03/26/2013 04:47 EDT | Updated 05/25/2013 05:12 EDT

5 things to watch for in New Brunswick's budget

Finance Minister Blaine Higgs is preparing to deliver his third budget on Tuesday as the provincial government continues to be confronted with tough choices on how to wrestle down the massive deficit.

Both Higgs and Premier David Alward government have been preparing the public for major changes, including various cuts and possible revenue-raising tactics, for months.

The third budget may be the last opportunity for any significant changes before the next election. The fourth budget will be delivered about five months before the 2014 election campaign starts so the next financial plan will largely be a pre-election document.

Here are five storylines to watch for in Tuesday’s budget:

1. The deficit-elimination promise

The Alward government had promised in the 2010 campaign that it would balance the budget before the 2014 election.

This promise was designed to strengthen Alward’s financial bona fides and further highlight the financial problems of the Shawn Graham government. The finance minister began talking tough soon after he came into office about cutting spending and he laid out his wants versus needs doctrine.

Each year, Higgs has prepared the public for spending cuts during his pre-budget consultation tours, but when it came time to release his annual spending plan, the deep cuts that some had anticipated were missing.

Higgs laid out a multi-year fiscal plan in last March’s budget, which put the provincial government on track for a balanced budget, albeit barely, by 2014. Higgs’s plan to return to a $6-million surplus months before the next provincial election would have required a lot of good fortune for the provincial government.

That plan went off the rails in October when Higgs announced the proposed budget deficit had nearly doubled to $356 million. It wasn’t government spending that fuelled the ballooning deficit, however. This time it was government revenues that were tanking below forecasts.

Had the Alward government moved more quickly on cutting spending earlier in the mandate, the deficits may not have been as substantial. But Higgs admitted in recent interviews that political considerations had to be weighed when looking at plans to cut spending.

"Any finance minister will likely have had different views on on how aggressive we can be. The premier on the other hand has to balance not only that aspect of our priorities but all of the other priorities,” he said.

The news got even worse in January when the projected deficit bumped up to $411 million.

Alward dropped the rhetoric in the throne speech last November about erasing the deficit, started by the Graham government. By January, Higgs and Alward began talking openly about how the 2010 campaign promise would not be kept.

“When I say it is a budget that counts, if we are going to be able to turn around the realities of our fiscal situation and we are going to be able to move forward in that direction and that direction is not going to see us balanced in two years. We are not going to make that goal,” Higgs said in January.

The finance minister will need to lay out a complex document that seeks to give a nod to the deficit-fighting rhetoric that have been in the budget blueprint for the last few years. But Higgs will also likely avoid any extremely controversial decisions considering the upcoming election is less than two years away.

2. Revenue-raising tactics

The finance minister told citizens turning out to his pre-budget consultations that he was weighing several ways to raise revenue. These revenue-raising tactics were needed, he said, because New Brunswickers would not likely support the deep cuts that would be needed to balance the budget otherwise.

There were trial balloons floated about a $115-million health levy, road tolls, an HST increase or increases to personal income tax and corporate income tax.

Individually, there is no single revenue option that could eliminate the deficit in one year. A combination could bring the deficit out of the red, but would be politically difficult for the Progressive Conservative government.

The New Brunswick Business Council has given the provincial government some political cover if they wanted to hike taxes. The council’s executive director backed a plan to increase the HST by two percentage points and bump up corporate income taxes to 2008 levels.

The New Brunswick government would receive about $270 million increasing the HST by two percentage points, thereby reclaiming the tax room left by the federal government when Prime Minister Stephen Harper cut the sales tax.

Erasing the Graham government’s personal and corporate income taxes would raise about $345 million. Even that would leave Higgs almost $65 million short of a balanced budget.

3. The possibility of a referendum

The spectre of a potential referendum is also hanging over the Alward government. The Alward government would be forced to seek approval from the public in a referendum if it decides to move forward with any new taxes or tolls.

Avoiding a referendum would mean the Alward government is bypassing one of the few ways to raise a significant amount of new revenue.

Higgs can thank Alward and a few of his cabinet and caucus colleagues for the potentially divisive exercise. The Bernard Lord government brought in the Taxpayer Protection Act in 2003 as a pre-election gimmick when the economic times were better and the provincial government was in surplus.

Lord wanted to strengthen his fiscal conservative resumé and use the law as a way to jam the Graham Liberals, who he often criticized as being spendthrifts.

So Alward now finds himself handcuffed by a law he voted for when economic times were better and by a deficit started by a government that he defeated when the economy tanked. A tax increase could go a long way in cutting the deficit, but it could also be a very dangerous political proposition.

The province’s Referendum Act details the steps needed to be undertaken before an issue can be sent to the public for a vote. Given that timing, it would be difficult to imagine a provincial referendum could be organized before the summer, so a fall vote may be more likely.

If the public voted down the tax proposal, the Alward government would be facing a double-whammy of bad political news. It would not have the desired revenue to reduce the deficit and it would have been defeated in a public vote less than a year before the 2014 general election.

4. Cutting departmental spending

Higgs has attempted to curtail provincial spending in his first two budgets. The finance minister has eliminated a handful of councils and forced departments to reduce spending or ratchet back on previously promised spending.

But overall the cuts in the first two budgets have not been dramatic.

Higgs and Alward have said the public would not endorse the type of sweeping spending cuts that would be needed in order balance the books.

“There's also a recognition that services are important to us and we need to find ways to deal with it," Alward said in February

If those deep cuts are avoided again, Higgs may fall back to his previous routine of small, targeted cuts. The impact is not immediately felt by the public, but the savings for the provincial government are also smaller.

Taxpayers will also likely learn the fate of the controversial government-owned plane. In 2012, Higgs promised to review the future ownership of the plane, but the study has not been released yet.

The Alward government may also run the risk of breaking another campaign promise when it comes to health spending. Alward had committed to a "minimum" of three-per-cent spending increases for the province’s largest department.

There have already been some cuts announced inside the two regional health authorities. The Vitalité Health Network announced 400 jobs would be cut in the next three years.

John McGarry, the president and chief executive officer of the Horizon Health Network, also hinted at similar job losses at the province’s largest health authority.

Another potential political problem for Higgs is he is running a significant deficit and the Alward government is running out of time to implement several costly election promises from 2010.

The provincial government has been criticized, specifically, about the lack of a promised catastrophic drug program.

There has also been confusion over the implementation of Alward’s promise to eliminate ambulance fees in the province.

5. Economic outlook

The economic outlook for the provincial government may offer some foreshadowing to the final 18 months of the Alward government’s mandate.

Higgs warned last March the provincial government’s budget would lead to slower economic growth, one of the few predictions from that budget that has held true.

The province’s unemployment rate has been over 10 per cent since July and there are still fewer jobs in the province now than January 2009. When the economy is slow, it adds more pressure on the provincial government because less revenue is coming in and there can be upward pressure for government-delivered services.

Higgs foreshadowed a slowing in the economy in his 2012 budget because of some of the cuts detailed in his spending plan. Another austere budget could further stymie the province’s economic recovery.