-
source revenue to compensate in recent years. However, in a moderate or 
low growth economy there eventually comes a point at which this type of 
revenue cannot be increased any further. 

2.173	It is at this point when the flexibility of a government to obtain 
money is reduced. Most funding for a government’s activities comes from 
one of three broad categories: federal revenue, own-source revenue or 
borrowing. If federal funding is unavailable or uncertain and own-source 
revenues have been maximized, then one of the few options remaining 
(apart from reducing expenditure) is to finance provincial shortfalls 
through borrowing. It is important for the Province to maintain a level of 
flexibility which will prevent the need for dependence on significant, 
additional amounts of long-term borrowing.

Expenditure

2.174	In total, 1996-97 spending decreased by $30 million (or 0.7%) as 
compared to the prior year. This year’s spending also came in under 
budget by almost $100 million. Exhibit 2.26 demonstrates that the 
Province has spent less than budgeted in three of the last five fiscal years.

Exhibit 2.26	
Comparison of budgeted 
expenditure to actual, by year



2.175	There has been public concern in recent years that spending on 
social services is being reduced or eliminated. Exhibit 2.27 shows that 
1996-97 expenditure for social services stands at 62.2% of total 
expenditures. This is actually an increase from the previous year’s level of 
61.1%.

Exhibit 2.27	
Components of total expenditure





2.176	Social services spending is further broken down into its 
components: Health, Income Assistance, Education and Justice.

Exhibit 2.28	
Components of social services 
spending





2.177	The largest increase in social services spending during 1996-97 
was in Education. Education spending increased by $10 million. As 
demonstrated by Exhibit 2.29 it is the first time in four years that spending 
in Education has been increased. Moderate rises in spending in justice and 
income assistance have also occurred in the current year.

Exhibit 2.29	
Social services expenditure, by year



                           Millions of dollars





2.178	Spending in health has increased during each of the last four 
years. However, it is difficult to determine the total cost of health care 
using the information in the Financial Statements. Assuming hospitals and 
nursing homes receive the majority of their funding from the provincial 
government, any deficits that they may experience may eventually impact 
the expenditure of the Province and the cost of health care in New 
Brunswick.

2.179	Note 1 to the Financial Statements states that hospital 
corporations and nursing homes are included in the financial statements 
using the transaction basis. This means the revenue and expenditure of 
these entities are not included in the balances of the Province. To improve 
disclosure, the provincial reporting entity has been expanded in recent 
years to include more detail on some major organizations that are 
accountable to the government. However, to get a complete picture, 
readers may still need to look to other financial information provided by 
the hospital corporations and nursing homes of the Province.

2.180	It is interesting to note that total spending by the Province for 
all the social services is approximately $3,541 per person in New 
Brunswick. This is up from 1996’s social services spending of $3,511 
per person in New Brunswick. Exhibit 2.30 breaks these amounts down 
into their component programs.

Exhibit 2.30	
Components of total social services 
spending on a per capita basis



2.181	The combined spending increases in Education, Health, Income 
Assistance and Justice were almost completely offset by spending 
reductions in Transportation and Central Government. Each program 
reduced expenditure by approximately $13 million in 1996-97.

2.182	The cost of servicing the public debt decreased in 1996-97 from 
last year’s $595 million to $564.4 million. This is a decrease of over $30 
million. This expenditure now consumes 13% (13.6% in 1995-96) of 
every dollar spent. It is the second consecutive year that the cost of 
servicing the public debt has decreased.

2.183	This decrease seemed to be unanticipated by the Minister of 
Finance in his Main Estimates. Main Estimates reflect a budget for 
Service of the Public Debt of $596 million. This is significantly higher 
than the actual results at $564.4 million.

 Summary

2.184	Exhibit 2.31 examines the Statement of Revenue and Expenditure 
from the perspective of a resident of the Province of New Brunswick.

Exhibit 2.31	
Revenue, expenditure and surplus 
per person