Fraser Forum

Newfoundland and Labrador government squanders another opportunity to reduce crushing debt

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Newfoundland and Labrador government squanders another opportunity to reduce crushing debt

The Furey government released Newfoundland and Labrador’s 2024/25 budget on Thursday. With robust revenue growth and spending already at high levels, the government had an opportunity to return to budget balance and begin paying down debt. Unfortunately, it chose a different path, namely the same old approach of higher spending and mounting debt.

The government projects a deficit of $152 million in the coming year, in addition to the $433 million projected deficit for the current year. Again, while these deficits are relatively small compared to other recent budgets in the province, this year the government had an opportunity to substantially strengthen the province’s fiscal position.

In the pre-budget period, we argued that Newfoundland and Labrador should restrain spending and return to a balanced budget to begin making progress on the provincial debt burden.

Under this scenario, if the province had restrained its spending plans, strong revenue growth of 7.8 per cent in 2024 would have generated a return to budget surplus. For example, if the government simply held the spending increase to the rate of inflation and population growth, a small surplus would be in the forecast and the province could’ve avoided significant debt accumulation.

In fact, the government last year promised a return to surplus this year. Instead, it will increase program spending (total spending minus debt interest costs) by 5.3 per cent this year. On a per-person basis, total spending will increase to $19,238, the highest of any province in Canada. This spending hike is the reason the province remains in the red.

As a result, Newfoundland and Labrador is once again kicking the can down the road when it comes to provincial debt. According to the budget, net debt will grow by almost $600 million. On a per-person basis, total provincial net debt will reach a projected $32,807 by the end of the fiscal year—also the highest level in Canada. Our previous analyses, which concur with Canada’s Parliamentary Budget Officer, show that Newfoundland and Labrador’s debt situation is unsustainable. This budget perpetuates that problem.

The budget does include a modest bit of good news, but with serious caveats. The government plans to contribute to the province’s “Future Fund,” which provides an opportunity to save some of the province’s natural resource revenues. Research has shown that simply funnelling natural resource revenues into the yearly budget leads to runaway growth in government spending and an unsustainable boom-and-bust cycle in provincial finances. Unfortunately, with an ongoing provincial deficit and projected increase in debt, this year’s contribution to the fund ($72.4 million) will have limited long-term impact.

To be sure, the Future Fund has the potential to deliver long-term benefits to residents of the province, but the government undermines these efforts with its policy of ongoing debt and deficits, in addition to other concerns over the relatively loose rules for future withdrawals from the fund.

Finally, the budget includes a reduction in the small business tax rate, from 3.0 per cent to 2.5 per cent. While this will provide modest relief to some businesses, the province remains relatively uncompetitive compared to its peers on both business and personal income taxes. Like the Future Fund, this is an example of where the value of a policy change is muted by the province’s overall fiscal approach. Given that this tax change is being enacted amid high spending and a debt increase, it’s more likely that tax increases—not reductions—will be the norm in the province’s future.

The Furey government is positioning the budget as a good news event, with a relatively small deficit and modest tax measures. However, when one looks below the surface, it’s clear that Newfoundland and Labrador is repeating the fiscal mistakes of the past. Planning to balance the budget in the future rather than now, while funnelling most natural resource revenues into an expanded size of government, all while increasing spending and debt, is an approach that has been tried time and time again. Until this cycle is broken, Newfoundland and Labrador will retain its status as the most indebted province in Canada.