Dealing with Oil Money: learning from Newfoundland and Labrador

With both a new premier and finance minister, the Government of Newfoundland and Labrador (NL) has begun to prepare its 2014-2015 budget in earnest with consultations that run throughout the month of February. NL’s newly appointed Minister of Finance Charlene Johnson will present the budget to the province’s House of Assembly in the coming months.

Last year, NL’s provincial government projected expenses roughly $500 million greater than revenue, which contrasts starkly to the province’s seven-year period of surpluses between 2005 and 2012. This year, the provincial deficit will likely be smaller due to cost-saving measures taken last year under the Dunderdale administration.

In part, NL’s fiscal troubles are due to declining oil royalties. The provincial budget is largely dependent on offshore royalties, which constitute over $2 billion in revenue of the province’s total of $6.392 billion, as estimated in the 2013-2014 budget. However, annual offshore oil production in NL peaked in 2007 (although new discoveries could boost figures in the future). Due to declining production, in addition to the emergence of new technologies, such as hydraulic fracturing, the province altered its price projections for a barrel of oil from $124 to $105. Royalties from future projects are also unreliable because volatile oil prices determine whether developments are profitable and, ultimately, reign in government revenue. With the upcoming Hebron project, for instance, the expectation is that production will plummet after 2020.

These developments demonstrate that buttressing long-term fiscal arrangements on temporary and volatile resource revenue is imprudent. In many cases, governments benefit politically from spending more or taxing less. However, lapses in revenue can compel them to pursue these benefits even spending increases or tax cuts are unsustainable.

If governments did not spend this revenue on programmes, though, where would it go? A number of alternatives exist.

The first alternative, based on Thomas Paine’s idea of a “citizen’s dividend,” involves equally distributing among a country’s population the rents received from private industry using public resources. Although Paine built the notion of a citizen’s dividend using common ownership as a foundation, the citizen’s divided can be justified on fiscal grounds. Giving royalties to citizens, rather than funnelling it back into government programs, would prevent disproportionate increases in the size of the public sector. Such decreases are problematic, as political incentives preclude the ability to lay-off workers in the future.

The second alternative reflects the Alberta Heritage Savings Trust Fund, which received initially 30 per cent of resource royalties within the province. In NL’s case, and in many other jurisdictions, debt reduction would take the place of a savings fund. Saving allows governments to pay less in interest payments or even earn money from lending. A model similar to Alberta’s, which stipulates mandatory savings, would undermine government attempts to boost spending in order to win short-term political gains.

Choosing either of the two options would conceivably help NL’s provincial government end its fiscal dependence on resource royalties. The current system encourages the government to borrow political capital from future governments by boosting spending when resource money is available. This incentive structure has adverse effects on certain individuals. For instance, laying off public sector employees hired on the assumption that their new position was stable due to budget cuts. Creating rules that govern the use of royalties would mitigate these unfortunate developments.

Michael Sullivan is a 2013-2014 Atlantic Institute for Market Studies’ Student Fellow. The views expressed are the opinion of the author and not necessarily the Institute

The Energy-East Pipeline: An Opportunity to Turn a Province Around

New Brunswick has been making a rare appearance in the national editorial pages and the prospect of natural resource development through the Energy East Pipeline has been the principal topic of debate. Some observers argue that this could be the province’s opportunity to turn around its fortunes, but, as always, there is opposition citing environmental problems, among others.

That opposition generally stems from the argument that Canada must end its reliance on fossil fuels and fears of possible oil spills in the future.

While environmental concerns are particularly important in all natural resource development cases, it would be irresponsible for any government (of any political stripe) to ignore the possibility for serious economic gains. This fact becomes very clear from an examination of the state of the New Brunswick’s economy and the stimulus the project could provide.

It is no secret that New Brunswick has faced serious economic problems since the 2008 global economic meltdown. In September 2013, Statistics Canada reported that the province faced a 10.7% unemployment rate, which is one of the highest rates in the country. In conjunction with this report, CBC reported in the same month that the province lost approximately a net 2,944 individuals to other provinces in 2012.

Although these are only two indicators of economic performance, they tell a story that New Brunswick is facing a major economic problem.

This brings forward the next level of discussion: How can the Energy East Pipeline help build the New Brunswick economy?

TransCanada, the company who wishes to build the pipeline, employed Deloitte to explore the economic benefits of the pipeline for Canada. Deloitte found that the pipeline would add the following figures to New Brunswick’s economy:

  • $2,799 million to GDP
  • S266 million in tax revenues during construction (6 years)
  • $428 million in tax revenues during the operation phase (40 years)
  • 868 jobs in development (3 years)
  • 2866 jobs in construction (3 years)
  • 385 jobs per year in the operations phase (40 years)

These large amounts of tax revenues could mean balanced budgets for New Brunswick and extra money to spend in other areas of government, such as education and healthcare. Balanced budgets will also restore investor faith in New Brunswick.

The pipeline would create jobs that would not only reduce unemployment, but also increase consumption. That will lead to more economic spin-off, meaning that individuals will be able to afford more and, therefore, will buy more goods and services creating even more jobs in turn.

In conclusion, considering the state of the New Brunswick economy, it would be reckless for the government not to consider the opportunities that could be afforded to the province through natural resource development: the numbers show clearly that there is an extreme potential for growth and the Energy East Pipeline could have serious economic benefits for the province.

Randy Kaye is a 2013-2014 Atlantic Institute for Market Studies’ Student Fellow. The views expressed are the opinion of the author and not necessarily the Institute