ST. JOHN’S, N.L. – Oil-dependent Newfoundland and Labrador’s unsettling record of overspending will get worse if the price of Brent crude keeps falling, warns its auditor general.
The province has racked up two straight deficit budgets with a third projected this year as falling oil prices threaten a surplus forecast for 2015-16, Terry Paddon said Wednesday.
“The biggest concern I have is that the deficit is starting to rise,” he said in an interview.
“We had a deficit in 2013-14 at $389 million and that was twice as high as the year before.”
Paddon outlined his concerns in a report Wednesday to the house of assembly on provincial public accounts.
The last provincial budget in March forecast a third straight deficit for 2014-15 of $538 million with a surplus of $28.5 million projected the year after.
Paddon said falling oil prices could derail that plan and increase this year’s shortfall.
“We see with the weakening in commodity prices, in particular oil, that it could have a significant impact on the forecast deficit for this year.”
The province based its latest fiscal blueprint on a projected average oil price of US$105 a barrel. Brent crude was trading Wednesday for about $22 less than that.
Finance Minister Ross Wiseman confirmed in an interview it costs the province about $30 million for each dollar the actual average price falls short of projections. Those forecasts are made with help from energy market consultants.
Wiseman said a weaker loonie means lower exchange rates that help offset, though not eliminate, that blow. But there will be no surplus in 2015-16 if oil prices stay down for the long term, Wiseman added.
“The plan will be to map out a strategy that will take us back to surplus again.”
Asked if that could include program or job cuts, Wiseman said much will depend on whether oil prices rally back over US$100 per barrel in coming months.
He will offer a fiscal update soon after the 12-member Organization of the Petroleum Exporting Countries meets Nov. 27, he said. Many will be watching for any production cut that would affect world supply and prices.
The benchmark Brent crude price has plunged since June from a high of US$115 a barrel, and there are signs a global oil glut could keep it down.
The province relies on its offshore oil sector for about one-third of government revenues.
Paddon said provincial expenses are up 58 per cent over the last decade and that net debt reached $9.1 billion in 2013-14. That’s down from a high of almost $12 billion in 2004 but Paddon said he’s concerned it’s creeping back up.
Wiseman said expenses rose but so did revenues as offshore oil wealth drove “strategic” new infrastructure and program spending along with record investment in capital projects.
“It has been money that we’ve invested in assets that have value.”
Unfunded public pension liabilities were blamed last March for about 75 per cent of net debt. The province has since reached a deal in principle that will see it pay $2.7 billion over 30 years toward the unfunded portion of the Public Service Pension Plan.
Unions agreed to increased contribution rates and other changes as they form a joint trusteeship with government to share responsibility and risks.
Paddon said the government must look at all options to bring spending in line with revenues. The province spent almost $15,000 per person in 2013-14 — 45 per cent higher than the average of all other provinces, he said.
“I think that will be the challenge that the government is faced with over this budget cycle and the next budget cycle.”
It comes during an election year. Under provincial law, Premier Paul Davis must hit the campaign trail within a year of the date he was sworn in on Sept. 26.
His Progressive Conservative government has lost popularity in recent months as it grappled with leadership issues. Davis has indicated he’ll bring down a budget before calling a general election.
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