Falling oil prices drive Newfoundland's deficit up to $726 million

ST. JOHN’S, N.L. – Newfoundland and Labrador’s budget is well into the red with a forecast deficit that has jumped to $726 million from a $258-million shortfall projected last April.

Finance Minister Tom Marshall delivered a fiscal update Thursday showing that the ballooning deficit is largely a result of plunging oil prices.

“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 Europe reduce demand on the global market.

For every dollar that oil goes down, it costs the provincial government almost $20 million.

Newfoundland and Labrador depends on offshore oil for about one-third of its revenues and is poised to approve a hydro megaproject 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.

Still, Marshall stressed that the provincial economy is among the strongest in Canada and that the proposed Muskrat Falls development would be an investment that will generate revenue, not more debt.

He said the government is reviewing its spending, adding that the province must keep a lid on public service salaries. He also said publicly funded pension plans continue to be “significantly” underfunded and are currently unsustainable.