The Rock in a Hard Place : The Difficult Fiscal Challenges Facing Newfoundland and Labrador

Newfoundland and Labrador’s current fiscal problems began in 2012/13 when the budget balance swung back into deficit and the net debt burden rose. The fiscal deterioration ramped up when the decline in oil prices beginning in late 2014 drastically reduced offshore royalty revenues accruing to the province. Large budgetary deficits had already opened before the negative impacts of the COVID-19 pandemic compounded the situation. Without strong corrective action, provincial finances appear to be set on an unsustainable track, with net debt to GDP reaching almost 60 percent by 2025 and interest payments eating over 14 percent of revenues. Program spending that is significantly and chronically in excess of other provinces constitutes by far the largest factor explaining the province’s current fiscal challenges. Publicsector compensation costs – particularly in health and public administration – are major contributors to higher-than-average spending. Funding additional personnel costs, which are largely of indeterminate duration, with volatile annual resource revenues has created major fiscal risks for the province. A balanced budget fiscal projection incorporating adjustments focused on expenditure reductions would put provincial finances on a more sustainable track. The province needs to rapidly explain to the public the underlying causes of its fiscal difficulties, consult with labor and business on potential options, and then take action. The newly formed Economic Recovery Team can play a crucial role in this respect