Newfoundland and Labrador government faces fundamental choice in upcoming budget
In its upcoming budget, the Furey government has an opportunity to address the fiscal challenges plaguing Newfoundland and Labrador—simply put, it must start relying less on resource revenues and reduce spending.
According to a recent report from the Parliamentary Budget Officer (PBO), Newfoundland and Labrador’s finances are currently unsustainable and the province’s long-term fiscal outlook is the worst in Canada. In other words, provincial government debt is on track to grow faster than the overall economy over the long-term.
And the PBO is not alone in its finding. An independent analysis from the Finances of the Nation project suggests the province requires a large fiscal adjustment to stem the growth of an ever-higher debt burden over time.
This is not surprising since Newfoundlanders and Labradorians are burdened with more provincial government debt per person ($30,486) than anywhere else in Canada. Ontarians, the second-most indebted residents, have a burden approximately $3,500 less per resident.
Why is this a problem?
Because in 2022/23, Newfoundland and Labrador expects to spend nearly $1 billion on provincial government debt interest—or $1,817 per person, the highest amount by far among all provinces. With rising interest rates and more debt on the horizon, this number is projected to grow larger in years ahead. Money used to service the debt is money unavailable for health care, education or tax relief.
The source of the problem is also clear. While the oil and gas sector remains a crucial part of the provincial economy, relying on resource revenues is not a sustainable way to balance the budget and stop debt accumulation. Oil and gas revenues are volatile, fluctuating significantly year to year, making it difficult to align revenues and spending.
The Furey government cannot control oil and gas revenues over the long-term, but it can control provincial spending. In nine of the last 10 years, Newfoundland and Labrador has increased program spending (annual average growth of nearly 3 per cent). The imbalance between revenues and spending has resulted in provincial deficits for nine of the last 10 years.
That said, thanks to high oil and gas royalties, inflation and a rebound in the economy, the province projects a brief return to surplus in 2022/23. But obviously, long-term fiscal challenges remain. The government’s recent announcement of a “Future Fund” to manage oil and gas revenues is a good first step to managing volatile oil and gas revenues, but it must be accompanied by other policy decisions such as spending control.
If the government continues to raise spending, it will increase the likelihood of budget deficits in years ahead, which would mean more debt and higher debt interest costs borne by taxpayers. The province cannot afford to continue down its current path that’s wrought with dire consequences.
Earlier in his tenure, Premier Furey seemed to understand the seriousness of the province’s fiscal challenges, stating "We need to own equally the responsibility to fix it so that future generations won't be standing at a podium like this talking about how dire our fiscal situation is." With this year’s budget, Newfoundlanders and Labradorians will learn whether or not the premier follows his own advice.