Newfoundland’s fiscal storm
With only 500,000 people, and an extra half time zone away, little attention is paid to Newfoundland politics when it doesn’t involve its unique tradition of theatrical premiers taking a turn on the national stage. Yet the April 14 budget in Newfoundland and Labrador is a sign of things to come for Canada’s heavily indebted provinces.
The Newfoundland budget is the responsibility of the new Liberal government, which was elected in December. The fault for the economic mess, however, belongs to the previous dozen years of Progressive Conservative administrations that squandered the oil windfall, which blew across the province like the powerful Atlantic winds.
The figures are staggering. In its boom years, Newfoundland got about one-third of its revenues from offshore oil. The government grew rapidly to match, with spending up 58 per cent between 2004 and 2014, according to the auditor general.
The fall in the price of oil blew a hole in the Newfoundland budget. By 2013, the provincial government was facing a deficit of $563 million and tried to undo the massive growth in the public sector by laying off workers. But in 2014, the annual deficit was still approaching $1 billion and the budget was in shambles.
Correcting that requires severe measures. This year’s budget hikes taxes on everything, while continuing to cut services. When spring finally arrives, gas taxes will have doubled, from 16.5 cents a litre to 33 cents. Income taxes are going up across the board. Corporate taxes are increasing by one percentage point, from 14 per cent to 15 per cent. The harmonized sales taxes is being increased from 13 per cent to 15 per cent. A new “deficit levy” will apply to all those earning more than $20,000, which rises with income to a maximum of $900. Meanwhile, about 650 public-sector jobs are being cut, class sizes are increasing, and fees and levies for services are going up, as well.
After all that, the deficit is projected to rise to $1.8 billion on a total budget of $8.5 billion — more than 20 per cent of all spending will be financed by debt. It’s a fiscal disaster that was entirely foreseeable to anyone who didn’t think high oil prices would last indefinitely.
Yet it is not just a cautionary tale for oilproducing provinces. Across the country, the relative fiscal health of the federal government may make Canadians complacent. After all, its recent budget serenely forecasts deficits for the new government’s entire term, couched in the hope that Canada’s relatively strong fiscal position means the debt to gross domestic product ratio will remain stable at about 31 per cent, if economic growth meets projected targets.
The situation is not the same at the provincial level. The two largest provinces have debt levels as a proportion of GDP that are considerably higher, with Ontario at almost 40 per cent and Quebec at 50 per cent. The three westernmost provinces are much healthier, but Manitoba and the four Atlantic Provinces all have debt-to-GDP ratios of 30 per cent to 40 per cent. The cushion the federal government fell back on for stimulus in fiscal 2008-09, which was possible thanks to the budget cuts of the mid-1990s, does not exist provincially.
True, the oil shock hit Newfoundland particularly hard. Yet poor fiscal planning meant when hard times came, even increased counter-cyclical borrowing would not be enough. Painful tax hikes and service cuts are now unavoidable. Unlike the federal government, which cut transfers to the provinces in the mid-1990s to deal with its own fiscal crisis, the provinces do not have that option. They can only hit their residents, and hit them hard.
Newfoundland gave itself more than a decade of budgets that required economic good times just to meet existing commitments. Much of the country is now in the same shape. Robust economic growth does not make provincial finances better, as much as it prevents them from getting worse.
Newfoundlanders have long been accustomed to the reality that it costs more to live here. The mismanagement of the oil boom means that this will be even more true now. But all Canadians should pay heed. The day of reckoning cannot be forestalled forever. Canada had its own in the mid-1990s, as did Alberta. Newfoundland is facing it now. Soon it will be Ontario and Quebec’s turn, and the pain will be harsh. It will be as fierce as an April snowstorm that blasted the province last week, but far more prolonged.