Falling oil prices prompt Newfoundland to tighten fiscal belt
Newfoundland and Labrador Premier Kathy Dunderdale talks to media outside her home in St. John's on Sept.19, 2011. (Paul Daly / THE CANADIAN PRESS)
Published Tuesday, July 24, 2012 7:18AM EDT
ST. JOHN'S, N.L. -- Newfoundland and Labrador Premier Kathy Dunderdale is freezing non-essential travel and other discretionary spending as her government faces a deficit that could top $600 million -- up from a projected $258-million shortfall.
Cabinet ministers have been asked to call off all but the most vital departmental travel in an effort to save tens of millions of dollars, Dunderdale said Monday outside the legislature.
The measure is on top of a review announced earlier this year to cut administrative fat and inefficiencies across departments.
At issue is the price of Brent crude oil which at around US$103 per barrel is far lower than the US$124 per barrel on which the provincial budget relies. And some analysts are predicting prices will stay low well into 2013 as economic woes in Europe reduce demand on the global market.
"For every dollar that oil goes down, it has an effect of almost $20 million on our budget," Dunderdale said. "So ... if everything stays where it is now, our deficit could be up around $600 million or $700 million."
Dunderdale said she's even more worried about 2013-14, when a deficit of almost $433 million is already projected.
"If oil stays where it is, our deficit could be around $1 billion," she said. "Now that's a reality check for everybody in the province."
Dunderdale said she'll be watching expenses closely over the next few months and some government job vacancies may not be filled. But she said it's not yet time to consider deeper cuts to programs or services.
Newfoundland and Labrador depends on offshore oil for about one-third of its revenues.
Finance Minister Tom Marshall opted for two years of overspending rather than austerity as he tabled his budget last April. He blamed a $1.1-billion hole in the province's finances due to a dip in oil production during refits and maintenance plus the loss of federal cash as the Atlantic Accord expired.
The joint offshore management program with Ottawa put $536 million in provincial coffers last year.
Marshall predicted a return to the black in 2014-15 with a $44-million surplus as higher offshore oil royalty rates kick in.
The last budget was a far cry from surpluses worth $5.5 billion racked up in six of the last seven budgets --largely thanks to higher oil production and prices. It was also a sobering reminder of the province's risky addiction to fossil fuels.
Dunderdale said it's a reality that bolsters the government's support for the proposed $6.2-billion Muskrat Falls hydroelectric project in Labrador. The plan to harness power from the lower Churchill River would help wean the province off oil, she said.
An all-party debate on Muskrat Falls is planned this fall before the government decides whether to go ahead.
Some critics say the government squandered a chance to pay down more debt when it was flush with surplus cash. Before the price of oil dropped, net debt was expected to reach $8.5 billion by the end of next March. That's up from $7.8 billion last year but down from a high net debt of almost $12 billion in 2004.
"This so-called Conservative government has been throwing around money like sailors on leave for the last eight or nine years," said Liberal Opposition member Jim Bennett.
"And if they can't manage prosperity, heaven help us when we hit a downturn like we're going into right now."
The Progressive Conservative government anchored its budget, as it has for the last nine years, using an independent average oil price provided by New York-based consultant PIRA Energy Group.
Bennett said the government should have considered at least two other forecasts before choosing a lower price to err on the side of caution. In the past, the government has been accused of low-balling oil prices to mute spending demands when surpluses wound up being dramatically higher than predicted.
Dunderdale said the fossil fuel market is being dragged down by economic slowdowns in Europe, China and India.
"I worry about it," she said. "It doesn't keep me up at night -- it is what it is -- and I think it just reinforces again our argument that we need to move from a place where we're so reliant on the revenue from oil."
Provincial New Democrat Leader Lorraine Michael said Dunderdale's suddenly dire fiscal forecasts expose a slap-dash approach to governing.
"I don't see this government really planning, and that's what I find very disturbing. Everything seems to be reaction."