March 23, 2023 | 14:46
Dipping Into Deficit
The Province of Newfoundland & Labrador is projecting a small $160 million deficit in FY23/24 (0.4% of GDP), a deterioration from a larger-than-expected $784 million surplus now estimated for FY22/23. The latter is improved from the fall fiscal update estimate of $479 million, and is the second-largest of the past decade. The weaker budget balance for this fiscal year comes as oil prices pull back from the 2022 heights (to $86 for Brent crude), and spending continues to rise.
Over the medium term, the Province expects modest surpluses over the forecast horizon beginning next fiscal year as both revenues and spending largely hold the line.
There were few major policy measures in this budget, with the focus instead on allocating spending to priority areas, especially health care.
Total revenues are forecast to drop 7.9% in FY23/24, to $9.7 billion. Tax revenues are expected to fall across a wide range of categories including personal and corporate income taxes, sales taxes and offshore royalties. That comes alongside a drop in nominal GDP after last year's surge. Federal transfer revenues, however, cushion the declines by rising more than $300 million from the prior year.
For volatile oil royalties, revenues are expected to be down $125 million, or 10.3%, from last fiscal year. Brent crude prices are expected to average $86 in FY23/24, while the Canadian dollar is pegged at 75.7 US cents. That oil price assumption is about $10 higher than levels on budget day, but prices have been volatile amid an uncertain and quickly-changing economic outlook. The Province estimates that a $1 increase in oil prices lifts royalties by roughly $16 million; and, a 1 cent increase in the Canadian dollar trims royalties by $18 million. So, we start the year off with some initial downside risk to the budget plan.
The budget estimates are also based on the assumption that the Newfoundland & Labrador economy will grow 2.8% this year, up from 0.3% in 2022. The improvement should come alongside a positive swing in mineral production as well as firm capital spending intentions.
Total spending is projected to rise 1.1% in FY23/24, but modest growth somewhat masks an already large in-year increase seen in FY22/23 (spending last fiscal year is now tracking $320 million above the budget plan). Health and community services spending receives a 5.4% boost this fiscal year.
Newfoundland & Labrador expects to borrow $1.5 billion in FY23/24, which is a touch smaller than the average of the past five years, and the smallest program since before the pandemic.
Net debt rises to $16.2 billion by the end of FY23/24, but it's noteworthy that this level is roughly $1 billion below what was expected a year ago, largely thanks to last year's surprise surplus. That leavesthe net debt-to-GDP ratio right around 40%. That will remain the highest in Canada, but is right in line with the pre-pandemic level, and an encouraging turnaround after the ratio was at risk of pushing through 60% just a few years ago, and creating some serious fiscal uncertainty.
The Bottom Line: The Province of Newfoundland & Labrador saw a large windfall last fiscal year thanks to the jump in oil prices and surging nominal output. That momentum looks to be stalling at the moment, and this budget reflects that turn, with possibly some additional downside risk.