As a host of problems hits Newfoundland, people are wondering: Could the Rock go bust?
The province’s problems are Canada’s problems. And those problems will cost billions
— Jon Keefe
Warrick Chubbs is like a character out of a tourism commercial.
If, on a summer afternoon, you show up at his home in St. Lewis, Labrador, he’s liable to invite you in for tea and cake, then take you on a tour of his vegetable garden. Then it’s on down to the wharf, to see the salted codfish drying in the sun.
St. Lewis is rural and remote, and feels like real frontier living. Older folks like Chubbs can remember a time when the only way to get around in winter was by dogsled, and until they built the road, the only way to get around in summer was by boat. Folks still live that traditional, hardy existence; because they’re so remote, they don’t have any other choice.
“We pretty much live from the garden and from the ocean,” Chubbs says. “We can get our heat for very little. We’ve got to go in and cut a little wood, but that’s only exercise.”
It’s an idyllic life, but call Chubbs up and get him talking about politics, the mood turns dark. The economy is in trouble, and the provincial government’s finances are in terrible shape.
“One of these days, we’re going to go bankrupt,” Chubbs says grimly.
It’s not just Chubbs thinking that way. A January poll by Abacus Data found that 53 per cent of Newfoundland and Labrador residents expect the province to go bankrupt sometime in the next few years, the most likely outcome a federal bailout.
The province is facing a perfect storm of geographic, demographic, fiscal and economic problems, and as the walls close in for Newfoundland and Labrador, the fiscal choices get more and more desperate. And increasingly, people like Chubbs who live a traditional, coastal way of life, are caught squarely in the crosshairs.
Chubbs is 72 years old, and folks in his generation cost the province a lot for health care. It gets even more expensive because St. Lewis — a 90-minute drive across a rough road to the next nearest town, and a full eight hours away from anything resembling a major population centre with a full suite of government services — needs its own health care clinic for its population of 194.
If it doesn’t close the clinic, the government might close the school — awfully pricey to operate for its handful of students. And anyone in rural N.L. will tell you that when the school closes, that’s a death knell for the whole community.
Chubbs hasn’t had a steady livelihood since the cod moratorium in 1992. Outports like St. Lewis were once vibrant fishing communities, but today they struggle to find economic purpose, home mostly to elderly citizens who feel they’ve earned the right to die in the same place they lived.
But this isn’t just a problem for Newfoundland and Labrador. The government says it can’t raise taxes enough to pay the bills, and none of the elected leaders are willing to cut spending enough to balance the books. Instead they are banking on financial help from Ottawa, which means that Newfoundland and Labrador’s problems are Canada’s problems. And those problems are going to cost somebody billions of dollars.
The warning signs for Newfoundland and Labrador have been coming for years. Danny Williams came to power in 2003, and promptly held a grim news conference where he warned that the provincial debt was out of control, and threatening to bankrupt the province. Fortunately for Williams, though, after one unpleasant budget and a nasty public sector strike, the price of oil rocketed from around $30 a barrel when he first took office, to $50 by the early months of 2005.
By the end of Williams’ first term in office, oil was flirting with $80 a barrel, and it only climbed higher in his second term. Williams cut taxes and allowed spending to explode, fuelled by windfall oil royalties, right up until he quit politics in 2010, one week after he announced a landmark deal for a multibillion-dollar hydroelectric project. During the good years, a few columnists, some policy wonks and the province’s auditor-general fretted that the government was living beyond its means, but the electorate didn’t care. After decades of crushing societal poverty, Newfoundland and Labrador was rich for a change, and Williams got credit for the economic miracle.
When the price of oil crashed in 2014, government opted not to slash spending to maintain balance, leading to huge deficits and hard choices. Today, it feels like the province is close to running out of road. Every budget, every major financial announcement comes with the question, “How will this affect the province’s credit rating?” Reporters routinely ask the finance minister whether he consulted with bond-rating agencies before making major decisions.
Looming just over the horizon is the prospect of a debt crisis and full-blown insolvency, and the brutal austerity policies which would surely come with it. This spring’s budget was little more than a fresh coat of paint on the same grim realities of the past few years.
There’s really no roadmap for any of this. No province has ever gone bankrupt. While most people assume that the federal government would step in before any province defaulted on its debt, there’s no mechanism for that kind of bailout. If it ever happened, it’d be messy.
Saskatchewan flirted with insolvency in the early 1990s, and even got the federal government of Brian Mulroney to tinker with the equalization formula. But Janice MacKinnon, the finance minister at the time, said that $14 million in federal assistance under equalization was only just enough wiggle room so that the government could sell a drastic austerity budget to caucus.
“The federal government can help the provinces around the margins in a oneoff, but they could not make a major injection of cash or the equivalent into a province without serious discussions behind closed doors with other provinces, because they are quite rightly going to object,” MacKinnon said.
“Other provinces that are quite rightly managing their books well, will rightly say that’s not a fair way to proceed; you’re rewarding provinces that aren’t managing their finances well at the expense of provinces who are managing their finances well.”
