THE 2008 NEWFOUNDLAND AND LABRADOR BUDGET

Released on April 29, 2008

HIGHLIGHTS

• Large windfall in FY 07-08
• Surpluses through FY 10-11
• Further cuts to personal income tax rates
• Program spending surges

Riding a tidal wave of 2007 nation-leading economic growth and revenues from the offshore oil industry, today's budget featured plenty of good news. First, the government is targeting surpluses through fiscal 2010-11. Second, the government announced a series of tax relief measures (detailed below) headlined by a 1 percentage point reduction in personal income tax (PIT) rates across all income brackets. Along with the tax cuts, the document features an 11% hike in total spending, concentrated in education, health care, and infrastructure, and expanding on last year's momentum of a 6% increase in outlays. Although the long era of annual deficit-fighting is now in the rearview mirror, the government continues to deal with the legacy of past shortfalls - its large net debt. Even then, today's budget highlights the meaningful progress being made in reducing the debt burden.

Fiscal performance and outlook

FY 2007-08 is set to mark the third consecutive consolidated surplus for the province. Compared with Budget 2007, the surplus is set to come in a whopping $1.1 billion higher, and even $882 million higher than its last published estimate. While the surpluses of FY 2005-06 and 2006-07 were modest at below 0.5% of GDP, this most recent surplus (FY 2007-08) is the province's highest ever, nearing an incredible 5% of GDP. Scale that up to the size of the national economy and you'd get a $77 billion surplus, nearly four times the highest ever actual federal surplus on record.

Clearly, we cannot expect a repeat performance. The province's economy grew by 9.1% in constant dollar terms and 13.4% in current dollar terms. Mostly due to a significant drop off in output from offshore oil extraction, growth will slow significantly this year. The government is projecting an outright decline of 2% in real GDP, along with a US$87/bbl crude oil price and a currency very near par with the U.S. dollar. These are admitedly quite conservative, which is understandable in a context with a large amount of uncertainty surrounding commodity and currency forecasts. By way of comparison, TD Economics forecasts real GDP growth of 1% this year, a WTI oil price averaging near US$100 this year and a slighter weaker Canadian dollar - all of which point to strong potential upside for government revenues. In all, the government expects its total revenue intake to decline by 3.7%, the result of both a prudent economic forecast and foregone revenues from announced tax measures. These include:

• Effective July 1, personal income tax (PIT) rates reduced by 1 percentage point across all income brackets, worth $75 million annually;
  
  
• Senior's benefit income threshold increased, and benefit amount for single seniors increased to match the benefit for senior couples;
  
  
• Retro-active to January 1, the province's 15% retail sales tax (RST) on insurance premiums is being eliminated, a measure worth $94 million this year and $75 million annually in subsequent years;
  
  
• $1,000 increase in the payroll tax exemption threshold, worth $6.5 million to em-ployers;
  
  
• $40 reduction in motor vehicle registration fees worth $10 million in foregone revenue;

These moves extend the tax relief measures presented in the previous budget, and will push PIT rates in Newfoundland & Labrador to below those of other Atlantic provinces, but still leaves them meaningfully higher than in Ontario and the west.

On the spending side of the ledger, few areas were forgotten, with education, health care and infrastructure all topping the list of priorities, similar to budgets from other jurisdictions in this regard. Discretionary (program) spending is set to increase by almost 13% to a total $5.3 billion in FY 08-09. Meanwhile, debt servicing costs will continue to edge down in absolute terms and drop below 11% by FY 09-10.

Bottom Line

Rising energy revenues are providing the province with a major opportunity to tackle some of its biggest challenges, such as its still-oversized debt and tax burdens. The prov-ince is also set to become a ‘have’ province by next year with respect to federal equalization, marking an important turning point for the province. The flip side is that the province’s rising reliance on offshore and mining royalty revenues exposes the province to added risk, since these sources are non-renewable and highly volatile. Fortunately, the government has built cautious assumptions into its forecast that should adequately protect its fiscal position.

Pascal Gauthier, Economist
416-944-5730