February 2, 2021 – A return to a balanced budget for Newfoundland and Labrador by 2025/26 is “hard, but doable,” say leading economists Don Drummond and Louis Lévesque in a new report from the C.D. Howe Institute.
In “The Rock in a Hard Place: The Difficult Fiscal Challenges Facing Newfoundland and Labrador,” the authors turn a spotlight on the root causes of the province’s current fiscal predicament – and prescribe solutions to help safeguard the province’s financial future.
The authors track the province’s current fiscal problems back to 2012/13 when the budget balance swung back into deficit and the net debt burden rose. Large budgetary deficits had already opened before the negative impacts of the COVID-19 pandemic compounded the situation.
Without strong corrective action, provincial finances appear to be set on an unsustainable track, with net debt to GDP reaching almost 60 percent by 2025 and interest payments eating over 14 percent of revenues.
Drummond and Lévesque identify that program spending significantly and chronically in excess of other provinces constitutes by far the largest factor explaining the province’s current fiscal challenges. When offshore royalties surged, the province increased its spending per capita to levels even beyond Alberta, the richest province in Canada (see figure). Public sector compensation costs – particularly in health and public administration – are major contributors to higher-than-average spending. Funding additional personnel costs, which are largely of indeterminate duration, with volatile annual resource revenues has created major fiscal risks for the province.
A balanced budget fiscal projection incorporating adjustments focused on expenditure reductions would put provincial finances on a more sustainable track, argue the authors. The province needs to rapidly explain to the public the underlying causes of its fiscal difficulties, consult with labor and business on potential options, and then take action. The newly formed Economic Recovery Team can play a crucial role in this respect.
The cost of the Muskrat Falls hydroelectric project, with its large overruns, compounds Newfoundland and Labrador’s fiscal difficulties. The report argues since the federal government encouraged the project with a loan guarantee, it should consider assuming responsibility for a portion of that debt, contingent on actions by the province to reduce its expected return from the project and to bring its program spending closer to the provincial average.
“Newfoundland and Labrador has structural economic and fiscal problems that will not go away with recovery from the 2020 woes from the pandemic and collapsing oil prices,” write Drummond and Lévesque. “The province needs to strengthen its economic growth prospects. The Economic Recovery Team will no doubt look at that. As soon as the economy recovers from the pandemic, it must embark upon fiscal correction to eliminate its chronic deficits and, more importantly, to reduce its debt burden. A goal of balancing the budget by 2025/26 is ambitious, but seemingly feasible given the high level of government spending in the province.”
For more information contact: Don Drummond, Stauffer-Dunning Fellow in Global Public Policy and Adjunct Professor at the School of Policy Studies at Queen’s University; Louis Lévesque, former federal Deputy Minister of Transport, Infrastructure and Communities, and Intergovernmental Affairs; or David Blackwood, Communications Officer, the C.D. Howe Institute, 416-873-6168, dblackwood@cdhowe.org
The C.D. Howe Institute is an independent not-for-profit research institute whose mission is to raise living standards by fostering economically sound public policies. Widely considered to be Canada's most influential think tank, the Institute is a trusted source of essential policy intelligence, distinguished by research that is nonpartisan, evidence-based and subject to definitive expert review.