The largest source of income for the Government of Newfoundland and Labrador in 2024 will be borrowing.
“Projected deficit of $152 million for 2024-25, which represents 1.5 per cent of revenues” says the official news release, which like the budget speech, uses numbers based on accrual accounting.
But the cash accounting ledger shows the actual deficit is far higher and amounts to 26% of government’s expected revenue, which the budget estimates at $7.9 billion. You can tell this is the deficit that matters because the borrowing will also drive up the total of everything the government owes by precisely the same amount. Again, that’s according to the budget documents.
The forecast deficit for this widely-expected election year - $2,055 billion - is not going to be a record but it’s not far off the record set by the floundering Pea Seas’ election budget in 2015 at $2.558 billion. Anyone who says this was not an election budget or was not supposed to be an election budget simply has no idea what they are talking about.
Biggest source of money is borrowing. Income tax, sales tax, and oil royalties will each bring in about $1.7 to $1.8 billion, according to budget documents. Some chunk of sales tax and income tax are also from oil directly or indirectly.
The budget speech and the government’s publicity for the budget all praise not only the record spending - they call it “investment” - but also record income.
Only one of those is true.
Spending - forecast at $9.9 billion in the Estimates (cash accounting) - will be a record.
Income, though, is below the record $8.839 billion set in 2022, but that was artificially high.
You can see the income and spending record of the last dozen years in the chart below.
Scrape away the thin crust of these numbers though and you see more clearly. This is especially true on the income side of the government’s ledger. Three things to notice:
the use of windfalls and one-off cash to support spending,
changes to the way government reports the budget that make it harder to track key indicators of the government’s financial health, and
the real dependency on oil.
In 2022, the provincial government got a windfall of federal cash - about $650 million - which it buried in another income line and didn’t talk about until one reporter pressed officials about it. Other provinces got the same cash. Some ‘fessed up. others, like Newfoundland and Labrador didn’t. So that 2022 surplus is actually a chunky deficit. You can see a different version of this chart in last-year’s budget commentary - also included below - that includes a calculation to estimate what the real deficit was in 2022.
In 2024, and for some unknown reason, the finance department took some key pages and tables that used to be with The Estimates and either disappeared them altogether or lumped them together with new tables that used the same method of accounting the budget speech is based on. The result was like the change to how the government reported the cost of paying interest on the debt and other costs related to the growing public debt. The year before those changes, debt servicing costs had become the second largest spending item in the budget, ahead of education. Not a good look. So they changed the way they counted that number. Said the new way was the correct way. But the changes in the budget reporting since 2021 make it harder to track key indicators of the province’s financial health some of which - like the way or reporting debt servicing - government has consistently and reliably used for decades.
In 2023, the government’s financial update also showed a large and unexplained increase in borrowing. Officials buried the change well down in the handful of slides that now make up the report. There was no comparison from the budget figure and, despite requests and months of times, there’s still no official reason why government’s forecast of borrowing went up by about $700 million.
At year-end, the deficit for 2023 was $1.116 billion rather than nearly $900 million forecast in the original budget. But here’s the curious thing: there’s about $500 million in one-off revenues that the government normally doesn’t get and doesn’t plan to get more of. One is a “NALCOR Dividend” of $300 million. That’s odd since government hasn’t taken any money from NALCOR in almost 20 years and NALCOR financial statements for the past two years don’t show the company has that kind of cash laying around. We won’t even mention that the budget says NALCOR although officially, the thing is supposed to NL Hydro.
The other is $209 million from an offshore revenue fund.
Realistically, then you can peg the actual deficit from 2023 at closer to $1.6 billion rather than the number in the deficit and drop the government’s revenue from a bit over $7.6 billion to a bit over $7.1 billion. Whether or not you do that, you have to notice that in the past two fiscal years the government has had sizeable cash windfalls or other one-off revenues that make its basic financial position look better than it is. Generally, the government revenue has been somewhere around $6.5 billion on average for most of the past decade and a bit. There’ll be more on this in Wednesday’s column for subscriber’s only.
That brings us to the third revenue point that leaps out, namely the continued dependence on oil royalties. The budget promo material this year makes a big deal about how low oil revenues supposedly are: “Oil revenues in 2024-25 are expected to represent 15 per cent of overall revenues compared to 33 per cent in 2011-12.” That’s from the official news release.
In fact, almost one dollar in every four (22%) the provincial government gets in the 2024 fiscal year will come from oil directly. The indirect impact - from sales taxes and income taxes - is much harder to calculate and would drive that percentage higher.
Remember that the Liberals came into office in 2015 with the promise to reduce the province’s dependence on oil They talked about economic diversification even though the economy is more diverse than it’s ever been. What they were really talking about was that time when one dollar in three came into the provincial government’s bank accounts directly from oil royalties.
Two interesting things happened with that promise. First, the Liberals promised to double oil production by 2030. Now it was a nonsense claim when they made and it was nonsense *before* the global shift to green energy but doubling offshore oil production would *increase* reliance by the government on oil money not decrease it.
