This Commentary has been re-printed as an Op-ed piece in the Halifax Sunday Herald on Sunday, April 21, 2002

Oil: The Saviour that failed Newfoundland

by Peter Fenwick

Former Newfoundland premier Brian Peckford often claimed that offshore oil would (make) “the sun shine and have not be no more,” Offshore oil would put an end to the persistent penury that seemed to dog Newfoundlanders and their hard pressed exchequer.

But has it?

This January Newfoundland’s second oilfield started producing, but judging by the most recent budget, the oil industry appears to have delivered little, and may have induced a false sense of comfort in a government that has driven up its debt and placed the province in financial jeopardy. Clearly the government has not listened to former Alberta treasurer Jim Dinning who warned during a recent AIMS sponsored event in Halifax that oil revenue must not drive up government spending beyond the ability of the province to sustain it.

Yet offshore oil has done wonders for the province’s gross domestic product. In the four years since Hibernia first started pumping oil in November of 1997, GDP has risen a staggering 37%. This year Newfoundland’s offshore could produce 87 million barrels of oil, and account for $3.5 billion of a $15 billion economy. Yet little of this wealth is now finding its way into the pockets of the people or the treasury of the province. Total personal income rose by less than half the increase in GDP, while government revenues remained stagnant.

And exported oil has done little to staunch the loss of population from the province. While GDP rose, the population dropped seven percent. Forty thousand people left the province since Hibernia started pumping.

Despite that loss of population, employment is at its highest levels ever. But much of that increase in employment came from a new shell fishery, and a spate of call centres, although Terra Nova construction was a substantial contributor. With that construction over, employment growth is expected to slow.

But the contribution to the government’s bottom line appears minimal at best.

Hibernia contributed about $30 million in royalties last year, netting the province about $10 million when equalization clawback is factored in. Even corporate income taxes have not risen appreciably.

Of course the several hundred employees on the offshore rigs pay more than their share of income taxes, but recent cuts in the personal income tax rate has kept that income source relatively flat.

While government revenue streams from Hibernia have been disappointing, Terra Nova, the newest oil filed, is expected to do better. The Terra Nova partners have an easier reservoir to tap, will pay higher royalties, and are expected to pay down their capital costs much faster. After capital costs are recovered, royalties increase dramatically. But all of that is in the future. It will be the end of the decade before Terra Nova pays off its huge capital costs.

At this point oil revenue is so tentative that it would be foolhardy to increase government spending based on oil alone. Yet this appears to be exactly what the province has done in its last few budgets.

On March 21st, 2002, the province brought down a budget with a nominal $93 million deficit, but with an increase in total debt that surpassed $450 million. Some of the increase in debt was additional borrowing by Newfoundland and Labrador Hydro, debt that is self-financing, but most was due to the transfer of sinking funds to the current budget in order to keep the deficit down. Total provincial debt, including unfunded pension liabilities, now stands at $10.8 billion.

And that artificial deficit itself was further whittled down by transferring $97 million from a federally funded Labrador roads program. The provincial government committed itself to spending an equal amount over the next seven years on Labrador roads, but with two years left in its mandate, it was promising that which it had no ability to deliver. Labradorian’s reaction to this “highway robbery” was extremely negative.

In addition to the Labrador trust fund, the government took $13 million from the Liquor Corporation, and some capital funds from the public housing corporation. These one-time sources of funds are not a new innovation. The provincial government has dipped into a succession of funds over the past few budgets. In the past, advances on Term 29 a federal confederation bonus, on the roads for rails fund, and on the ferry funds have helped keep deficits under control.

But the one-time funds are not the only fiddle. The provincial government excludes school and hospital board deficits from its in its budget figures. These deficits have had to be paid down eventually. When the province publishes its public accounts, which include everything, they are invariably several hundred million dollars more in the red than the budget figures. Newfoundland is still the only province in Canada to budget this way.

The minister of finance defended her budget, arguing that the province’s debt, while rising, is still only 55% of GDP. If one folds in unfunded pension liabilities, however, that ratio rises to 75%. But an oil revenue inflated GDP is a questionable indicator of the province’s ability to carry debt. Economic activity in the offshore oil industry employs few people and does little to help the government pay its bills. If offshore oil production were excluded from the GDP figures the debt/GDP ratio would approach 100%.

Frankly a better way of calculating ability to pay is debt per capita. When Roland Martin calculated Newfoundland’s financial liabilities in 2000, (in the AIMS publication Debtors Prison II) he put debt per capita at $15,709. Using the newly released population counts, current debt is now in excess of $21,000 per capita, up over 30% in less than two years — the highest in Canada.

While back-to-back construction of Hibernia and Terra Nova propped up the province’s economy in the lean nineties, in the production phase they do not spur employment or income growth at anything near GDP growth. And while the industry may deliver more to the province’s bottom line when Terra Nova matures, its most notable effect to date has been to encourage an almost reckless increase in spending and debt by the provincial government. The province is now in a desperate race to wring new revenue from its natural resources before its inability to service its huge debt forces it to cut services drastically.

Although offshore oil holds promise for the future, it has delivered little but false hope to date.

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