There has been much public chit-chat these days in our province about the drop in oil prices, and how government should respond. The recent report from the Auditor General has sounded the alarm bells with regard to Newfoundland and Labrador’s dire fiscal situation.
The provincial deficit of $389 million for the year ended March 31, 2014 has doubled from the previous year and expenses have grown beyond the amount of revenue available to pay for these expenses. Auditor General Terry Paddon further warns that “an additional deficit is projected for 2014-15 which, combined with weakening global oil prices, may impact the province’s ability to return to surplus by 2015-16.”
The NL Employers’ Council and the Board of Trade expressed grave concerns about the report, and while singing from the same songbook, contend that the best way to resolve the loss of revenue is to cut spending – alleging that our too-big public sector is the root cause of the province’s pending economic woes.
The Newfoundland and Labrador Federation of Labour (NLFL) also has concerns about what this alarm will trigger from a government and Liberal opposition that has only viewed fiscal problems as being a direct result of spending and having nothing to do with the revenue side of the income statement.
In the NLFL’s recent issues-based convention, we invited Diana Gibson from the Canadian Centre for Policy Alternatives (CCPA) to speak to more than 300 delegates from the province’s unions. CCPA’s recently released report “Newfoundland and Labrador – Options for a Strong Economy” looks carefully at the drivers of the deficit, the province’s strengths and options for addressing economic sustainability.
Our economy is in good shape
While it is true that the deficit has increased over the past fiscal year, on the fundamentals, between 2003 and 2013, the province’s trends are strong across a range of economic measures. The deficit as a percentage of gross domestic product (GDP) is still a fraction of what it was.
Since 2006, the province’s absolute debt decreased as revenues substantially exceeded expenditures, and although slightly higher this year is still stable. Although net debt of the province has grown by $737 million in 2013/14 and is forecast to increase again in 2014-15, debt is still down as a percentage of GDP from 70 per cent in the 1990s to less than 25 per cent today and has been relatively stable at that level.
Provincial government expenditures as a share of GDP have been falling from 30 per cent of provincial GDP through the 1980s and 1990s to a low of 17 per cent in 2007/08 and now stand at approximately 18 per cent of GDP. In short, government expenditures have not kept pace with the rapid growth of GDP and the province has so far not utilized the fruits of growth on public spending.
The province has reported significant deficits over the past two years but at the same time Muskrat Falls spending is on the books as a transfer to Nalcor. This has given rise to a temporary, not a structural deficit.
There are challenges to our economy. Recent oil price fluctuations are a good reminder of the risks associated with resource revenues. In addition, our province has a history of public underinvestment in social and physical infrastructure, a highly rural population, a difficult geography, higher than average growth in the cost of living, high unemployment, high poverty and outmigration of workers. Overall revenue available is lower, a lot of which is due to tax cuts implemented since 2008, which amount to more than $500 million.
The Federation of Labour agrees that government will have to look at all options available to return to surplus to ensure that programs and services provided to all Newfoundlanders and Labradorians are sustainable for the long term.
The benefits of a strong public sector
A strong public sector helps the economy weather the volatility of resource fluctuations. In fact, that was a factor in how we weathered the 2009 recession. Cuts in the public sector means the loss of jobs that support local economies all throughout Newfoundland and Labrador.
Resource booms are expensive and inflationary. Resource revenues are volatile and oil and gas creates relatively few jobs. In fact, public sector spending can create up to 20 times the jobs per dollar invested compared to oil and gas.
Today, the gap between the rich and poor is wider than ever.
Even in the Canadian context, Newfoundland and Labrador is not a high spender on public services. Although provincial program spending is relatively high on a constant dollar per capita basis compared to other provinces, it is not high when considered as a percentage of GDP.
In fact, this province is in the middle of the pack – and that includes capital spending. Looking at public program expenditures as a percentage of GDP, Newfoundland and Labrador is lower than the other Atlantic Provinces, as well as Manitoba. And although the province spends more relative to GDP than Alberta, British Columbia, Ontario and Quebec, as previously noted Newfoundland and Labrador faces some very different and more costly circumstances than those highly urbanized provinces.
The direct effects of government program spending are clear: increased access to public services and programs as well as more quality public sector jobs. Spending creates jobs and services directly, both inside and outside of government, in education, health care, construction, administrative, professional and consulting services and other sectors. And it has been proven to be far less costly overall than public-private-partnerships.
In addition, we are much wealthier than we were a decade ago. Isn’t it the role of governments to ensure a fair distribution of the wealth workers create so that all people have the opportunity to share in our prosperity? The best way to ensure equal distribution is through public services.
We need to have a balanced debate about options for a strong economy. Newfoundland and Labrador is capturing a smaller share of GDP in revenues than other provinces, with a disproportionate and larger share of growth going to corporate profits – profits that do not stay in the economy.
Corporate profits make up a much bigger share of this province’s GDP than most other provinces at twice the national average. On the flip side, a smaller portion goes to wages. There are other provinces with higher corporate tax rates and Newfoundland and Labrador has room to move. We could also consider a windfall profits tax as countries like Australia and Norway have done.
The best way to ensure equal distribution [of the wealth workers create] is through public services.
In 2007, Newfoundland and Labrador turned early surpluses into tax cuts, the bulk of which went to the wealthy. Over a three year period, the cumulative cost of combined tax cuts for this province exceeded $750 million. Today, the gap between the rich and poor is wider than ever.
Tax revenue as a percent of GDP is quite low for Newfoundland and Labrador compared to other provinces. Even at the Canadian average, we could boost our revenue substantially.
Our province is in a very unique place, at a very unique time in its history, and we really cannot afford any more reductions in public services and public investments. Let’s look at all the options, especially those that more progressive jurisdictions are implementing. Doing the same things over and over that have a history and track record of not working may signal that the time for change is at hand.
Let’s not take the low road and risk shortchanging our citizens of long-term, stable prosperity in favour of short-term gains for a few.
Taking the high road means we recognize and implement options for raising revenues and maintaining a strong public sector and strong public services, and have the courage to invest not just in our province, but in its people and its future.
Correction: A previous version of this article stated that, over a three year period, the cumulative cost of combined tax cuts for this province exceeded $750 billion. This was a typo and the correct figure is in fact $750 million.
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