Second, the most obvious change to government’s income in the past dozen years has been the extra money from the federal government’s Hibernia shares. The first came in 2019 and then more cash came in 2022. At the time, this money was tied to Muskrat Falls rate mitigation. In practice, it’s just been more money for government to spend.
The problem is we know oil revenues will dwindle very quickly simply because there hasn’t been the discovery of more and more oil to match the fields that are already running. And there hasn’t been new discoveries and new planned production to replace those older fields as they dry up. Continued reliance on oil revenue remains a a massive strategic risk for the province.
Since Confederation, the Government of Newfoundland and Labrador has faced four financial crises:
Early 1990s during the global recession when provincial total liabilities and the size of the economy were roughly the same, all three major drivers of the provincial economy tanked at the same time, and the federal government was also hit hard by the recession.
2013 as oil prices plummeted and the provincial government closed the financial deal for Muskrat Falls.
2015 -2016 as oil prices plummeted and the provincial Pea Seas under Paul Davis headed for an election in 2015, followed by a tightening of capital markets through early 2016 that meant the provincial government had trouble funding its new long-term debt (to cover overspending).
2020 when - before COVID had a real impact - the provincial government faced tightening markets and was having trouble getting anyone to buy its bonds at the interest rate government offered. While the federal government bailed out provinces during COVID with bond buyouts by the Bank of Canada, and in a highly unusual act, GNL actually bought up its own first-issue bond offering at the end of the 2019 fiscal year and stopped recording meetings of the government committee that made the purchase.
Three of the four major financial crises since Confederation happened within the past dozen years. The most recent one prompted Premier Dwight Ball to write the Prime Minister to tell the government was nearing financial collapse: “Our province has run out of time” Ball wrote Trudeau in March 2020.
We must be living on borrowed time. Continued massive deficits - look again at that chart at the start of this column -reflects the continuing perilous state of provincial government finances. We are never far away from another financial crisis like the other three of the past decade or so. Overall government income hasn’t changed substantially over the past decade. The improvements that there have been are from sources that the provincial government cannot control or rely on: federal government transfers especially the Hibernia money, oil, and bonds/borrowing.
If you add up non-renewable resource revenues (driven by global commodity markets), federal transfers, and borrowing (markets don’t have to buy our bonds at rates we can afford), that accounts for 51% of GNL revenues for 2024. In 2023, it was 41%. That’s exactly where the provincial government was *before* oil arrived 27 years ago and turned this into a “have” province. That shift backwards happened within the past 20 years, with the most recent decade just carrying on the trends and policies set after 2006. We are back where we started but given that public liabilities these days are *triple* what they were in 2003, the provincial government is in many respects far worse off than at any time in almost a century.
Now consider that in all the budget comments last week, no one talked about this at all. The government itself applauded the record spending, which was on top of record spending in earlier years of this period. The opposition parties, unions, and other groups praised the government and asked for more spending.
The head of the now defunct group that represented some of the largest businesses in the province thought the budget was a “responsible and reasonable” one, despite delivering a few hundred dollars each on average to the province’s small businesses and no change in the morass of bureaucracy that stalls economic development. “Overall, I felt honestly inspired,” she told CBC. The St. John’s Board of Trade was equally chuffed.
All of this is very familiar to anyone watching political and economic events in Newfoundland and Labrador in this century, particularly the last five years. The words are the same. The are just coming from different people on behalf of the same interests. The real change is that there are fewer people speaking about anything of any substance.
The problem we have in Newfoundland and Labrador is not a lack of options and opportunities to sort out the government finances ourselves and build a genuinely prosperous place for all to live and thrive in. The problem facing Newfoundland and Labrador is that the leading people of the province, not just the politicians but all the leading people, don't have the stomach not only for making choices but for discussing sensible and real problems we face and how we might deal with them. Instead, we blow smoke like the business leaders did after the budget or fight about foolishness like Equalization, or imagine that some magical commodity like oil or rare minerals will save us, or - as the new trend seems to be - simply not talking at all.
If the provincial government’s finances are not very good, the silence makes it all the worse.
Related:
Sovereignty (2017)
On the need for politics (2020)
Gaslighting a society (2019)
“The problem facing Newfoundland and Labrador is that the leading people of the province, not just the politicians but all the leading people, don't have the stomach not only for making choices but for discussing sensible and real problems we face and how we might deal with them.”
This certainly encapsulates the reasons why we are financially dire.
Our Debt Servicing continues to grow as our politicians continue to whistle. It’s maddening and
fiefdom building and political pandering will continue in the absence of any meaningful policy.
At least let’s hear about the merits and demerits of the Greene Report….let’s start there!
Good job, Ed. Thanks for putting in the time and effort to do this in-depth analysis. Your budget analysis is broadly consistent with our beliefs about what is happening.