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The Rock’s in a hard place: Why things look bleak for Newfoundland

Newfoundland’s new Liberal government is facing a Greece-like mountain of red ink—and has no clear path to tackle it


 
Storm clouds form over the city of St. John's and St. John's busy harbour. (V. J. Matthew/Shutterstock)

Storm clouds form over the city of St. John’s and St. John’s busy harbour. (V. J. Matthew/Shutterstock)

There was a fierce debate during the 2015 federal election campaign over whether Prime Minister Stephen Harper had actually delivered a “surprise” $1.9-billion surplus last year, or had in fact rang up a similar-sized deficit. But, as is so often the case, it was all smoke, no fire. Wrapping up the fiscal year a few billion on either side of the ledger is a rounding error in a $2-trillion economy.

By contrast, Newfoundland and Labrador is suffering from the opposite problem. The province’s finances are in shambles—the deficit has ballooned to $1.96 billion thanks to plunging oil and gas revenues, according to a recent fiscal update—and yet politicians managed to stump their way through a provincial election in November without addressing the issue head-on. And make no mistake: at seven per cent of GDP, the province’s red ink isn’t something that can be fudged away. It’s on par with Greece’s average deficit-to-GDP ratio over the past two decades. And, as some have joked on Twitter, we all know how that turned out.

The turn of events is shocking considering it was only a few years ago that Newfoundland’s oil-fueled economy was hailed as one of the country’s fastest-growing. But it is hardly a surprise. Last spring, the previous Progressive Conservative government forecasted a $1.1-billion budget shortfall based on an average oil price of US$62 a barrel. With oil now at US$36, it wasn’t difficult to do the math. And yet Liberal Premier Dwight Ball won in a landslide after his party promised more deficit spending, in part because of a plan to scrap the previous government’s two per cent sales tax increase.

“The Liberal campaign provincially tried to mirror the campaign the federal Liberals ran so successfully,” says Memorial University political science professor Russell Williams, adding that it was clear early on that the Liberals were going to sweep away 12 years of Tory rule. “But the context is obviously so fundamentally different. Federal finances are in great shape. But here in Newfoundland, we’re talking about similar-sized deficits and there’s only half a million people.”

That’s not to say Ball’s government isn’t taking the deepening pool of red ink around its ankles seriously. Last week, a grim-faced Ball released a fiscal update that confirmed the deficit is closing in on $2 billion and could run as high as $2.4 billion in 2016-2017. “Newfoundland and Labrador is at a critical juncture and at no other time has it been more important for us to get our province back on track,” Ball said in a statement.

Trouble is, the government doesn’t have much room to maneuver thanks to the province’s unique economic challenges and the Liberals’ own election promises. Oil and gas now accounts for nearly 30 per cent of the province’s economy, making Newfoundland and Labrador more exposed to swings in crude prices than even Alberta. At the same time, a third of Newfoundlanders are employed by the government, far higher than the national average. No wonder, then, that Ball is promising not to lay off any government workers. Doing so could arguably make the province’s bleak economic situation that much worse. Instead, Ball has promised a round of government belt-tightening that includes: reduced hiring in the public service (though not a complete hiring freeze); a clampdown on travel, discretionary spending and the use of consultants; and a review of the $7.6-billion Muskrat Falls hydroelectric project that’s over-budget and behind schedule.

Yet, while every bit helps, a permanent solution will almost certainly mean raising taxes, among the lowest in Atlantic Canada, or cutting services—both measures that vote-conscious politicians are eager to avoid. Already, Ball’s government has written Ottawa to inform finance officials its decision to undo the planned increase of the province’s portion of Harmonized Sales Tax to 15 per cent from 13 per cent on Jan. 1. “That’s another $200 million we’re in the hole for next year,” says Williams. “It’s a strange message to send when you’re now going to have to look at raising other types of taxes or slashing public services—basically austerity across the board.”

In Alberta, by contrast, the NDP government led by Premier Rachel Notley responded to a looming $6-billion budget shortfall by raising corporate taxes and those paid by high-income earners. The move was predictably controversial, but probably unavoidable given a history of hefty spending increases that Notley’s government has continued. A recent report by the right-leaning Fraser Institute argued Alberta would still be in the black despite the oil crash if it had held spending to the rate of inflation plus population growth. “A government can choose to be disciplined on spending and set aside resource revenues for future generations, or it can spend like the good times will last forever,” says Charles Lammam, one of the study’s authors. “In the case of Alberta, they chose the latter and are now bearing the consequences.”

