Creditors will be chief audience for Newfoundland budget

The financial problem facing the government is so large that it will need to borrow enormous amounts over the next five years, no matter what

newfoundlandSt. John’s, N.L. Mar. 13, 2017 /Troy Media/ – Newfoundland and Labrador’s 2017 budget needs to correct a public finance crisis, which has been ushered in by years of high spending and big drops in oil-based revenues. It’s a critical time for the province, so the must government make wise decisions in the next few months.

During this process, there are three factors that the government of Premier Dwight Ball should consider from recent experience.

First, there’s little room in the government’s plan for changes in its assumptions, as many of these assumptions are beyond its control. The plan is based on holding down expenses as revenues rise, mostly from oil. The result is that the government operates within a very small box. Its walls are the warnings from the province’s creditors, demands from public sector unions and its supporters to spend, and cries from the business community to reduce spending.

Further limiting options is the fact that some regions of the province depend heavily on government spending – a situation that won’t change quickly. Take the recently-announced plan to move 30 jobs in lands management from St. John’s to Corner Brook. Ostensibly about efficiency and development, the move was similar to a program in the late-1990s that put relatively high-paying government jobs in regions experiencing economic difficulties.

This is the kind of decision that a government takes in the interest of supporting economically-depressed areas. Unfortunately, these moves don’t contribute to a leaner and more affordable government. Nor do they help to address the province’s fiscal woes.

This situation should serve as a lesson about the dangers of dependence. Heavy reliance on government spending by so many people makes righting the public finance ship politically difficult. But unless the government manages to do so, this problem will continue to hold back the economy and affect everyone in the process.

Second, pressures come from many quarters, but those that count most are from bond raters and lenders. There isn’t an infinite supply of money in the credit markets for the province. As Finance Minister Cathy Bennett once said, Newfoundland and Labrador’s creditors might just say no when the province calls wanting more money.

This is an exaggeration but not by much. As with household or business credit, evidence of fiscal judgment and discipline affects a government’s capacity to borrow. A loss in creditor confidence will make borrowing more difficult.

This confidence makes all the difference for a jurisdiction in Newfoundland and Labrador’s position. The financial problem facing the government is so large that it will need to borrow enormous amounts over the next five years, no matter what. The government needs to borrow some $3 billion in 2017 alone to cover the costs of the deficit and the Muskrat Falls power project.

The government needs to reduce spending but deep reductions made quickly would cause severe damage. The government really can’t make everyone happy but it especially can’t afford to distress those who lend it money.

Third, public confidence matters. The tax increases in last year’s budget slowed the economy even more than expected because of the foreboding that came with the budget. Uncertainty was rampant as the government changed its plan in the face of widespread public criticism. People who are worried about the future will invest less, whether it’s in a new washing machine or in a new business.

Altogether, this means the government is in a very delicate position, sensitive to even the slightest jostling of public opinion or oil prices. That sensitivity is why people are looking with some trepidation to the budget due in the next few weeks.

The government must address the intense limitations on budget options, a potential loss of creditor confidence and the climate of doom surrounding the circumstances. To recover the province’s fiscal situation, it’s imperative that the government strike the right balance.

Ed Hollett is a senior research fellow with the Atlantic Institute for Market Studies (AIMS.ca).

Ed is a Troy Media contributor. Why aren’t you?


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One Response to "Creditors will be chief audience for Newfoundland budget"

  1. Randy Gillespie   March 13, 2017 at 9:24 am

    Ed:

    Are you limited in the amount of time you have to research this topic, or is it your choice to offer a biased perspective?

    Not at all helpful. May even be harmful.

    Muskrat, for example, is an investment with lots of upside potential. And what about recent moves in the mining sector? CETA fisheries fund? How is it that you, and others, are happy enough to forecast negatives with confidence, but not positives?

    Reading this tripe one would swear that NL is an economic basket case. We do indeed have our challenges, but one cannot ignore the fact that we are awash in natural resources, and home to some of the most innovative people in Canada, if not the world.