Speaking Notes
Honourable Loyola Sullivan
Minister of Finance
President of Treasury Board
Release of Independent External Review

Monday, January 5, 2004

Good afternoon ladies and gentlemen. Thank-you for coming. Joining me here today is Mike Gourley, Project Leader and Special Consultant with PricewaterhouseCoopers.

On November 6, 2003, government announced that an independent external review of the province’s financial situation would occur. Through a request for proposal process, PricewaterhouseCoopers was selected to conduct that review. Today, I am releasing the final report and providing an overview of the findings.

Government views securing and strengthening the financial condition of Newfoundland and Labrador as the number one challenge we must face. Without sufficient financial resources, government cannot provide the services and programs that the people of Newfoundland and Labrador need and deserve. As such, we must implement sound and stringent financial management practices for our province.

PricewaterhouseCoopers was asked to focus its review on two areas:

• first, whether or not the 2003-04 fiscal targets outlined in the 2003 budget remain realistic and attainable;
• and second, whether or not, based on certain assumptions, the budget can be balanced by 2007-08, thereby eliminating the cash deficit.

PricewaterhouseCoopers has completed this work, and they have completed it within the time frames government requested. I now want to outline the findings of the report.

From government’s perspective, there are three primary findings.

First, government will clearly not be able to meet the fiscal targets outlined in the 2003 budget.

Mr. Gourley and his team have told us that the fiscal targets contained in the 2003 budget, that is the deficit targets, are no longer realistic and attainable.

The projected deficit target of 665.9 million dollars is now 827.2 million dollars and the projected cash component of that deficit has increased from 286.6 million dollars to 506.6 million dollars. The deficit targets in the current fiscal year are no longer attainable as a result of having to purchase the Student Loan Portfolio and that the cost must now be recorded for retirement benefits for group health and life insurance.

This is a very high deficit for any provincial government, particularly extraordinary for a smaller province like Newfoundland and Labrador. Having a deficit means government is not taking in sufficient funds to pay for day-to-day activities. It is the same as individuals having to borrow to buy groceries and furnace oil or to pay the telephone and electric bills. It is not sound financial management.

The second finding in the report is that if government does not implement significant expenditure management measures, we will have deficits in excess of one billion dollars annually for each of the next four years, with the cash component of that deficit averaging over 660 million dollars annually. That means we will spend, on average, 660 million dollars more each year than we will receive in revenues.

The deficit has grown from 187 million dollars in 1999 to over 800 million dollars in 2003-04 and will average over one billion dollars per year over the next four years if no restraint measures are taken. Continuing to operate with large deficits is not a sustainable or responsible situation and it simply cannot continue. Government cannot keep spending 660 million more than we take in each year.

In addition, the province’s debt is projected to reach 11.6 billion dollars at the end of the current fiscal year and will grow to 15.8 billion dollars by the end of 2007-08 if no corrective action is taken. Just 11 years ago, the people of the province were responsible for six billion dollars of debt. By 2007-08, if we continue on the current course, the people of the province will owe 15.8 billion dollars, almost three times what we owed in 1992-93. This equates to over 30,000 dollars for every man, woman, and child in the province.

The consultants have also indicated the public sector pension plans remain a concern for the province’s future financial health. The unfunded pension liability is projected to increase from 3.7 billion dollars to 4.5 billion dollars by 2007-08. The report states: "it is clear all participants in the pension plans have to contribute to the solution to make those plans more stable."

With this high debt load, currently, approximately one billion dollars goes to paying only the interest. For every dollar of revenue earned over 25.4 cents currently goes to pay the interest on the debt. That will increase to almost 30 cents by 2007-08 if control measures are not taken.

Unfortunately, even with these large payments, none of the money is being used to reduce the principal portion of the debt. It is like continuing to pay the interest on your mortgage and never making a payment on the principal. We must do a better job of managing our money.

The third, and perhaps the most important and significant finding, is that the budget cannot be balanced by 2007-08 with revenue growth alone. The 2003 budget speech by the previous government stated: "...revenue growth could account for all of the fiscal improvement needed to eliminate the deficit, and more." PricewaterhouseCoopers has stated this is not possible. In fact, based on the report, we cannot even come close to eliminating the cash component of the deficit through revenue growth alone.

The deficit for 2004-05 will automatically grow by 125 million dollars because of one time revenues contained in the 2003-04 budget. When allowances are made for limited growth and annualization for existing commitments such as salary increases, the deficit for 2004-05 will reach almost one billion dollars.

The new government has inherited a serious problem, and we must address it now.

PricewaterhouseCoopers has reviewed the province’s financial situation, and its advice to government is simple and direct. They have stated in the report: "Government needs to develop and implement clear and decisive action plans to address the fiscal imbalance and to avert those forecast record levels of deficit for each and every year over the next four years." The consultants have painted an accurate picture of the province’s financial situation, and simply put, it cannot continue.

This is not the first time government has heard this message. The Auditor General has repeatedly stated this theme. Major financial institutions and credit rating agencies have indicated that the fiscal situation is cause for concern and not sustainable. I’ll quote from one such group, Moody’s Investor Services, which stated in May 2002: "The province now faces more difficult budget circumstances and is relying to a great extent on non-recurring measures to enhance its short-term financial flexibility. The use of such measures in response to ongoing spending pressures posed by last year’s costly salary agreement is unsustainable."

Most recently, the Royal Commission on Renewing and Strengthening Our Place in Canada put forth compelling evidence on the need for government to get its fiscal house in order. The commission’s report called the trend in budgetary deficits in the province unsustainable.

The time has come for government to listen to the message, and this government has committed to do just that.

The information in this external review will play a critical role as we develop a plan to address the financial situation. But there are other components. The consultants have told us that the fiscal situation is not solely government’s problem, but that the financial health of the Newfoundland and Labrador is the concern of government, its employees and every single resident of the province.

We are all partners in addressing the fiscal challenges. Earlier this morning, Mr. Gourley and I met with members of the business and union communities to share the findings of the report and to explain the financial situation we are facing. Tonight, Premier Williams will give an address to the people of the province which will outline how the financial position of the province affects our future and what steps the province must take to address this challenge.

Beginning next week, I will be conducting pre-budget consultations in a number of communities throughout Newfoundland and Labrador. I want to hear from the people of the province, and I will be seeking input and suggestions for controlling expenditures, developing priority spending areas, and identifying potential areas for savings.

With input from Newfoundlanders and Labradorians, and the information from the external review, government will address the province’s financial situation. We have made this commitment, and we will deliver.

There is little doubt that government is on a path that will require tough decision-making. These decisions must be made, and will be made, for the good of our province, and for the good of our people.

Thank-you. I’ll now open the floor to questions from the media.

  Back