Newfoundland and Labrador fiscal update – July 2020

Key Points:

  • This year’s deficit projected to balloon to $2.1 billion
  • Net debt to soar 18% to $16.7 billion, or 57% of GDP
  • Borrowing requirement to nearly triple to $3.2 billion
  • Daunting task ahead to turn the situation around

On July 24th Newfoundland and Labrador Finance Minister Tom Osborne provided a first look at his province’s fiscal situation this year. And to no one’s surprise, it wasn’t pretty. He expects COVID-19 and the turmoil in the oil sector to plunge the provincial budget into a deep $2.1 billion deficit—ranking as the second-largest on record in the province in dollar terms (but the biggest when measured relative to the size of the provincial economy, at 7.3%). Health-related measures and a $200 million contingency for COVID-19 will be the main drivers of a $720 million increase in overall expenses. The collapse in oil prices (the province cut its oil price forecast by half to US$34 per barrel) will drill a $560 million hole into revenues. Combined with other revenue losses caused by the recession, the province faces an overall revenue drop of more than $630 million.

This year’s upwardly revised shortfall (it was previously pegged at -$800 million in Budget 2019) and a delay in the commissioning of the Muskrat Falls hydroelectric project will cause the government to nearly triple its borrowing requirement to $3.2 billion this year (from $1.2 billion last year). This will boost the province’s net debt by 18% to $16.7 billion by the end of 2020-2021. Measured as a percentage of GDP (57%), it will represent the highest debt level in 16 years in the province. It will also be the highest among the provinces—by far.

In his press conference, Minister Osborne indicated his government is working on a full budget that will be released in the coming months (Newfoundland and Labrador has yet to table a budget for 2020). He indicated it will contain a multi-year plan to bring the budget into balance. He also asked for further help from the federal government to achieve this goal. Some assistance has already started to flow in the form of the federal government’s $19 billion Safe Restart Program announced mid-July. The province estimates its share at a “minimum of $146 million” (this estimate wasn’t included in this budget projection). With population declining, an unemployment rate currently exceeding 16% and challenging economic growth prospects, the task at hand is daunting. Beyond federal help, Minister Osborne and his government could also use some good news on the problem-plagued Muskrat Falls project. And a brighter longer-term outlook for global oil prices wouldn’t hurt either.

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Robert Hogue is responsible for providing analysis and forecasts on the Canadian housing market and provincial economies. Robert holds a Master’s degree in economics from Queen’s University and a Bachelor’s degree from Université de Montréal. He joined RBC in 2008.

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