Debt threatens to submerge Newfoundlanders and Labradorians
This op-ed was published in The Financial Post on May 1, 2019.
Newfoundland and Labrador boasts stunning scenery, friendly people and hands down the most colourful sayings in Canada. But there’s a financial storm looming and taxpayers on the Rock are staring down the barrel of bankruptcy while the provincial government is twiddling its thumbs.
In 2017, Carleton University professor Ian Lee predicted than within 10 years, Newfoundland and Labrador would be fiscally insolvent, requiring a bail-out from Ottawa.
Within the last decade, the province’s revenues have been sporadic. Some necessary spending reductions were made in 2016, but the government didn’t stay the course.
It’s not easy to deliver government services in a large, rural province, but the auditor general’s December 2018 report noted that the province’s per-capita spending was the highest in Canada.
The net debt when Premier Dwight Ball entered office was $12.5 billion. Four years later, it’s $15.4 billion. For a province with a population of about 525,000 it’s a staggering number and the per-person net debt is over $29,000.
The aging population means that many of those people are retiring rather than working. That leaves fewer people to cover the health-care bills for more and more people.
The net-debt-to-GDP ratio is the highest in Canada, sitting currently at 46 per cent, making it increasingly hard for the province to pay back its debts.
There’s a public inquiry into the Muskrat Falls hydroelectric project, which is responsible for much of the debt. Ball called it “the biggest economic mistake in Newfoundland and Labrador’s history.” The project is virtually guaranteed to skyrocket electricity rates for cash-strapped taxpayers and businesses.
The government announced that it will subsidize electricity rates to cushion the blow – essentially taking from taxpayers and giving to ratepayers, who in reality are the same people.
In short, the debt is an iceberg threatening the beautiful province and the government needs to steer the ship now.
Three short years ago, Newfoundland and Labrador’s government delivered a crisis budget, imposing significantly higher taxes and announcing spending reductions, many of which never materialized after protests spooked politicians.
Fast forward to today, and the government has gone from crisis to complacent.
The government’s budget reads more like an election platform (it was announced the day before an election was called). Hundreds of millions in new spending was sprinkled across the province, and overall spending is up.
It was a foggy morning in St. John’s on budget day, but some of the numbers were even foggier. The government’s $1.9 billion one-year surplus is thanks almost entirely to the Atlantic Accord deal with Ottawa. Without that federal cash, Newfoundland and Labrador would be facing a deficit of about $575 million.
It gets foggier.
The provincial government accounted for the entire $2.5 billion Atlantic Accord payment in the first year – and officials insisted they had to – resulting in a massive surplus and reducing the net debt from $15.4 billion to $13.7 billion in a single year. In reality, the Atlantic Accord payment is front-end-loaded, but it will still be spread out over decades.
The total debt is still rising, and in the next two years, the province is projecting a plunge back deep into deficits.
This means that taxpayers are paying ever-growing debt interest payments, which are now more than $1 billion. That’s more than the province spends on education.
Higher interest rates would have serious consequences. It’s necessary that the government taps the breaks before it takes taxpayers over a fiscal cliff and put all Canadians on the hook for a bailout that will cost them dearly – with a likely web of unpleasant strings from Ottawa attached. The Newfoundland and Labrador government owes it to its taxpayers to get a handle on the debt while it’s still in the driver’s seat.
Paige MacPherson is Atlantic Director of the Canadian Taxpayers Federation.