One other significant anomaly in our government's authority is the inability to borrow without federal cabinet approval. Section 20 of the Northwest Territories Act requires the GNWT to obtain Governor in Council approval to borrow. The most recent order in council approved last April authorizes the GNWT to borrow up to $575 million until March 31, 2015, and up to $500 million thereafter. This requirement for federal approval to borrow is a shortcoming in the NWT Act. We would prefer either to eliminate the requirement altogether or to base it on provisions similar to our fiscal responsibility policy.
Governments must be able to borrow to adequately plan for and deliver program services and infrastructure to their residents. The imposition of a borrowing limit has long been an issue for the GNWT. The Northwest Territories has a significant infrastructure deficit. The territories lack of transportation and energy infrastructure is a barrier to economic development and to the well-being of our residents. Other governments are able to borrow to finance large capital investments and to service that debt either from tax revenues or from revenues generated by the project, such as tolls or power sales.
The GNWT borrowing limit is inadequate to allow for the investment in the infrastructure we require. In the absence of an adequate borrowing limit or additional funding to meet infrastructure needs, the GNWT has two options: reduce spending on core programs and services or not make necessary investments. This means that NWT residents are not able to take advantage of economic opportunities and the GNWT is not able to make investments that will create long-term benefits.
The borrowing limit is part of a continuing dialogue between the GNWT and the federal government. In 2006 we requested that the borrowing limit be changed to reflect the approach to debt and borrowing that we have adopted in our fiscal responsibility policy. In 2007 the limit was increased from $300 million to a more adequate $500 million. In April 2010 the limit was temporarily increased to $575 million to allow the GNWT to assume $165 million in debt associated with the Deh Cho Bridge project.
In May 2010 Minister Flaherty asked his territorial counterparts to participate in a general review of the territorial borrowing limits to clarify the definitions used by all three territories with respect to what constitutes borrowing for the purposes of the limits. The NWT Department of Finance is working with Finance Canada and the other territories to complete this review. The review, however, has created uncertainty for the GNWT. One of its potential consequences is a change in the treatment of some debt. Some changes might give us more room, but other changes might require the GNWT to request an increase in the limit. Currently, the review does not include discussions about the adequacy of the limit.
Any discussion about the borrowing limit should be twofold. It should address both the adequacy of the limit and the definition of borrowing included in the limit. Neither the NWT Act nor the federal order in council defines borrowing for the purposes of section 20 of the act. The GNWT has relied on advice from our own legal counsel as well as that from the Auditor General of Canada to establish our definition.
For the purposes of the limit, the GNWT defines borrowing as bank lines of credit to the extent that they're actually used, other short-term debt, long-term debentures, bond issues, and mortgages. This applies to direct GNWT borrowing as well as to the borrowing of GNWT agencies, including territorial corporations. The GNWT's fiscal responsibility policy provides clear guidelines for responsible spending, borrowing, and debt repayment, and it defines affordable borrowing limits. The policy has played an important role in maintaining Moody's Investors Service's favourable ratings on GNWT debt since it began rating our debt in 2005. Moody's currently rates GNWT debt as Aa1, one of the highest available ratings.
Under the policy, the GNWT only borrows for infrastructure investments, self-liquidating investments, and repayable loan programs. Total debt is considered affordable as long as the debt servicing payments, both principal and interest, are no greater than 5% of our total revenues. If that threshold is exceeded, operating surpluses must be generated in the following two years to permit principal repayments that will bring debt servicing costs to 5% by the third year. The GNWT is accountable for its management of borrowings through performance criteria, thereby ensuring that total borrowing does not exceed our ability to repay it.
The federal order in council limiting the amount the GNWT may borrow sets an arbitrary amount not explicitly linked to the GNWT's capacity to finance debt.
Our 2006 proposal to Finance Canada requested a blanket authority to borrow for the following reasons.
First, the limit is contrary to the principle of territorial autonomy and decision-making.
Second, the limit is too restrictive, especially since approximately two-thirds of the GNWT's debt is self-liquidating--that is, the cost of servicing the debt is financed by a dedicated stream of revenues from tolls and customers, and not by other government revenues.
Third, the GNWT has demonstrated prudent fiscal management and has a fiscal responsibility policy with clear guidelines and a responsible definition of affordable borrowing limits.
Bill C-530 is one approach to increasing the ability of the GNWT to borrow. The bill would somewhat reduce the arbitrariness of the borrowing limit by linking it to the government's revenues. It would also result in a higher borrowing limit. However, the bill does not define what types of borrowing are to be included in the limit. While the GNWT would welcome a higher borrowing limit, if it means other potential liabilities such as unused portions of bank credit or guaranteed debt that is not a draw on general government revenues are included in the definition, then we may be in the same position we are in now.
The GNWT has not performed any rigorous analysis of the bill. Our preferred approach would be to eliminate the borrowing limit completely. As a responsible government, the GNWT would continue to exercise prudent debt management strategies and adhere to the limits within the fiscal responsibility policy.
The GNWT is committed to the current review process under way with Canada and the other territories. The review will create certainty with respect to the treatment of borrowing and debt for the purposes of the limit. However, this review is not considering the adequacy of the borrowing limit to permit the territories to borrow for large-scale resource development, front-end investment for economic growth, and the capital infrastructure investment required for the normal delivery of government programs.
The GNWT would like to change the question from “What is an appropriate limit?” to “Why should a responsible government be subject to an externally imposed limit on the amount it can borrow?” We are committed to our fiscal responsibility policy, which is based on the principle of living within our means and avoiding unaffordable levels of debt. If there must be a legislated borrowing limit, a formula-based approach mirroring the requirements of the fiscal responsibility policy is preferable to an arbitrary amount.
Canada needs to consider its role in the long-term development of the NWT. The size and definition of the borrowing limit have a very real impact on our government's ability to support needed investments in infrastructure that will grow the NWT economy and improve the lives of our residents. A longer-term perspective on the borrowing limit, one that enables the GNWT to make large, financially sustainable investments would be a win for both governments in our efforts to create a sustainable future for the NWT.
Thank you.
