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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.”


 

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