The Conference Board of Canada’s Senior Economist Daniel Fields offers the following perspectives/insights on Newfoundland and Labrador’s 2019 Budget:
“Facing an oil price crash and a recession, the Liberals first term was dominated by tax increases and spending restraint. These measures helped the province narrow its deficit from $2.2 billion to $521 million. With its fiscal situation improving, the government’s 2019 Budget provided some minor tax relief. However, to balance its books by 2022–23, the province is relying on a more austere spending plan than the one it rolled out over the past four years.”
- When the government was elected four years ago, it was during the oil price crash that hit Newfoundland and Labrador’s economy hard. Oil royalties fell by more than $1 billion in 2015–16 and in response to this revenue shortfall, the government increased taxes by nearly $900 million. New tax measures, some improvement in oil revenues and a tight rein on spending has narrowed the deficit from $2.2 billion in 2015–16 to $521 million in 2018–19.
- With an election on the horizon, the 2019 Newfoundland and Labrador budget presented a voter-friendly budget with some minor tax relief (elimination of retail sales tax on car insurance as well as the end of the temporary personal income levy by the end of this year) and a temporary—due to a public sector accounting quirk—surplus of $1.9 billion this year.
- Fortunately, the government is not touting this surplus as a win. An influx of $2.5 billion through the Atlantic Accord from the federal government is being counted this year due to accrual basis public accounting rules. The province will only actually see $134 million in cash this year, with the rest being shared out over the next 37 years. The government does not project a proper return to balance until 2022–23.
- Without the $2.5 billion injection, the province would have posted a deficit of $575 million. Still deep in the red, the big challenge for the province is to eliminate its deficit and Budget 2019 lays out a plan to do that through spending cuts.
- By 2022–23, total expenditures are expected to fall by $617 million when compared to 2019–20 estimates. This number includes debt charges, which are expected to remain around $1 billion each year (Budget 2019 does not provide an estimate for debt charges).
- Given our forecast for debt charges, to hit the government’s spending target, program spending (which excludes debt charges) will have to be reduced by 2.8 per cent per year over the next three years. This would represent one of the most stringent spending periods in the province’s history.
- The 2019 Newfoundland and Labrador budget is based on a weaker real GDP forecast between 2019 and 2022 when compared to the Conference Board’s current economic outlook. Thus, there is some upside risk to the government’s revenue forecast, which is expected to remain essentially flat over the forecast period (after removing the $2.5 billion Atlantic Accord transfer in 2019–20).
- According to budget estimates, if spending targets can be met, net debt as a share of GDP will gradually fall to 40 per cent by 2022–23.
While the government successfully increased taxes to fill the hole left by the 2015 oil price crash, the hardest work is still ahead. If the province can meet its ambitious spending targets, it should be able to balance its books in 2022–23 and set itself on a more sustainable fiscal path going forward.