While the fiscal situation remains challenging in Newfoundland and Labrador, Budget 2022 highlighted positive developments. It projects the provincial deficit to decline from a downwardly-revised $400 million in FY 2021-22 to $351 million in FY 2022-23 followed by further reductions in the next three years on the way to a small $82 million surplus in FY 2026-27. The province is seeing higher-than-expected revenues—up $1.2 billion from the initial level anticipated in Budget 2021’s medium-term outlook—that outpace the growth in expenditures. Budget 2022 offers some targeted tax relief and income support with the elimination of the 15% tax on home insurance and waive license plate registration fees and a 10% increase to the Income Supplement and maximum Seniors Benefit.
The debt side is still daunting, however. The Newfoundland and Labrador’s debt—already the heaviest among the provinces—is projected to continue to grow as share of GDP. As interest rates ramp up, future debt servicing costs are at risk of becoming more burdensome. Addressing those issues will require unrelenting efforts on the part of the government over the medium to longer term.
Revenues- Going up with further upside
Newfoundland’s total operating revenues1 are projected to grow to $9.1 billion in FY 2022-23, up $407 million (4.7%) from FY 2021-22, as improving economic conditions result in higher tax revenues (up 0.8%). Provincial own-source revenues, which account for the vast majority of the province’s total revenues, at $6 billion (on a consolidated basis) will grow by $48 million. Higher sales tax, corporate and personal tax receipts, and mining tax and royalties contribute to this growth. These gains will be slightly offset by lower fee revenues (Newfoundland announced a 50% rebate on vehicle registration fees in Budget 2022) and offshore oil royalties. The province forecasts oil production to decline in FY 2022-23 as some oil fields come offline for planned maintenance and well productivity falls, which will undermine offshore royalties. We think there is upside risk to the province’s revenue projection for offshore royalties. At US$86/barrel, Newfoundland’s Brent crude forecast is much below RBC Capital Markets’ forecast (US$103/barrel). The province estimates that a $1 increase in oil prices brings in an additional $13 million in royalties—suggesting the government could see upwards of $200 million in additional revenue if RBC’s forecast is realized. Federal transfers (which represent 13% of total revenues) is expected to fall by $57.8 million to $904 million, a 6% decline, largely due to lower health transfers (one-time pandemic-related health transfers will not be repeated) and slightly lower revenues from the Atlantic Accord. In its multi-year outlook, Newfoundland and Labrador includes a revenue contingency, acting as a buffer in case oil prices fall from forecast. The oil risk adjustment is included in FY 2023-24 onward, starting at 1% of revenues and growing to 5%.
Expenses- Budget 2022 spends a good portion of additional revenues
Total expenses will reach $9.4 billion in FY 2022-23, up $358 million (4%) from the previous fiscal year. However, $774 million of the $9.4 billion in total expenditures is fully funded by the federal government. In its multi-year forecast, Newfoundland excludes the $744 million from its deficit projection, with expenses reported at $8.6 billion, a decline of $416 million from the prior fiscal year. Since Budget 2021’s multi-year outlook, Newfoundland has accumulated an additional $1.2 billion in revenues, with roughly 80% of these additional revenues being spent.
Health accounts for the largest portion (40%) of the province’s current account (operating) expenditure at $3.5 billion. Notable health allocations include expanding primary health clinics across the province, programs to attract more family physicians to Newfoundland, and mental health services. Education accounts for another 16%. Included in education is $87 million invested to create new regulated childcare spaces and launch a pre-kindergarten program, as part of Newfoundland’s Pre-Kindergarten and Early Learning and Child Care Action Plan. The Federal government is subsidizing $41 million of this cost, with Newfoundland covering the remaining $46 million. Newfoundland continues to invest in the recovery of the tourism industry, with a $95 million allocation (up $20 million from the prior fiscal year).
Debt servicing costs, at $673 million- are expected to come in lower this year (down $4.7 million), representing 7.7% of gross expenditures.
Capital expenditures account for 4% of total budgeted expenses in FY 2022-23, with total spending at $365 million, down $431 million from FY 2021-22. The majority of capital spending is earmarked for transportation projects and health facilities.
Indebtedness still a concern
The government anticipates net debt will reach $17.1 billion in FY 2022-23, up from $16.5 billion in FY 2021-22 (a 3.6% increase). As a share of nominal GDP (which the province expects will grow by 3.6% in 2022), net debt will remain the highest in the country, reaching 44.2%, up from 42.8% in FY 2021-22. Newfoundland does not provide any indication of forthcoming fiscal guardrails over the medium term. As borrowing costs go up alongside rising interest rates, debt servicing costs (which already represent nearly 8% of the province’s total expenses) will mount. This is why addressing the province’s growing debt levels will be of upmost importance in the coming years. Borrowing requirements will reach $2.7 billion, up $1.1 billion from FY 2021-22.
1. Newfoundland’s final revenue estimate, at $9.1 billion, is reported on an accrual basis, while detailed estimates are reported on a cash basis. Revenue sub-categories do not add up to the $9.1 billion total.
Carrie Freestone is an economist at RBC. She provides labour market analysis, and is a member of the regional analysis group, contributing to the provincial macro outlook.
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