ST. JOHN’S, N.L. – Newfoundland and Labrador’s budget is well into the red with a forecast deficit that has jumped to $725.8 million from a $258.4-million shortfall projected last April.
Finance Minister Tom Marshall warned Thursday of cuts to the public service and programs next year as he announced a ballooning deficit due to lower than expected oil and mineral earnings hit by a global economic downturn.
“The volatility that’s inherent in commodity prices is not a factor that’s under our control, but in the face of new fiscal challenges we must respond,” Marshall told a news conference.
At issue is the price of Brent crude oil, which at around US$109 per barrel is far lower than the US$124 per barrel on which the provincial budget relies. And some analysts are predicting prices will stay low well into 2013 as economic woes in the U.S. and Europe reduce demand on the global market.
For every dollar that oil goes down, it costs the provincial treasury almost $20 million.
The Progressive Conservative majority government had anchored its budget, as it has for the last nine years, using an independent average oil price provided by New York-based consultant PIRA Energy Group in consultation with other experts.
“I don’t pick what the price of oil is going to be,” Marshall said. “We rely on the best experts out there.
“We look at what they say and we plan accordingly.”
The government depends on offshore oil for about one-third of its revenues and is poised to approve the Muskrat Falls hydro megaproject in Labrador that would cost the province at least $6.2 billion.
“This is an example of how we can, and how we must, diversify our revenue base,” Marshall said. He stressed that Muskrat Falls is an investment that’s expected to earn dividends of more than $50 billion over 50 years starting in 2017.
Despite fiscal troubles brought on by worldwide forces, the provincial economy is among the strongest in Canada with capital investment of up to $9.7 billion this year along with strong housing starts and retail sales, he said.
Provincial unemployment is down to 12.5 per cent — an improvement although it’s still highest in the country except for Nunavut.
Net debt is now expected to hit $8.9 billion but is down from a high of almost $12 billion in 2004, Marshall said.
He also talked of the need to whittle spending and keep a lid on government hiring and salaries as the province prepares for what could be testy talks with its public service unions. Publicly funded pension plans continue to be “significantly” underfunded and will go broke unless the province and unions compromise, he added.
Opposition NDP Leader Lorraine Michael questioned the government’s handling of provincial finances.
“You have certain needs, then you do multi-year planning for those needs, how you’re going to pay for that. And you just don’t do crisis planning with regard to your expenditures,” she said.
“They say that they’re fiscally responsible. I think this today shows that they are fiscally irresponsible because they’re not doing that planning.”
The province will now have to borrow more to finance a cash down payment of about $2 billion on Muskrat Falls, Michael said.
“I understand the minister said the dividends will pay for the loan. Well, the dividends aren’t going to start until 2017 and the loan is going to have to happen before then.”
Michael compared Muskrat Falls and its potential cost overruns to a home renovation that the province can’t afford.
“Can we as a province have the luxury of planning a project like Muskrat Falls with the reality that we’re facing today?”
Nancy Healey, CEO of the St. John’s Board of Trade, said she believes the hydro development will ultimately be a good investment. But she raised concerns about the extent to which provincial spending is outpacing revenues.
“We need to start looking at what government is doing, what services and programs it’s offering and say: ‘Are they sustainable?’
“Here we’re in the most robust economy we’ve ever had, with great GDP, yet we still can’t balance the books. So we’re going to have to get very serious about this now.”
Healey pointed to countries around the world that are now in dire straits after failing to manage and reduce debt.