Our Current Fiscal Situation

Options to Offset Declining Oil Revenues

Due chiefly to the unforseen drop in global oil prices, the Government of Newfoundland and Labrador is anticipating it will have $1 billion dollars less to spend on programs and services. There are three methods, or “levers” to deal with the shortfall: increase revenue, reduce spending, and increase borrowing.

Despite our current challenges, we need to remember that Newfoundland and Labrador has seen significant economic growth over the past 10 years. We have come a very long way and we have a great story of progress to build upon, and in the longer term, the enormous potential of the province’s offshore resources is reason for optimism about the economic future of Newfoundland and Labrador.

The Provincial Government’s goal is to encourage growth in 2015 and intensify efforts to pursue the significant opportunities available to the province to ensure a vibrant economy over the long term.

Through sound fiscal management and responsible decisions, our government will continue to work to strengthen the business environment, encourage the development of innovative industries, and diversify the economy. Major projects such as Muskrat Falls, Long Harbour and Hebron are key components to diversifying the economy; they are investments in our province’s future.

Three levels to deal with current shortfall: Increase Revenue, Reduce Spending, or Increase Borrowing

 

Fiscal Performance

Over the past 11 years, Newfoundland and Labrador has experienced 6 budget surpluses. In 2014-15, a decline in total revenue due to the unforseen drop in offshore oil royalties has compelled the Government of Newfoundland and Labrador to devise a new budget strategy – one that will require us to increase revenues, decrease spending, and borrow over the next five fiscal years before a planned return to surplus. These deficits will be necessary so that the Provincial Government can continue to provide programs and services to the people of Newfoundland and Labrador.

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Put very simply, net debt is the money you owe minus they money you have – liabilities minus financial assets. For example, if you have $1000 on your credit card, and $500 in your savings account, your net debt is $500.Net Debt declined from a high of $11.9 billion in 2004-05 to $7.8 billion in 2011-12, a decline of 34 per cent. However, since then net debt has increased to $9.1 billion in 2013-14 and is projected to increase to $10.4 billion as of March 31, 2015.

Net Debt as a percentage of Gross Domestic Product (GDP) has declined from a high of 61.3 per cent in 2005 to 25 per cent in 2014. Furthermore, in 2014 Net Debt as a percentage of GDP was lower than the average of all other provinces.

Economic Indicators

The province has made tremendous economic progress since 2003. Strong economic growth has been driven by investment, which is up over 230 per cent since 2003. Investment is expected to total a record $12.4 billion this year.

Since 2003, real Gross Domestic Product (GDP) is up 13.5 per cent, employment is up by 13.2 per cent and the unemployment rate has fallen by 4.6 percentage points.

Employment growth combined with strong wage gains has increased household income by over 80 per cent. Retail sales have also increased by more than 55 per cent. Over the past decade, wages have grown almost 50 per cent. Average weekly earnings in 2013 were $949, second only to Alberta.


Economic Indicators 2003 2014F % Change
Capital Investment ($M) 3,712 12,407 234.2
Employment 210,700 238,600 13.2
Average Weekly Earnings ($) 640 991 54.8
Household Income ($M) 12,661 23,048 82.0
Household Disposable Income ($M) 9,416 17,460 85.4
Retail Sales ($M) 5,736 8,923 55.6
Housing Starts (units) 2,692 2,119 -21.3
Consumer Price Index (2002=100) 102.9 128.4 24.8
Unemployment Rate (%) 16.5 11.9 -4.6 ppt
Real Gross Domestic Product ($2007 M) 25,541 28,989 13.5
Infographic of economic indicators

Economic Outlook

Activity in the local economy remains high and long-term prospects are good but it looks like the near-term will be challenging. Coming off major project peaks, combined with the impacts of lower oil prices, will likely result in reduced economic growth over the next couple of years.

In the longer-term, the start of production from Hebron and Muskrat Falls, development of Statoil’s Bay du Nord discovery, and construction of the underground mine at Voisey’s Bay will provide a boost to the province’s economy.

The enormous potential of the province’s offshore resources is reason for optimism about the economic future of Newfoundland and Labrador. The Canada-Newfoundland and Labrador Offshore Petroleum Board has announced a 249 million barrel reserve increase for Hibernia bringing total reserves to 1.644 billion barrels (from 1.395). This optimism is also supported by recent land sale results in the Newfoundland and Labrador offshore. Successful bids were received for three of six parcels and the bid on a parcel in the Flemish Pass by ExxonMobil Canada Ltd., Suncor Energy Inc. and ConocoPhillips Canada Resources Corp. was $559 million, the highest bid ever on a land parcel in the Newfoundland and Labrador offshore area.