The N.W.T.'s debt limit what is it and why does it matter?

Unlike Canada's provinces, the Northwest Territories, Nunavut and Yukon all have debt caps imposed by the federal government.

And it comes up in nearly every budget cycle in the North.

As N.W.T. Finance Minister Caroline Wawzonek prepares to deliver her first budget on Feb. 25, CBC North is taking a look at the debt cap, where the territory is at, and what it means for you.

What is the debt cap?

In simple terms, the borrowing limit is like the limit on your credit card.

It's the amount that the federal government feels the territories can borrow and eventually pay off by issuing bonds and taking out loans from banks. It's set by the federal finance minister and it's the territory's responsibility to pay it off.

In the Northwest Territories, the limit is $1.3 billion. Nunavut's limit is $650 million, while Yukon's is $400 million.

In the same way many of us use a line of credit to pay for home renovations, or a mortgage to finance a home, the Northwest Territories takes on its biggest debts on infrastructure projects like the $300-million Inuvik-Tuktoyaktuk highway, or the $350-million Stanton Territorial Hospital.

Today, the government owes about $1 billion. That's about $100 million more than in 2018 because it spent more on infrastructure projects and borrowed more from its banks, according to its year-end report for 2019.

Why do the territories have a debt cap?

It's a leftover policy from when the federal government was responsible for administering Canada's Northern territories. At that time bureaucrats in Ottawa approved the Northwest Territories budget line-by-line.

When Nunavut and the Northwest Territories split in 1999, the federal government allowed the territory the autonomy to make its own spending decisions, but set a $300 million cap on how much it could go into debt.

Since then, that cap's been raised five times, most recently in 2015.

How close is the N.W.T to going over? And what happens if it does?

To date, none of the three territories have ever gone over their limit and the Northwest Territories has room to take on about another $300 million before it hits the debt ceiling.

That's about a new hospital or another major highway. Or, it's about enough to run the Education, Culture and Employment Department for a year.

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The annual report notes the debt limit makes it difficult for the government to take on more debt to finance more major projects.

The power to raise the limit lies with the federal finance minister, and it's on the territory to make a business case for them to do that.

The Northwest Territories Act does not set out specific penalties for the territory if it goes over the limit, but officials in the territory's Finance Department say it wouldn't be good if that happened.

Hitting that debt cap could mean that the territory would need to make changes to how it operates, causing job losses or cuts to programs and services, or bring in higher taxes to pay off the debt.

They say it would also likely damage the relationship between the territory and the federal government, which is responsible for just about three out of every four dollars the territory brings in, and is the major financial backer of many of the territory's infrastructure projects.

How is the territory dealing with it?

The Northwest Territories took a conservative approach to managing the government's money under former finance minister Robert C. McLeod.

The governmenttook over a financial situation that McLeod called "unsustainable," with money not coming in fast enough to pay off growing expenses and debt.

Over the next four years, he routinely spoke about the government's struggles to find new ways to bring in money. In last year's budget address, he explained his strategy was to "not spend beyond what we can afford."

At this time last year, he told reporters he'd been in discussions with federal Finance Minister Bill Morneau about raising the cap, but there's been no update since then.

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On Tuesday, Finance Minister Caroline Wawzonek will release her first budget, signalling this new government's approach. So far, she's promised to be creative, and to invest without big cuts to public spending.

That won't be easy, and the debt cap means the government can't spend its way out of its problems without raising taxes or finding new ways of bringing in money.