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Politics Newfoundland delivers harsh budget in effort to slay deficit, fix finances

Newfoundland and Labrador Finance Minister Cathy Bennett presents the 2016 provincial budget at the legislature in St.John's, Thursday, April 14, 2016.

PAUL DALY/THE CANADIAN PRESS

Newfoundland and Labrador raised taxes across the board in a harsh budget designed to slay the eastern province's deficit and fix its deteriorating finances.

Newfoundlanders and Labradorians will fork over more in taxes for just about everything from their income and insurance premiums to gas, where the rate will increase by 16.5 cents per litre. The government also imposed new fees, cut hundreds of civil service jobs and slapped a temporary deficit-reduction levy on those earning more than $20,000 in taxable income.

The Liberal government also broke a campaign promise by raising the harmonized sales tax to 15 per cent.

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"It's a painful budget but it is absolutely necessary," said Finn Poschmann, chief executive officer with the Atlantic Provinces Economic Council. "It is a sharp shock that the provincial finances really did need."

The government projected a $1.8-billion deficit for fiscal 2016-17, compared with an estimated $2.7-billion without the drastic tax hikes, levies and spending cuts.

Finance Minister Cathy Bennett blamed the previous Conservative government for gross fiscal mismanagement and said everyone in her province will pay the price. "The choices we have made were not easy and every Newfoundlander and Labradorian … will have to be part of the solution," she said in written remarks.

The province's precarious fiscal position mainly stems from the deep decline in oil prices. Oil is trading around $40 (U.S.) a barrel, down from $100 in mid-2014, eating away at government funds.

A third of the province's revenues come from oil royalties and that has shrunk 70 per cent over two years due to weak crude prices and lower production. The government now expects $502-million from offshore royalties, the lowest level in a decade. In comparison, the province pulled in an average of $2.1-billion in oil royalties during the boom years.

But the pain is about to get worse as major oil and energy projects wind down. The unemployment rate is poised to jump from 13.1 per cent in March to nearly 20 per cent in 2019, according to budget forecasts. This comes after the province suffered from the shutdown of an iron-ore mine in Labrador and slowdown in related business.

The province has been under immense pressure to improve its fiscal position. Investors had soured on Newfoundland's bonds and credit rating agencies downgraded the province's debt.

"There was zero appetite for their debt," said Robert Kavcic, senior economist with Bank of Montreal. Mr. Kavcic said the budget makes Newfoundland's bonds "more saleable" – a crucial point given that the government must borrow funds to run the province.

Ms. Bennett's budget aims to stave off another damaging credit downgrade, which would lead to higher borrowing costs when the government has scant resources. This year, the government is on track to spend nearly $1-billion on interest payments. The Liberals compared this to the $900,000 in spending on childhood education.

"It is impossible for us to be satisfied that we will spend more on debt expenses than we do on educating our children," Ms. Bennett said.

Under the budget, the HST will rise from 13 per cent to 15 per cent, which is in line with other maritime provinces. The personal income tax will increase for two consecutive years, with the rate on those earning less than $35,148 a year rising from 7.7 per cent to 8.7 per cent and the rate on those earning over $175,700 rising from 15.3 per cent to 18.3 per cent.

The Liberals also broke another campaign promise to not cut public-sector jobs. The budget outlines plans to eliminate 450 of what it calls "full-time equivalent" jobs across public agencies, boards and commissions, as well as 200 government positions.

Editor's Note: An earlier version of this story said the government has imposed a temporary deficit-reduction levy on higher earners. In fact, the levy is adjusted based on earnings and starts with those making more than $20,000 in annual taxable income.

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