Newfoundland and Labrador must restrain spending to right fiscal ship

The province of Newfoundland and Labrador recently released its fall fiscal update, an annual snapshot of its fiscal position in the middle of the fiscal year. The update projects the provincial deficit at $154 million this year (compared to a $160 million forecast). The budget deficit has been reduced in recent years and is relatively small by historical standards. But beyond the top-line numbers, some major fiscal threats and opportunities emerge.

Provincial debt is growing at an unsustainable rate, and spending remains the highest in Canada. This continues a long-term trend where the province’s fiscal history is one of high spending, deficits and debt.

It’s important to understand the province’s recent changes in its fiscal position. The Furey government came into office partway through the 2020/21 fiscal year, a time when the province was reporting one of the largest deficits in history ($1.49 billion). The large deficit was not merely pandemic related—the province had recorded deficits of at least $550 million in five of the prior six years as spending continued to outpace revenue. Just past its three-year anniversary in office, the Furey government has managed to reduce the deficit to a relatively small amount and even posted a surplus last year.

Yet, the province’s debt continues to grow rapidly due in part to capital spending. Provincial net debt was $14.4 billion before the pandemic and projected to grow to $16.2 billion this year. However, according to the fiscal update, net debt for this year will now be $17.1 billion—or $31,749 per person, the highest level of any province in Canada by a substantial margin. The provincial debt load is also growing compared to the size of the economy, which is a sign of unsustainability.

A substantial volume of research has connected debt accumulation to the way the province manages its finances. The government has largely funnelled revenues from the oil and gas sector, which are volatile, into expanding the government sector rather than saving for future benefits. As we’ve explained previously, the province’s new “Future Fund” helps with this problem by saving a portion of those revenues in a dedicated fund.

However, more aggressive actions are necessary to create a lasting fiscal advantage for the benefit of all Newfoundlanders and Labradorians. For that to occur, the Furey government must reduce per-person spending levels.

With robust revenues and a small deficit, why then are spending cuts required?

To illustrate the advantage of spending cuts, consider Newfoundland and Labrador’s position compared to peers and over time. On a per-person basis, provincial spending will likely be the highest in Canada this year ($18,654) and well above the average among provinces ($14,966). Prior to the spike in oil and gas revenues in 2007/08, Newfoundland and Labrador’s own spending levels in the preceding five years averaged $15,115 (adjusted for inflation).

In other words, the province is spending nearly $4,000 per person this year above the national average, or even its own historical average. If the province had reduced spending levels back toward these norms at, for example, $15,000 per person, it would have a surplus of $1.81 billion this year. And if it held new spending growth to the rate of inflation plus population, it would likely continue to enjoy substantial surpluses going forward.

There are several benefits to this approach. The province would be able to meaningfully reduce its crushing debt burden and save on debt interest payments, which now exceed $1 billion per year. It would also be well-protected against future shocks to the provincial budget from changes in oil prices, recessions or other unpredictable events. Lastly, it would position the province better to provide tax relief to residents who are among the highest-taxed people in North America.

Continued spending increases will keep Newfoundland and Labrador on the same fiscal roller-coaster that’s led to persistent deficits and the highest government debt burden in Canada. But this needn’t be the case. In light of the province’s robust natural resource sector, which drives strong growth in government revenues, if the government restrains spending there’s no reason Newfoundland and Labrador cannot be a fiscal leader in Canada, generating benefits for residents for years to come.