In Saskatchewan’s case, both the province and the federal government worked hard to keep the dire situation secret from the public, because of concerns that any publicity would harm investor confidence and dissuade people from buying Saskatchewan bonds.
In Newfoundland and Labrador’s case, people are already talking quite openly about a federal bailout; in some quarters, it’s a foregone conclusion. MacKinnon said that Saskatchewan didn’t want to even test those waters, because the government knew it would come with Ottawa dictating terms.
“What we didn’t want was for the federal government to take it as their problem,” she said. “We would have expected that if the federal government was going to do more than just make some minor changes, that they were going to expect something in return.”
People like Warrick Chubbs who live in the outports are part of the financial challenge for Newfoundland and Labrador, as the government struggles to deliver modern services across pre-industrial settlement patterns. But there’s more to it than that. It’s tough to keep health care costs low when you’ve got an ever-increasing cohort of senior citizens who require expensive health care. And health care gets even more expensive when you account for the fact that Newfoundlanders and Labradorians lead the country when it comes to the rates of diabetes, heart disease, obesity and alcohol consumption.
FEDERAL GOVERNMENT ... COULD NOT MAKE A MAJOR INJECTION OF CASH OR THE EQUIVALENT INTO A PROVINCE WITHOUT SERIOUS DISCUSSIONS BEHIND CLOSED DOORS WITH OTHER PROVINCES, BECAUSE THEY ARE QUITE RIGHTLY GOING TO OBJECT. — JANICE MacKINNON ‘We’re headed towards the black hole. There’s no question about it.’
WITHOUT NEWFOUNDLAND AND LABRADOR BEING TREATED FAIRLY, THEN IT WOULD REQUIRE EXTREME MEASURES, AND WHAT THOSE MEASURES WOULD LOOK LIKE, I THINK IT’S TOO EARLY TO TELL. — PREMIER DWIGHT BALL ‘This is a period of transition, and we are looking for financial fairness.’ — Premier Dwight Ball
For years, a succession of auditors-general have been warning the province that per capita provincial government spending is dramatically higher than any other province in the country. The outcome has been a situation where taxes are high, but government services are mediocre.
Over the short term, the current Liberal government says it has a plan to return to balanced budgets by 2023, although that relies on hitting deficit-reduction targets along the way, and Finance Minister Tom Osborne missed those targets this year.
The initial reaction from bond-rating agency Moody’s wasn’t good, expressing doubt about whether the province can return to a balanced budget.
When the St. John’s Telegram asked Osborne for his response, he told the paper, “Nobody’s saying this is easy.”
But over the long term, based on demographic and economic fundamentals, the federal Parliamentary Budget Officer estimates that Newfoundland and Labrador will have a major structural deficit. To balance the budget, the PBO said in an October report the province would need to raise taxes permanently by 26 per cent, or cut spending by 21 per cent.
While the provincial government grapples with all of this, the deficits pile up. This year, the province will spend more than $1 billion in debtservicing costs, which is a helluva lot in a province whose annual budget is only $8.3 billion. This year, the province will spend more on debt interest payments than it’ll spend on the whole education system.
All of this fiscal doom and gloom is smothering business confidence and investment.
“I’d be a fool to not look at those things and question is this the right place to grow our company,” says Deirdre Ayre, head of Canadian operations for Other Ocean Group, a video game development company with operations in Newfoundland, P.E.I. and California.
Other Ocean relies on attracting top talent, and with the high cost of living and all the problems facing the province, Ayre says it’s not easy to grow.
“I would be lying to say it hasn’t affected some of the strategy and our thoughts in the growth of the company,” she says.
“It is becoming a very hard sell to bring people there and keep people there.”
And looming over all of this is Muskrat Falls, the disastrous energy megaproject that’s threatening to drain the budget and wreck the economy even further.
Back in 2010, the hydroelectric dam at Muskrat Falls in Labrador was supposed to be a clean, renewable investment which would stabilize electricity rates and generate revenue by selling surplus electricity to the New England energy markets.
Maybe it would have been a good idea, if the government had managed to build the dam for $6.2 billion as originally forecast, but it’s looking like a catastrophe now that cost overruns have driven the total cost to an estimated $12.7 billion. This is in a province with only about half-a-million people; a hypothetical comparable project in Ontario would have started at $161 billion, and with overruns driving it to around $330 billion.
And because of revised electricity demand forecasts, it now looks like the province maybe didn’t need to build the project at all.
Things have gotten so bad that the provincial government just launched a public inquiry into the whole debacle before construction on the project has even finished.
Newfoundland and Labrador is now trying to figure out the best way to subsidize electricity rates, because if ratepayers have to bear the full cost of Muskrat Falls, it would mean that electricity rates would shoot up so dramatically that it would only do further damage to an economy that’s already struggling.
So, is Newfoundland and Labrador going bankrupt?
Premier Dwight Ball says that there’s no solution to the crisis without federal assistance. “This is not a bailout for Newfoundland and Labrador,” Ball insisted. “This is a period of transition, and we are looking for financial fairness, no different than Canadians who live in other provinces.”
Ball argues that it simply costs more money to deliver services in Newfoundland and Labrador because the province has the lowest population density in Canada, and it’s tough to maintain roads and deliver services to a spread-out, elderly population scattered all across rugged coastlines.
