Oil windfall could cushion public sector cuts in Thursday's budget: economist

Newfoundland and Labrador Premier Dwight Ball hinted recently that sweeping cuts to the public sector will not necessarily be part of Thursday's highly anticipated provincial budget.

Observers like Memorial University economist Wade Locke say that's a tell-tale sign that Ball's Liberal government is sitting on a windfall from oil revenues, and will likely use that money to cushion the blow as it grapples with a worrisome spending problem.

• Waiting for the other budget shoe to drop

"They're in a situation that nobody wants to be in," said Locke, who's been studying the financial health of the province for three decades, and has advised previous governments.

"Politicians being politicians, will want to get elected, and they're already having a lot of struggles in terms of the current fiscal situation. They've taken a lot of heat for it."

Widespread trepidation

There's widespread trepidation in the province ahead of Cathy's Bennett's second budget since the Liberals were elected to power in late 2015.

Her first budget a year ago was highly controversial because it included tax and fee hikes of nearly $650 million, a measure that ignited protests and repeated calls for Dwight Ball's resignation.

Heading into this year's budget, the picture remains just as bleak, with some saying the province is facing its worst financial disaster since Newfoundland and Labrador joined Confederation in 1949.

"The province is literally at a tipping point," chartered accountant Larry Short told CBC News Wednesday.

Public service fearing job-cutting axe

Bennett forecasted a deficit of nearly $1.6 billion for last year, and has pledged to dramatically reduce spending by as much as a quarter-billion-dollars this year as part of a plan to balance the budget by 2022.

This will be a bad day no matter how you phrase it. Hopefully it won't be as bad as we fear.- Wade Locke, economist

With salaries accounting for about 40 per cent of government spending, many fear a job-cutting axe will fall on the 45,000-strong public service on Thursday.

This would be on top of the nearly 400 management level jobs that have already been eliminated in recent weeks.

Locke said government would have to slash about 4,000 jobs in order to reach its target.

He doesn't see that happening because of the shockwaves it will send throughout the entire economy, but said there will have to be cuts.

"This will be a bad day no matter how you phrase it," said Locke. "Hopefully it won't be as bad as we fear."

Oil sector on the rebound

Locke said tens of millions in additional oil revenue could help soften the blow.

"I would assume that there'll be a cut in expenditures ... maybe not as big as was originally implied in the original budget because they have some additional revenue coming in through oil," he said.

"So it will help mitigate some of those bigger cuts. But cuts I think we should expect."

Three things worked in the province's favour.

In late October, the government forecasted that petroleum production would likely increase by four million barrels, that oil revenues would grow by about $100 million, and that the average price for Brent crude for the year would be $45 US per barrel.

But oil prices have consistently traded higher, and were in the mid-50s for the final three months of the fiscal year, and most analysts are forecasting a steady growth in oil prices into the future.

Punishing debt threatens ability to borrow

But a modest improvement in the oil sector won't be enough to reverse the province's fortunes.

Ten years ago, the province was raking in about $2.8 billion in oil revenues, but that figure has now dropped to $600 million.

This is equivalent to the ship is flooding and we need to get to shore.- Larry Short, accountant

Larry Short said it's simple. A punishing debt of nearly $13 billion and steadily increasing debt servicing costs must be addressed.

"Out of every $100 that is being spent by the government say in 2010, 2012, roughly six dollars went to pay for interest and cost related to the debt," said Short.

"We're [now] at $14. That's a trajectory that can't continue."

Short said the debt amounts to roughly $24,000 for every citizen in the province, which is more than three times that of Saskatchewan, which recently brought in its own austerity budget.

"This is equivalent to the ship is flooding and we need to get to shore," Short explained, adding that the province faces the prospect of having its capacity to borrow money severely restricted if the situation is not addressed.

"It's pretty bad," he said.