N.L. has few good options in quest to balance books

As Newfoundland and Labrador government officials come up with a plan to tackle the deficit, they find themselves staring at a series of politically poisonous options that don't even come close to getting the job done.

The government has already ordered all of its departments, agencies, boards and corporations to identify 30 per cent spending cuts in an attempt to dig itself out of a $2.4-billion deficit hole.

But senior government officials concede there is no way all of those cuts will be implemented. The 30 per cent exercise is designed to force bureaucrats to be as creative and ruthless as possible in coming up with a realistic plan to fix a structural spending problem.

The actual solution will be a blend of cuts and increased revenues (read: tax hikes). But those tax hikes will be a tough political sell and will only deal with a fraction of the fiscal problem.

One option that's on the table is a doubling of the provincial gas tax. There's room to do that now that the oil slump has dragged down the price at the pump. But such a move carries political baggage and only delivers $100-million to the coffers — 1/24th of the problem.

It's a similar story with the HST. Premier Dwight Ball made good on an election promise when he scrapped a 2-point increase, calling it a job killer. But Ball now finds himself facing the very realistic possibility of having to swallow himself whole on that issue and go ahead with the tax hike anyway — after already having lost $200-million in foregone revenue.

2 mistakes made on campaign trail: insiders

In fact, Liberal insiders say Ball made two mistakes in last year's election campaign: Vowing to roll back the HST increase and promising there would be no layoffs.

Ball was cruising to a majority government, so top Liberals say there was no need for Ball to box himself in like that. It seems fairly clear that both will be necessary if the deficit is going to be eliminated.

It might also take an increase in provincial income taxes. Some academics have suggested that rolling back the Danny Williams-era tax cuts could raise another $600 million a year, though a top government source says the actual numbers aren't nearly that high.

Newfoundland and Labrador has fewer taxpayers than when Williams cut taxes in his 2007 pre-election budget, so the revenue would be lower.

The government source suggested that unpopular increase in gas taxes, HST and income tax would generate significantly less than $1 billion a year, which doesn't even get the government halfway to its deficit goal.

As the government maps out its plan for an April budget, it also faces the challenge of opening negotiations with its public sector unions.

The major collective agreements expire at the end of this month and sources say the government has told union leaders it wants to start those talks in earnest even as it deals with the budget.

Public sector salaries are the biggest part of the budget and have grown significantly over the past decade.

There are nearly 50,000 people working for the provincial government in some form or another, in a provincial workforce of just 218,000.

Pressure from inside and outside

The internal political pressure is significant. But so is the external pressure from banks and bond-rating agencies.

The provincial government recently suffered its first credit rating downgrades in years, and the bond raters say they want to see a credible plan to manage a debt that is at a staggering 35 per cent of GDP.

A key point — according to a top government official — is that the bond raters are less concerned with how quickly that happens than they are in how credible the plan is.

That means the Liberals at least have some time to get this done.

The government has a menu of difficult and unpopular options in front of it. They need to present a reasonable start in the next budget, but there's little pressure to rush through a fast-paced austerity agenda that balances the books in just three to four years.