The federal government isn’t eager to talk about any of this.
Neither Finance Minister Bill Morneau, nor N.L.’s representative in the federal cabinet, Seamus O’Regan, would do an interview for this story.
Officially, the message coming from Ottawa is that it’s up to the provinces to manage their own affairs.
“The federal government monitors the fiscal situation of provinces and territories on a regular basis. Each jurisdiction is responsible for setting its own fiscal policy and managing its obligations,” Department of Finance deputy spokeswoman Jocelyn Sweet said in an email. O’Regan’s office issued a statement that included nearly identical wording.
All the same, Ball indicated that both Morneau and Prime Minister Justin Trudeau are well aware of the situation, and discussions are happening.
“Without Newfoundland and Labrador being treated fairly, then it would require extreme measures, and what those measures would look like, I think it’s too early to tell,” Ball says.
“There’s no reason for us to have that discussion (about bankruptcy) right now, because we’re having better discussions at better tables.”
Part of the reason why Ball is unwilling to deliver tough medicine and tackle the province’s problems on his own is because he tried already, and it went very badly.
When the Liberal government was first elected in the fall of 2015, they inherited pretty much all the problems they’re grappling with today.
Ball immediately scrapped a signature election promise and raised the HST by two percentage points, and then in the spring of 2016, then-finance minister Cathy Bennett hiked taxes and fees across the board. The new government asked all departments and agencies for proposals to cut spending by 30 per cent as they laid out an aggressive plan to return to balanced budgets.
Predictably, public reaction was swift and angry. Within days, a grassroots protest movement started to form, and thousands of demonstrators flocked to the steps of the legislature.
One of those protesters was Jon Keefe, a guy who ran a small business doing screen printing by hand out of the spare room in his house.
Using his silkscreen printing apparatus, he whipped up a few protest signs that said “STOP THE BOLOGNA BUDGET” with the B’s in “bologna” and “budget” shaped like sideways McDonald’s logos. It was a cheeky little shot at Bennett, who was a McDonald’s franchise owner before she went into politics, and after the budget came out, people said she was running the province like a fastfood restaurant.
Pictures of the signs wound up on the front page of the St. John’s Telegram, and they were prominently featured on the local CBC supper-hour newscast.
In the wake of the initial budget protests, Keefe started hand-printing more posters, this time with Ball’s face under big red letters that said, “RESIGN,” and activists posted them on telephone poles all over the city. The posters were a touchstone for public anger at the government, and when a bunch of the posters were torn down by a government contractor, the anger intensified.
Ball’s Liberal government found itself on the defensive about even the smallest spending cuts. Opposition politicians fixated on a plan to eliminate round-the-clock staffing for snowplow drivers, shifting to an on-call model which would save $1.9 million. Critics said this would make the roads unsafe in the winter.
Progressives fixated on tax hikes which would disproportionately impact poor people. People were also furious about a proposal to add sales tax to books and close more than half of the province’s libraries, despite N.L. having among the lowest literacy rates in Canada.
At the same time, the province’s unions were buying TV and radio ads to attack the budget, setting the stage for a tough round of contract negotiations.
For a while, it felt like the government was under siege, and things were getting weird. Protesters would show up at government buildings in the morning and barricade the parking lot as an act of protest, until the cops showed up. An email from the premier’s director of communications showed that she tried to have some of the “RESIGN” posters pulled down, so Keefe used the text of the email to print new posters, and then activists started putting those posters up around town too.
The whole thing reached a climax of political weirdness when Keefe showed up at the government’s summer cabinet retreat dressed in a full-body Pikachu costume and a homemade press pass, demanding to ask Dwight Ball some questions.
Keefe wasn’t allowed in, and the subsequent media coverage made it look like Ball was afraid of answering questions from a guy dressed like a cartoon Pokémon.
These days, Keefe laughs at those antics, but in a way, the protests sort of worked.
The Liberal government’s poll numbers plunged, and eventually Bennett resigned from cabinet. When Osborne took over as finance minister, he took a much gentler approach to public sector union negotiations. The book tax, and some of the other controversial budget measures were rolled back.
The government has scaled back plans for deeper spending cuts, and instead of aggressively pursuing deficit-reduction targets, Osborne and Ball are spending a lot of time talking about the need for federal government assistance.
In the past year or so, Keefe said he’s taken a step back from political activism to focus on a new business venture: selling specialty cannabis processing paraphernalia.
He says that a lot of other political activists have also taken a step back from protesting too, but the anxiety and the anger is still simmering out there, waiting to boil over again.
“All of the people that were involved with this, you know, they can’t afford to scream and wail. They’ve got to get to f---in’ work. They’re going to be broke in five years. They’re going to be going bankrupt. You know, some of these people have kids now and families that they have to take care of,” Keefe said.
“We’re headed towards the black hole. There’s no question about it. For me, it’s frustrating because we’re still not really truly openly acknowledging what we’re heading toward on a public level, and we’re not preparing for it because of that. If we don’t say what’s coming, then we can’t reasonably try to figure out what’s next.”