Newfoundland and Labrador government should reduce spending in face of dire fiscal outlook

Recently, Canada’s Parliamentary Budget Officer (PBO) published its annual report on the health of public finances across Canada, which finds that Newfoundland and Labrador’s long-term fiscal outlook is the worst in Canada.

This may come as a surprise to some Newfoundlanders and Labradorians given how much the province’s short-term fiscal outlook has improved in recent years with the increase in oil prices. The annual operating deficit has fallen from $1.4 billion in 2020/21 to a projected $351 million this year. Of course, this is good news.

But the purpose of the PBO’s annual report is to assess the sustainability of government finances using a technical definition of the term. Under the PBO’s definition, a government’s finances are unsustainable if, under current policies and reasonable economic assumptions, government debt is on track to grow faster than the overall economy over the long-term.

Simply put, the report finds that Newfoundland and Labrador’s finances are unsustainable and (in the absence of even higher taxes) the government must significantly reduce spending to put the province’s finances on a sustainable trajectory—specifically, by approximately $1.4 billion to attain sustainability in one year. Relative to the size of the economy, this is the largest required fiscal adjustment in Canada. To illustrate the scale of the challenge, the province’s debt as a share of the economy is projected (again, absent policy changes) to more than triple by 2046.

Of course, the Furey government could take a more gradual approach to reducing spending. However, there are meaningful advantages to moving quickly including reducing the likelihood of budget deficits in the years ahead, which would mean more debt, and all else equal, higher debt interest costs borne by taxpayers. The volatility of resource revenues from oil and gas also underscores the need for action now.

The PBO is not alone in its finding. An independent analysis from the Finances of the Nation project concurs. In fact, its analysis suggests the province requires an even larger fiscal adjustment ($2.4 billion or 27.8 per cent of program spending) to stem the growth of an ever-higher debt burden over time.

The prospect of more debt growth in the future should be particularly concerning in Newfoundland and Labrador, which has the largest net debt per capita (on track to reach $32,631 this year) and debt relative to the size of the economy in Canada. Both the PBO and Finances of the Nation show the province is on track to add even more debt in the years ahead, which would increase the burden on future generations who will either pay back or pay the interest on all this debt.

Despite the shrinking deficits of recent years, the long-term fiscal challenges facing Newfoundland and Labrador are among the most daunting in Canada. Complacency in the face of these challenges would be a grave error. Policymakers owe it to present and future residents of the province to develop and implement a plan to reduce spending and finally put the province’s finances on a sustainable trajectory.