Don't get too excited about N.L.'s unexpected surplus, experts say

The Newfoundland and Labrador government announced an unexpected surplus in Wednesday's fall fiscal update, but experts say it would be a mistake to assume the province's dire financial straits have seen a permanent reversal.

Other than the 2019 accounting surplus due to the Atlantic Accord, the $479-million surplus is the province's first in more than a decade — an $830-million turnaround from the $351-million deficit projected in the 2022 budget.

In an interview with CBC News, Russell Williams, a Memorial University political scientist, said the turnaround is good for government coffers but not necessarily for residents struggling with the cost of living.

"Part of the reason why it's good news for the fiscal balance of the province is because there's a lot of economic bad news confronting citizens of the province," he said.

According to Finance Minister Siobhan Coady, the unexpected surplus is mostly driven by boosts in oil royalties, sales taxes and personal and corporate income taxes. The provincial government is seeing an extra $374 million in oil royalties, about $400 million in corporate income taxes and about $300 million in personal income taxes. 

Coady said part of the unexpectedly high tax revenue is because of a stronger-than-expected Canadian economy. However, the high tax revenue also stems partially from inflation.

The price of consumer goods and services rose by 6.7 per cent from September 2021 to September 2022.

"Newfoundland and Labrador households are spending a lot more on basics in life," Williams said. "Because they're spending a lot more on basics in life, they're also paying more in taxes on those basics in life. And that's improving the financial situation of the provincial government, it's just not really improving the financial situation of households."

Upgraded outlook

The turnaround has reduced Newfoundland and Labrador's projected net debt by $1.01 billion — a positive sign for the most indebted province, per capita, in the country, said Marc Desormeaux, a principal economist with Desjardins.

"It will be well received by creditors," he said in an interview with Radio-Canada.

On Wednesday, Coady told reporters the province's credit agencies had upgraded their outlook for Newfoundland and Labrador from negative to stable.

Desormeaux said the turnaround is reflective of a national trend driven by inflation and a stronger-than-expected economic recovery from COVID-19.

"Newfoundland and Labrador has now followed suit there and reported a much-improved fiscal result, an unexpected surplus, with benefits from oil prices and that stronger-than-expected recovery," he said.

However, Desormeaux said oil market volatility, inflation and an aging population could put pressure on future budgets.

Challenges ahead

Oil prices were higher than projected in the 2022 budget — $102 US rather than $86 US per barrel.

Williams said the province's reliance on oil revenues amounts to a "roller-coaster."

"If there are windfall revenues coming in now, I think the government needs to be far more careful than they've been in the past," he said.

Coady said the volatility in oil prices is one of the reasons the provincial government has introduced legislation to establish a "future fund," into which it will deposit a portion of revenues from non-renewable resources and proceeds from the sale of assets valued at over $5 million. The future fund was one of the measures recommended by the premier's economic recovery team in 2021.

"If this future fund had been in place since the beginning of oil revenues, there would be over $3 billion plus decades of compounded interest," Coady said while announcing the fund.

The government plans to deposit $157 million into the future fund this year.

Williams said he doesn't disagree with the concept but argued that Newfoundland and Labrador's future fund is largely symbolic.

"This money is being targeted towards debt reduction or debt servicing, which means it doesn't really serve the purpose of what future funds do elsewhere, which is to create a savings account and to create a situation where government isn't dependent on oil revenues to sustain its regular operations," he said.

Recession 'imminent': MUN economist

Volatility isn't the only challenge — last week, Coady referenced the possibility of a global recession. The same day, federal Finance Minister Chrystia Freeland warned of "difficult days ahead" for the Canadian economy.

Tony Fang, a MUN economist, said Newfoundland and Labrador won't be immune.

"The recession is coming. I think it is imminent," he said.

Fang said he's concerned — though he isn't arguing for government spending cuts.

Earlier this month, the provincial government announced it would be giving $500 to people in Newfoundland and Labrador who make less than $100,000 and between $250 and $500 to people who make more than $100,000 but less than $125,000. Fang said he doesn't disagree with the handouts but believes more targeted measures would have had more impact.

From July 1, 2021, to July 1, 2022, Newfoundland and Labrador's population grew by 5,520 — mostly from international and interprovincial migration. Fang called for more measures to help retain newcomers and international students.

"We know that most of the international students, and also newcomers, would like to stay here. The major hurdle for them is get so-called Canadian experience, work experience," he said.

As deaths in Newfoundland and Labrador continue to outpace births, Fang said measures targeting newcomers would be part of a long-term strategy for economic growth. 

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