The same arguably goes for Newfoundland, which also used its windfall from oil and gas to pave the way for tax cuts. Now difficult choices must be made—the sooner, the better. “The numbers are so shocking we’re not yet talking about them in detail,” Williams says. “We know an opportunity has been squandered, but nobody knows where to go from here.”


 

The Rock’s in a hard place: Why things look bleak for Newfoundland

  1. What is new, both the taxpayer and the government think a windfall will last forever.

  2. Let me guess: The ABC: Anything but Conservative program hasn’t worked out well since OPEC (otherwise known as Saudi Arabia) has refused to turn off the taps. Crazy that voting Liberal hasn’t saved them. Big shock there.

    • I’ve been out of NL for a couple of decades and don’t follow its politics that closely, but it’s fair to say the last two premiers since Danny Williams left office have done a pitiful job. The Libs find themselves taking office with a mess on their hands that’s largely due to external forces (oil prices) – but the PCs certainly didn’t help.

      As the Libs have been in office there for even less time than they have been federally, it’s a tad premature to be blaming the Libs for anything – though the HST reduction seems a very stupid way to kick things off. Kinda seems more like something Harper-style Conservatives would do…

    • Ooooh … you’ve got us there! It’s only cons that favor market manipulation and contrived scarcity over supply and demand. Of course, bad behavior is a matter of perspective: finding ways to dump more Canadian dilbit into the global market is good while Saudi unloading its crude is bad (it just has to get out of the ground)!? Let’s just say that ‘don’t put all your eggs in one basket’ is better advice than anything the Fraser Institute ever came up with.

  3. One has to wonder how much the sagging Alberta economy is affecting Newfoundland, Alberta being a major source of Newfoundland employment and personal income.

    In any case, you’ve got to make hay while the sun shines yet previous governments did little to refurbish other industries, develop new ones or to aggressively exploit the export markets for clean electricity in New England. Con governments tend always to be overly laissez faire (excepting corporate welfare). In any case, Newfoundland oil and gas won’t last forever; in the recent past, declining volume was masked by increasing price – nevertheless there for all to see: down to less than 80 Mbbl from 130 Mbbl in 2007; no matter what, Newfoundland will need to make substantial adjustments to its economy.

  4. The province’s finances are in shambles
    It’s on par with Greece’s average deficit-to-GDP ratio over the past two decades.

    ABC– way to go Newfoundland—you’ve taken a great idea from Ontario (McGuinty/Wynne) and spent more than you are taking in…right back where you have been since joining Canada.
    Don’t get me wrong; we all love Newfies except for that ego maniac Danny Williams who I hear is doing just fine.

    • Exactly right! “spent more than you are taking in” which is exactly what the new Feds are promising. Dont governments ever learn? The more debt the more cost for your debt, yes the Federal government is in better shape than many provinces, certainly Ontario, but why mess with that. Spend what you can afford will pay off in the long run.

  5. Lovely Newfoundland of the picturesque postcard tourism ads!
    What is stopping Canada from the sheep – wool – craft export business? (faint recall of that interprovincial trade barrier thing once mentioned by you know who)

    Understandably, a set of initiators different from those of the oil and gas crowd would be needed to get it to export levels — the government tried to get it going before.

    Now, after watching this:
    re: http://www.cbc.ca/landandseanl/2013/07/the-shepherd.html

    Why not give it a second go, dear government?

  6. The thing is, it made no difference what the Liberals offered as a platform, they won long before the election was called. As taxpayers and voters we had enough of the corrupt Conservatives at that point, and a change had to be made with the Liberals being the only choice. The NDP continued it’s history of delivering a band of misfits, none of which were suitable governing material, so what choice did we really have? The Conservative government of the past decade and more, have been the most corrupt and reprehensible governing body in the history of Newfoundland. They squandered billions on top of billions with no sound explanation. When explanations started to be demanded by the public, the answer was a swift change to the access to information laws so we could not see the nitty gritty of where the money was being squandered. The majority of Newfoundland have seen no increase in government services(aside from a couple new government buildings to house the redundant civil service) and by large, the Newfoundland prosperity of the past decade has been derived from Newfoundland workers bringing home big Alberta oil money. I read articles all the time that say Newfoundland has squandered their opportunity but that is simply not true. We were not asked how our money was to be spent. It was done in closed meetings and offices of the Conservative government without our consent or truthful knowledge. We did not squander anything. It was stolen by a group of wolves in sheep suits.

