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The Quick Take: March 28, 2018

Slow Road to Balance Continues, but Toughest Tasks Still to Come

Daniel Fields
National Forecast

“With the target of balancing the books by 2022–23, there was little room for any major spending announcements or big tax breaks in Newfoundland and Labrador’s 2018 Budget. Despite recent improvements to the deficit—due to a combination of higher oil revenues and spending restraint—the remaining path to balance will require even more difficult spending decisions.”

The 2018 Newfoundland and Labrador budget, released on March 27, focused on maintaining the slow path to balance while providing some minor tax cuts on automobile insurance as well as increasing the threshold for business payroll taxes.

But, the big story remains the amount of spending restraint that is required over the remainder of the forecast period.

By 2022–23, total expenditures are expected to fall by $450 million when compared to 2018–19 estimates. This number includes debt charges, which are expected to remain over $1 billion each year (Budget 2018 does not provide an estimate for debt charges).

With that in mind, program spending, which excludes debt charges, will likely have to be reduced by upwards of $600 million if budget targets are to be met. This will certainly represent one of the most stringent spending periods in the province’s history.

The 2018 Newfoundland and Labrador budget is based on a weaker real GDP forecast between 2018 and 2020 when compared to the Conference Board’s current economic outlook. However, for the final two years of the forecast, the opposite occurs, with budget forecasts being more optimistic when compared to the Conference Board’s.

Overall, the budget projects revenues to grow by 1.9 per cent between fiscal year 2018–19 and 2022–23 thanks to decent nominal GDP growth of 2.2 per cent over the same period.

One possible upside risk to these numbers is the potential for the province to qualify for equalization payments if the federal government adjusts its formula in line with the scenarios suggested in the recent Parliamentary Budget Office report.

Overall, the government expects the deficit to improve to $683 million in 2018–19 from $812 million in 2017–18. The current plan is to achieve a surplus of $56 million by 2022–23.

According to budget estimates, net debt as a share of GDP will peak in 2020–21 and begin its descent downwards as the target deadline approaches.

In summary, the Newfoundland and Labrador government continues to outline overall spending targets that will be required to achieve a balanced budget. However, the details on how these targets will be met are left for future budgets. If these difficult targets can be met, the goal of a balanced budget should be reached by 2022–23.

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