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In its 2014-2015 budget, Newfoundland’s oil royalties provided more than a quarter of the government’s revenue. By last fall, that contribution had slumped below 10 per cent.

As Prime Minister Justin Trudeau's visit to Alberta this week puts the focus squarely on the ailing provincial economy, it's easy to forget that Alberta actually isn't the province hurting the worst from oil's demise.

Last week, debt-rating agency Standard and Poor's lowered Newfoundland's credit rating to single-A from single-A-plus, citing the deterioration of the provincial government's budget as a result of "the fall in oil prices, significant expected increase in debt and now-low economic prospects." It also slapped a "negative" outlook on the rating – implying that, unless conditions improve, a further downgrade could still be down the road.

Thanks to its offshore oil riches, Newfoundland's economy thrived during a bull run in global oil prices that lasted the better part of a decade. In recent years, the energy sector has accounted for anywhere from a quarter to one-third of Newfoundland's gross domestic product. That's actually a touch more than the industry's share of the Alberta economy.

But Newfoundland, with a much smaller and less diverse economy than Alberta's, has been more dependent on its oil industry for government revenue than Alberta has – and its budget is now feeling an even more severe pinch.

In its most recent (2014-2015) budget year, Newfoundland's royalties from oil production provided more than a quarter of the government's revenue. The province's 2015-2016 budget projected that those royalties would still deliver 20 per cent of revenue; but, by last fall, with oil prices mired well below the budget's forecasts, that contribution had slumped below 10 per cent. (Alberta, by contrast, counted on oil royalties for about 15 per cent of its 2014-2015 revenue. In its budget last October, oil royalties made up just 5 per cent of estimated 2015-2016 revenue.)

The result is a projected Newfoundland budget deficit of $2-billion for the fiscal year ending March 31 and $2.4-billion next year – which, relative to its population, is roughly triple the size of Alberta's expected deficits.

New Premier Dwight Ball and Finance Minister Cathy Bennett are gearing up to dispense some harsh medicine to address the ballooning deficits. The government, elected in November, recently asked all departments to identify 30 per cent in spending cuts over the next three years. While the government has said it doesn't expect to make cuts of that magnitude across the board, Ms. Bennett has openly acknowledged that "we're short 28 per cent of the money we need to pay the bills." In a province where more than a quarter of all jobs are in the public sector, that's a scary prospect.

Not that there isn't a good argument to be made that Newfoundland's public sector is in need of some scaling down. The province's program spending per capita is the highest in the country, about 35 per cent above the national median. It has soared 76 per cent since 2005.

Rather than save some of its oil windfall during the boom years, to give the government something to fall back on in lean times, Newfoundland favoured expanding its spending and, at least for a time, reducing its debt. But while the province did have some success in whittling it down in the mid-2000s, its net debt has been rising steadily since 2012. By next year, the debt will have nearly doubled in five years.

Alberta's effort to build up a nest egg from its oil bonanza, while roundly criticized as inadequate, has still left it with about $18-billion in its Heritage Savings Trust Fund. Newfoundland has nothing of the kind. The new Liberal government pledged in last November's election campaign to create such a savings fund, but not until the budget is back in balance. Without a severe overhaul of government services or a miraculous reversal of oil's fortunes, a balance isn't even on the horizon.

There's little question that Newfoundland needs to recalibrate the size of its government for an environment of much lower oil prices. The question is whether now is the best time to do it. Newfoundland's economy is already in a prolonged recession; real gross domestic product contracted more than 2 per cent in each of the past two years, and private-sector forecasters expect it will shrink again in 2016. The unemployment rate has swollen to 14.4 per cent, a five-year high. A major austerity program now could pour gasoline on the fire.

The government could opt to raise taxes, such as the sales-tax increase that nearby New Brunswick announced this week to address its own fiscal shortfall. But Mr. Ball won the election, in no small part, on a promise to cancel a two-percentage-point sales-tax increase planned by the previous Progressive Conservative government. It could be political suicide to renege.

But Finn Poschmann, president and CEO of the Atlantic Provinces Economic Council, warns that the longer Newfoundland waits to address its fiscal imbalances, the deeper in an already deep financial hole it will sink. He argues that the province has little choice than to reduce services and enforce spending controls that are independent of how much oil revenue is coming in.

"The big concern is the social impact of reduced services," he says. "But it has to be done."