Skip to main content
The Globe and Mail
Support Quality Journalism.
The Globe and Mail
First Access to Latest
Investment News
Collection of curated
e-books and guides
Inform your decisions via
Globe Investor Tools
Just$1.99
per week
for first 24 weeks

Enjoy unlimited digital access
Enjoy Unlimited Digital Access
Get full access to globeandmail.com
Just $1.99 per week for the first 24 weeks
Just $1.99 per week for the first 24 weeks
var select={root:".js-sub-pencil",control:".js-sub-pencil-control",open:"o-sub-pencil--open",closed:"o-sub-pencil--closed"},dom={},allowExpand=!0;function pencilInit(o){var e=arguments.length>1&&void 0!==arguments[1]&&arguments[1];select.root=o,dom.root=document.querySelector(select.root),dom.root&&(dom.control=document.querySelector(select.control),dom.control.addEventListener("click",onToggleClicked),setPanelState(e),window.addEventListener("scroll",onWindowScroll),dom.root.removeAttribute("hidden"))}function isPanelOpen(){return dom.root.classList.contains(select.open)}function setPanelState(o){dom.root.classList[o?"add":"remove"](select.open),dom.root.classList[o?"remove":"add"](select.closed),dom.control.setAttribute("aria-expanded",o)}function onToggleClicked(){var l=!isPanelOpen();setPanelState(l)}function onWindowScroll(){window.requestAnimationFrame(function() {var l=isPanelOpen(),n=0===(document.body.scrollTop||document.documentElement.scrollTop);n||l||!allowExpand?n&&l&&(allowExpand=!0,setPanelState(!1)):(allowExpand=!1,setPanelState(!0))});}pencilInit(".js-sub-pencil",!1); // via darwin-bg var slideIndex = 0; carousel(); function carousel() { var i; var x = document.getElementsByClassName("subs_valueprop"); for (i = 0; i < x.length; i++) { x[i].style.display = "none"; } slideIndex++; if (slideIndex> x.length) { slideIndex = 1; } x[slideIndex - 1].style.display = "block"; setTimeout(carousel, 2500); } //

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.

Story continues below advertisement

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.

Story continues below advertisement

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."

Your Globe

Build your personal news feed

  1. Follow topics and authors relevant to your reading interests.
  2. Check your Following feed daily, and never miss an article. Access your Following feed from your account menu at the top right corner of every page.

Follow the author of this article:

View more suggestions in Following Read more about following topics and authors
Report an error Editorial code of conduct
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

Comments that violate our community guidelines will be removed.

Read our community guidelines here

Discussion loading ...

To view this site properly, enable cookies in your browser. Read our privacy policy to learn more.
How to enable cookies