As the pandemic begins to ebb, Newfoundland’s fiscal fire roars again

On March 30, 2020, Dwight Ball – then the premier of Newfoundland and Labrador – wrote to Prime Minister Justin Trudeau with a desperate plea for help.

“To put it bluntly,” he wrote, “our recent attempts to finalize our borrowing program … have been unsuccessful.” In plain English, no one would buy its bonds. Newfoundland had hit the debt wall.

The immediate context was the pandemic, and the associated collapse in the price of oil. But in truth Newfoundland was headed that way long before the pandemic.

Indeed, as noted by Moya Greene, chair of the Premier’s Economic Recovery Team – commissioned by Mr. Ball’s successor, Andrew Furey, to chart a way out of the province’s fiscal crisis – the pandemic arrived just in time, allowing the province to share in the federal program of emergency aid to the provinces without having to ask for a “bailout.”

But now the pandemic is receding, and so is the flood of federal cash, leaving the province’s fiscal position more exposed than ever. And yet, before the Greene report’s arrival last week, the true dimensions of Newfoundland’s fiscal crisis were likely not appreciated.

The headline figure, net debt, is bad enough: at $14.4-billion as of March 31, 2020 – it would be nearer $17-billion today – it now amounts to more than 50 per cent of GDP, the highest of any government in the country.

But net debt is not necessarily the best expression of a province’s fiscal position: it assumes the government can actually sell the assets on its books to pay off its debts. The province’s gross debt, at roughly $26-billion, may be a better measure.

Add in the debts on the books of the province’s three big Crown corporations – the provincial liquor distributor; the provincial lottery agency; and, most notoriously, the provincial energy utility Nalcor, father to the massively over-budget Muskrat Falls hydroelectric project – and the public debt balloons to $39-billion.

Throw in about $5-billion in sundry other liabilities, plus the nearly $3-billion the province borrowed over the past year, and the report puts the total provincial debt at more than $47-billion.

If only things were merely that serious. But with a rapidly aging, and shrinking, population, Newfoundland can look forward to much worse in the decades to come. The Parliamentary Budget Office’s latest projection shows Newfoundland’s net debt rising to nearly 90 per cent of GDP by 2043, on its way to 240 per cent by 2068 and still dizzier heights after that. For perspective, when Saskatchewan hit the debt wall in the 1990s, its debt-to-GDP ratio was in the high-40s.

That a province of barely 500,000 people could have racked up so much debt is nothing short of amazing. It’s all the more amazing when you consider that Newfoundland collects so much more in revenue per capita than the other provinces, thanks to its oil wealth: roughly onethird more, on average, in recent years.

That it has nevertheless run deficit after deficit is because it has spent even more. Like their cousins in Alberta, governments in Newfoundland spent the money just as fast as it came in, never stopping to think what would happen when the money started to slow.

The Greene report documents some of the resulting anomalies. The province spends more on health care, per capita, than any other province, while still recording some of the longest wait times. It has the highest ratio of teachers to pupils – the province maintains three schools at public expense that have no students in them, plus several more with fewer than 10 – yet lags in international test results.

Given how much trouble Newfoundland is in, and how far out of whack spending has grown, the panel’s recommendations are surprisingly modest: notably, a 5per-cent cut in “core” spending, plus a six-year freeze after that. And yet the province will likely prove unwilling to do even that – not while the alluring alternative of a federal bailout remains.

This is what makes the situation so potentially perilous for the rest of the country. It isn’t only that a bailout would discourage Newfoundland from coming to grips with its fiscal problems: the precedent would discourage other provinces as well, some of whom – Manitoba, Saskatchewan, New Brunswick – are in nearly as rough shape.

Suppose one province went bust, or was bailed out, or both: credit markets would immediately start to speculate on which province would be next, driving up interest rates on that province’s debt and worsening its condition. Europe’s all-consuming debt crisis, recall, began with little Greece.

The only way to prevent this is for the feds to make very clear, now, that there will be no bailouts: not for Newfoundland, not for anyone. Alas, that does not appear to be the reigning orthodoxy these days in Ottawa.