Download Even a Great Year Wasn`t Good Enough

March 22, 2005
Even a Great Year Wasn’t Good Enough
St. George’s, NL – “Finance Minister Loyola Sullivan’s Monday budget
was full of unexpected windfall revenues, but despite that remarkably
good fortune he was still unable to bring the Newfoundland budget into
balance. That is a wasted opportunity for the people of Newfoundland
and Labrador, whose future is mortgaged by the province’s debilitating
level of debt,” says Peter Fenwick, research fellow with the Atlantic
Institute for Market Studies.
Newfoundland’s strong economic growth and hard nosed bargaining
with Ottawa have helped increase provincial revenues by 13 per cent
since 2003. Strong revenue growth helps close the deficit gap, but
only when a government makes the tough decisions. In St. John’s
yesterday, that didn’t happen.
There’s lots of money, but much of it is from non-repeatable windfalls
that if properly spent could have put Newfoundland and Labrador
firmly on the road to debt reduction, and therefore more sustainable
public finances. Instead, the opportunity was squandered by shortterm decisions to spend much of the money, often unwisely, on
schemes that have already proven that they produce little of value.
A large part of the windfall profits the province received, and is
counting on in the future, comes from the offshore. This is not revenue
to be depended on to pay for day-to-day operations. Oil revenue is
money from the sale of a non-renewable asset that should not be
squandered and cannot be depended on year after year. In fact by the
province’s own estimate, oil revenue is scheduled to decline starting in
fiscal year 2007.
“Monday’s budget fell short by not directing revenue from the nonrenewable oil resources toward closing the gap. Simply put, if growing
government revenues are not readily turned into debt reduction and
sustainable spending levels then the province’s fiscal health will not
improve,” said Mr. Fenwick.
Furthermore, the Newfoundland government appears to have
abandoned its plan to systematically reduce the size of the provincial
civil service. According to a recent study by AIMS researcher David
Murrell, of the ten provinces, Newfoundland and Labrador has the
second highest ratio of general government civil servants to residents.
Only PEI has more employees per person on the government payroll.
Newfoundlanders are burdened with the highest per capita provincial
debt in the country. Based on this year’s budget plan, provincial debt
will rise to $16,610 per capita as of March 2006. Closing the budgetary
gap and planning to balance the books in 2006-2007 on a cash basis is
a positive step, but the challenge will be to reduce the annual accrual
deficit, which will add almost $500 million to the provincial
government debt this year, and will add nearly $400 million per year
until 2007. Though progress in matching spending on government
operations with government revenue is good news, it will do little to
reduce levels of public debt.
A full 20 cents of every dollar the province takes in goes to servicing
the debt. Until the deficit gap is closed, both on a cash and an accrual
basis, prospects for net debt elimination are bleak.
If the windfalls of the past year were applied directly to the huge
provincial debt, the province might have brought its out-of-control
finances to manageable levels. As a second best strategy the province
could have reduced some of the taxes that it takes from its citizens. As
it was, the only tax cut was on club-bought liquor, and that only to
offset the potential loss in video lottery revenues as the province plans
to reduce the number of terminals.
Unfortunately the province is still spending on rather dubious
initiatives such as the rural secretariat and on revolving funds for small
businesses, programs that have been spectacularly unsuccessful in the
past. Jurisdictions do better when they reduce taxes and limit their
expenditures, allowing the private sector to create a vibrant economy
with the taxes that are left in people’s pockets.
Growing government is the single largest threat to Newfoundland’s
fiscal health. As the province’s economy grows, the debt to GDP ratio
may decline, but every year each Newfoundlander’s share of the debt
grows. Worst still, 20 cents of every dollar raised will be needed to pay
for spending from one generation ago. Even a great year for revenue
growth was not enough to change that.
-30For further information, please contact:
Peter Fenwick, AIMS Research Fellow – 709-644-2273