Newfoundland Has Pushed its Financial Apocalypse Down the Road

There were no mass layoffs and no new taxes in the 2017 Newfoundland and Labrador budget. But the Liberal government's plan raises more questions than it answers.

On its face, it is a much less intimidating document than expected. Last year's deeply unpopular budget raised taxes, fees, and fines across the board to tackle the province's fiscal crisis. Many expected that this budget would drop the hammer on spending.

Instead, the budget highlights were mild—nearly pleasant. The projected deficit for 2017-18 is $778 million. Last year, the projected deficit for 2016-17 was anticipated to be $1.8 billion, but a flush of oil revenue and lower borrowing costs brought the deficit down to $1.1 billion. There were no mass layoffs, there were no new taxes or fees, and it was announced that the province would be slashing the temporary gas tax it introduced last year by 75 percent over the next eight months: down 8.5 cents on June 1, and down another 4 cents on December 1.

The province also announced that it would be investing $73 million in mental health services over the next ten years (thanks largely to federal funding through the Canada Health Accord). The Liberals plan to set aside $250,000 for a Sexual Assault Response Pilot Project, which will provide free legal advice to sexual assault complainants. They're also maintaining the tuition freeze at Memorial University, and re-announced that they are partnering with the federal government on a $3-billion infrastructure plan over five years.

The government also announced that it managed to cut spending by $283 million through finding administrative efficiencies. The Liberals are confident that they are on track to return to budget surplus by 2022-3.

But beneath the surface, details of what the budget would actually mean were more murky.

The province's plan for returning to surplus by 2023 is that revenues will gradually rise, while spending will remain relatively flat for the next six years. The 2017 economic forecast released alongside the budget paints a bleaker picture.

The estimates are not great. Provincial GDP is forecast to contract by 3.8 percent this year, following declines in most major sectors. Capital investment is down 7.8 percent, following peak investment in Vale [mine] and the Muskrat Falls megaproject. Household income is declining while consumer prices are expected to rise. Housing starts, sales, and prices are all down.

Oil production is down by 7.8 percent, and although the Hebron project is expected to come online later this year, treasury revenue will be minimal because the Danny Williams administration opted for an equity stake in the project instead of a royalty regime. Total fish landings are also expected to decline relative to 2016, and while northern cod stocks are finally beginning to recover, there has been a 20.8 percent decline in landings of more lucrative shrimp and snow crab, and further reductions in those quotas are expected as the stocks themselves decline.

The employment rate is down by 1.9 percent, and the unemployment rate is projected to rise by 0.5 percent to 13.9 percent overall, even factoring in the roughly 4,900 full-time jobs the province expects to create every year through its 5-year infrastructure plan.

Newfoundland and Labrador's population increased overall in 2016, but it was literally all in the 65+ demographic. Young people, and core labour-force age group of 18-64, both declined. Overall, population is expected to continue dropping, and continue aging, over the next six years.

It's a bleak picture, but it's a clear one. The province is in the midst of a structural contraction, and this is expected to continue for years. Significantly, all the "positive developments" and "long term potential" identified in the forecast centre on non-renewable resource development—particularly in the oil and gas sector.

Anyone hoping for a transition to a sustainable, diversified provincial economy will not find it in this document. They will also find no plan to address climate change or the federal government's plan to impose a nation-wide carbon pricing scheme. The words "climate change" (or even "carbon") appear nowhere in either the budget documents or the economic snapshot. When asked at a scrum why there is no mention of carbon pricing in the budget, Finance Minister Cathy Bennett basically shrugged and said they didn't have to do anything with it until 2018, so, they're leaving it until next year's budget—although they may make an announcement about it when they address the second cut to the gas tax in December.

But the real story in the budget was what it said—or more precisely didn't say—about layoffs. Since last year's budget, maybe people have expected that its sequel would include an announcement of mass layoffs in the public sector. Instead, there were no layoffs announced in the budget, and Bennett was emphatic that they would not be coming in this document. But even as she refused to confirm that layoffs might be coming in the future as spending reviews continued, she reiterated that "decisions will be made" in the future.

When asked directly whether employees in the core civil service could consider their positions safe, Bennett emphasized that "we are not a government that does mass layoffs," but that "everyone should understand that we are addressing a culture of spending." There will be no announcement of mass layoffs, but there is an implication that a steady stream of smaller layoffs remains on the table.

The finance minister's language here, like that of the budget document, is cryptic and deflective. It touts its good news up front and wedges its more unpalatable truths between the lines.

But the clearest hint of what might come next for the province were two lines in Bennett's budget speech almost surely directed at the public sector unions currently negotiating with the government:

"It is important to manage government benefits and salaries as they are a significant expenditure of the Provincial Government totalling $3.3 billion. In recognition of our challenging fiscal situation, our government will propose legislative changes to implement a wage freeze for management and all non-union employees for the current fiscal year."

They're playing coy, but the promise is clear: the Liberals are going to play hardball in their contract negotiations with NAPE and CUPE. Expect it to be a long year, Newfoundland.

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