Newfoundland & Labrador’s 2016 budget: Wrong approach for province’s fiscal troubles

Newfoundland & Labrador Finance Minister Cathy Bennett did not mince words in her recent budget speech, noting the province has dug itself into a deep hole after many years of rapid spending growth. In speaking of the record of previous governments, Bennett said: “Quite frankly, they increased spending beyond what our province can afford.”

There is considerable truth to this statement, and it’s good to see her acknowledge the dire fiscal situation is not entirely due to the drop in revenue from lower oil prices. And yet, rather than deal with spending in a meaningful way, Bennett’s budget takes a misguided approach, resorting to major tax increases.

Newfoundland & Labrador’s fiscal outlook is certainly troubling. This year’s deficit is projected at $1.8 billion, equivalent to 6.2 per cent of the provincial economy (GDP)—nearly double the size of Alberta’s deficit, which is projected at 3.3 per cent of GDP. And Bennett’s government is projecting deficits for at least the next seven years, with no end in sight.

Debt (after accounting for financial assets) will double from $7.8 billion in 2011/12 (the last year of surplus) to $14.7 billion by the end of 2016/17. This debt comes at a real cost as interest payments now consume more than 14 cents of every revenue dollar collected by the government, leaving less to be spent on health care and education.

Bennett is right to point out that spending increases by past governments have contributed to the province’s current fiscal problems. Government spending in Newfoundland & Labrador took off after 2004/05 coinciding with the commodity boom. Program spending is now 86 per cent higher in nominal terms. From 2005/06 to 2011/12, the government increased program spending by a whopping 8.4 per cent each year on average—much faster than the rate needed to keep pace with increasing overall prices (inflation) and a slightly growing population (2.3 per cent).

Crucially, had the government restrained spending increases since 2004/05 to the combined rate of inflation and population growth, it would have averted going into deficit, despite the marked recent decline in revenues. Instead, deficits have been run every year since 2011/12.

Even though Bennett acknowledges spending is at unaffordable levels, the budget increases program spending by 3.1 per cent this year and effectively holds it steady thereafter.

In other words, the budget avoids taking the necessary action to reduce and reform spending. It does, however, implement a series of tax increases that are expected to raise revenues by $632 million this year, and $863 million in later years.

Personal income tax rates are being hiked across the board, between one and three percentage points depending on income. Other tax hikes include a higher HST rate (from 13 per cent to 15 per cent), higher corporate income tax rate (from 14 per cent to 15 per cent), and increases to a host of other taxes. The government has even introduced a new temporary income-contingent head-tax that will cost Newfoundlanders up to $900.

This is the wrong approach. Canada’s history and international evidence show deficit reduction plans driven largely by tax hikes are generally unsuccessful and do more economic damage than plans based on spending reform.

Newfoundland & Labrador already has an uncompetitive tax system and these tax increases will only make it more difficult to attract and retain skilled workers, entrepreneurs, and investment. They will also discourage economic growth and prosperity.

If Bennett truly accepts that spending has increased beyond what the province can afford, then she would have put forth a bold plan to reduce and reform spending. Unfortunately, the budget falls short in this regard and will in fact make a bad situation worse.