Lessons from the Rock: Oil Revenue, Government Spending, and Public Debt

Newfoundland and Labrador has experienced tremendous economic growth in the last decade. GDP per capita, for instance, has increased significantly and is currently above the national average, personal earnings are at record-high levels, and most importantly, the province is no longer a “have-not” province under the federal equalization programme.

Largely thanks to booming oil production, Newfoundland and Labrador has set a benchmark for short-term economic growth. Yet, with oil prices plummeting, the provincial government has implemented a freeze on discretionary spending and placed additional restrictions on public sector hiring. Given the recent expansion of the province’s public sector, however, it is important to consider whether spending restraint is achievable, or whether the provincial government’s decision is simply too little, and too late.

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In the past ten years, oil revenues have been a major staple of the province’s budget. The most recent budget, for instance, projected offshore royalties to bring in $2.4 billion, representing roughly 36.45 per cent of total projected revenue. Equipped with this enlarged, volatile revenue source, however, the government has continuously increased spending, rather than having enacted measures to improve the province’s position in the long-run, such as paying down the province’s public debt or creating a savings fund.

Between 2005 and 2011, for example, public sector employment increased by nearly 8,000 jobs–17 per cent in six years, which is a rate much larger than that of private sector job growth during the same period. Since 2010, however, offshore royalties have fallen and forecasts suggest a steady decline over the next twenty years. Ebbing royalty flows stem from the end of federalization equalization payments, as per the Atlantic Accord, and the falling value of oil production.

This combination of increased spending and faltering offshore revenues spell fiscal trouble for Newfoundland and Labrador. It is, therefore, important for the government to consider important cuts to the public service to ensure sustainability, lest the provincial government compound the public debt.

If recent history is any indication, it is unlikely that the provincial government will pursue substantive reforms. Instead, projected expenditures are set to increase in the next decade. But with oil prices hovering roughly $40 lower than the budgeted $105 USD per barrel, fiscal consolidation is highly important.

The government attempted to curb spending in 2013 by cutting nearly 1,200 public sector jobs, implementing a long-term public sector hiring freeze, and announcing plans to conduct an efficiency review of postsecondary institutions. But after public backlash, the provincial government reversed many of these decisions, such as lifting the hiring freeze. The efficiency review was also never completed. In fact, the most recent provincial budget features rising expenditures, adding $808 million to existing net debt.

Of course, cutting the public sector is politically sensitive and it requires serious deliberation, but if the provincial government chooses to base spending on volatile revenue sources, it also needs to cut expenditures when receipts fall. These jobs would be lost in the short-run, but in the long-run, consolidating the province’s fiscal situation will lower the public debt burden and consequent spinoff effects will provide benefits for every resident of the province.

Devin Drover is an AIMS on Campus Student Fellow who is pursuing an undergraduate degree in economics at Memorial University. The views expressed are the opinion of the author and not necessarily that of the Atlantic Institute for Market Studies

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