  7. Wow. In a speech years back, D.Williams said the oil revenue was to diversify to a renewable economy. I’m not sure what NFLD’s industrial capacity is. I suppose the oil can be used to refine petrochemicals. Need to list what infrastructure and schools NFLD has already. I’m happy Brandon has a University. Probable NFLD could have a couple.
    For example, they told me I was working in the 3 largest building, smaller than two malls. This was for pandemic purposes. Now they’ve told me Haprer was a deadend during the stimulus, a once in a generation opportunity. They said $4B would be enough to retrofit ($1.1B a building) an assembly line to renewables (such as wind turbines). The building is good for 100 years. The boarded up homes were supposed to be 80 years or whatever. And the retrofit would’ve only been for 30-40 years. With 100 infrastructures, you have to be flexible. Renewable power is good for civil defense too. In the future, maybe giant bird zoo infrastructure will be constructed after we wipe out the wild migrating ones. Metal tents would shield Warthog like planes, made of copper and plastic, against an EMP. They told me a business plan that involves treating schizophrenia and OCD (I will be the one hunting OCD down from now on) with brain games, that introduce rationality (unless NFLD Churches). The key is to find EEG chart anomalies and to stimulate next decades EEG nanotech brain improvement inventions (they won’t say what but sensors in the mush is too much). My point is you need Psychiatry Grad schools for this. And high Provincial taxes on the wealthy to pay for the mental illness economy. I’m learning a lot about side channel attacks and access control. Whoever is mentally healthy should get the future hack-proof infrastructure investment. I need shrinks to buy my videogames; is better EEG chart database builder than RNG via brainwaves.

  8. For starters, when I google what NFLD’s manufacturing employers are, I can’t find it. There are few Atlantic Canada sites, but the region will not amalgamate their MP/Senate representation. I have trouble finding the 2nd largest population cluster, so I guess immigrants should just come to St. John’s. For 25000 Syrian immigrants, 1 or 2 will be terrorists, 10-12 will funnel money to Al Qaeda, and about 2500 will be a net loss. That is good ROI for an aging population.
    To retool an auto-plant costs $1.1B to any metal product. A new one costs $3.9B including all first year costs. I suppose NFLD doesn’t have anything of that scale. Every farmer on Earth will need a bioreactor to turn protein plants into a saleable product. I’ve looked into Sugar cane, GMO-ing the protein % to 10%. They have suggested making birch or poplar, syrupy. NFLD could accomplish this forestry research. From the Memorial website, it looks like there is the expertise to find a replacement for bird protein. I’m not sure what the crop is. Neutrino beams will be useful for preventing WMDs. There is wave power to invest in. They said USA Corn subsidies would be enough to phase in fake protein meat via crops. This suggests to me taxing oil (or just plain corporate taxes) to fund wave power R+D and manufacturing, seems reasonable. A pandemic response is to develop lithium batteries at home connected to a burner plate and a food dehydrator: people can turn their meats into beef jerky. This is similar to the cod canning industry.
    They said AB spent their oil money on new cars 1st, on stuff for their wives 2nd, and on home renovations 3rd (what I thought #1). It is clear to me, every province, every media and blog shill, who lobbied for low corporate taxes in an oil country, is proven wrong. And it is proven correct the dollars of retrofittable and retraining employment income, are worth more than is a dollar of women’s clothing and shoes, and a dollar for a new car is if you were a 1950s teenager fighting the Cold War…the home renos seem like a good idea regardless.
    They pretended to be 2095 NSA head and begged me to work on Access Control for WMD infrastructures, so there is lots of money in treating mental illnesses. Trillions or tens of trillions by 2030. I’m not sure if the improvements to EEGs will be little, or big (like MRIs), or both. But regardless, it could be manufactured in NFLD. There is a need for a centre of excellence of Psychiatrists using novel mental illness treatment methods. Any country’s DofD would be a customer, and eventually safety nets would require treatment. The 200 USA DofD papers I’ve just read about hacker consider hackers rational actors. The idea is to treat mental illnesses so their models are true. I’ll have more economics from them, but why bother if you want to be an AGW economy forever?! I’ll learn Norwegian.

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