Newfoundland Brings in Election-Style Budget

Newfoundland and Labrador, like all Canadian provinces, is in danger of hitting the health care wall, the point where insatiable demands of the health care system smack into the limited resources of the province. On March 22, in its latest budget, the province hit the wall, but through some rapid juggling of numbers it claims to have balanced its budget.

Since 1994 the province has increased health care spending by 38%, while its total revenues have risen less than ten per cent. If it were not for the vandalizing of its sinking funds, one-time equalization top ups, and special dividends from its electrical utility, the province would be financing this extravagance with over $200 million in new borrowings, a deficit that has not been seen in the province since the early nineties.

As it is, the geographically large, but demographically small province of 538,000 is now staggering under $10 billion in debt. That debt is 74% of GDP, down infinitesimally in the last two years since Roland Martin awarded Newfoundland a C+ for its efforts to regain fiscal stability in his 1999 AIMS report “Debtors Prison II”. At the time Newfoundland and Labrador’s debt was three times PEI’s and fifty per cent higher than New Brunswick or Nova Scotia. Lamentably, it still is.

Worse still, debt to GDP ratio is not an accurate indicator of the province’s ability to service its debt. Much of the increase in GDP over the last few years has been offshore oil. At the start of oil production, before the projects are paid down, provincial oil revenue is minuscule, employment during the production phase is minimal. A better indicator of the financial capacity of the province is personal income. While GDP has risen 63% since 1994, personal income has risen an anaemic 7%.

But it is not bond debt alone that threatens the province. If it were not for its massive unfunded pension liability, Newfoundland and Labrador would actually have a reasonably comfortable debt to GDP ratio. But years of running an unfunded public service pension plan and some rather generous increases in pensions, has left the province with $3.3 billion in unfunded pension liabilities. By contrast the net bond debt is just over $7 billion.

In the last few years the province raised the pension premium rate and has borrowed to put the pension fund on a sounder footing. But those moves have increased bonded debt by over half a billion dollars, while the fund still bleeds red ink. The province has only two contributors for every pensioner, up from a five to one ratio in 1990.

Even laying off civil servants is a mixed blessing. While it would help reduce current account expenditures if the employees were pensioned off, it would then put additional pressure on the pension funds. To compound the problem, the current unfunded liability calculation is over a year old. The drop in the equity markets of the last year have not been worked into the equation.

On a positive note, the province has made some progress on reducing its foreign debt exposure. The 39% foreign exposure of 1999 has declined to 30% today, although it would have been even less if the Canadian dollar had not decreased so substantially against the American dollar. But of course that is why foreign debt is so dangerous.

And while health care was the major consumer of additional public funds, education still got its share. The province bowed to public pressure and retained the 218 teachers slated to be laid off due to school enrollment drops. Canada’s poorest province now has the richest student teacher ratio in the country.

Spurred on by matching federal government grants the province is allocating $60 million to its heavy handed economic development strategies. Those funds are heavily subsidized by almost $20 million in federal dollars.

But the hidden deficit of the 2001-2 fiscal year may pale in comparison to deficits in future years. In addition to the sinking fund revenues, the province moved a number of previous year surpluses from Newfoundland and Labrador Hydro into the budget, and benefited by a number of one-time revenue sources. The cap on equalization will be reapplied this year, and with the Canadian economy softening, the heady rise in equalization payments that helped the province fund its budget increases for the last few years is probably over. The finance Minister Joan Marie Aylward called for revisions to the equalization program in her budget speech, but progress on that front is unlikely. There are some things the province could do, however.

It may be time for the province to put the crown-owned Newfoundland and Labrador Hydro back on the market. The utility accounts for a billion dollars of the province’s debt. Selling the utility would not only reduce gross debt, but would also give the province a one time cash infusion to lower the debt further. Of course divesting Hydro would also eliminate the revenue stream from the utility that has saved the province’s bacon the last few years.

To compound the government’s problems, the public sector unions have a massive strike mandate, and any eventual settlement may push the province more into the red in the upcoming year. The province has offered a three per cent increase, but that is a long way from the eight per cent the unions are demanding.

Part of the reason for the chaos in the province’s finances is the failure of the accounting system. The province, alone among Canadian provinces, does not include all its agencies in its budgeting. Much of the increase in expenditure this year was to cover past year losses of its health and education boards, losses that would have been accounted for much earlier by other provinces.

As Roland Martin noted in his “Debtors Prison II” the province had done a remarkable job of handling its finances in the nineties. Fiscal discipline kept the debt from rising, and the province had finally addressed its hidden secret — the multi-billion dollar unfunded public pension debt. Why then has the province thrown caution to the wind this time?

The reason may lie in three recent public pinion polls that show the governing Liberal regime far behind the PCs and their new leader Danny Williams. The PCs now have the support of about 50% of decided voters, with the Liberals trailing at about 39%. In Newfoundland and Labrador the heavy reliance on federal transfers, which finances as much as half of all expenditures in an average year, makes spending much more popular than cutting taxes or reducing the debt. Other than a few feeble protests from the Board of Trade and the Federation of Independent Business, the budget was universally acclaimed.

It is this almost total disconnect between who pays, and who receives, that has allowed the provincial government to ramp up spending in a way that is clearly unsustainable. Newfoundland and Labrador’s position is frighteningly similar to that of Nova Scotia in the nineties when partisan politics prevented a concerted attack on the deficits.

Which is why this has all the earmarks of an election budget. It throws money at health care problems in an attempt to build up support for the governing Liberals. Unfortunately the trick cannot easily be performed two years in a row.

It also allows the province to ignore the massive problems in the way health care is organized. Much too often hospitals are built in districts where the influence of the cabinet minister outweighs health care considerations. And when one health care board actually did its job and proposed reorganizing its health care delivery system, the communities and unions affected put up such a howl that the politicians backed off. In a leadership vacuum, health care costs spiral ever upward, and the financial stability of the province becomes shakier.

The brave path followed by the Newfoundland and Labrador government in the nineties that was slowly nursing the province back to fiscal health has been abandoned in the heat of political competition. Where the province will end up now is anyone’s guess.