N.L. posts unexpected $479M surplus on higher oil revenues, taxes

On the back of higher than expected revenue from oil — and taxes — Newfoundland and Labrador is projecting a 2022 budget surplus of nearly half a billion dollars.

The provincial government's fall fiscal update Wednesday shows a surplus of $479 million, rather than the $351-million deficit projected in the 2022 budget earlier this year — a reversal of $830 million.

Finance Minister Siobhan Coady said the revenue increase is fortunate but doesn't necessarily mean smooth sailing ahead.

"While we're in a better fiscal situation in 2022 than we had anticipated, we still must continue on our path to achieve a stronger, more sustainable Newfoundland and Labrador," she said.

The provincial government is predicting total revenue will be $1.33 billion higher than projected in budget, driven by higher-than-expected oil royalties and revenue from corporate income tax, personal income tax and sales tax. Expenses increased too, by $504 million.

Net debt is $16.04 billion, a reduction of $1.01 billion from the net debt projected in the 2022 budget. Borrowing requirements have decreased from $2.7 billion to $1.8 billion.

An uncertain future

Coady said the improved situation has resulted in all three of the provincial government's credit agencies moving their outlooks for Newfoundland and Labrador from negative to stable.

Oil prices are higher than projected — up from $86 US per barrel to $102 per barrel — and production is up, from 83.1 million barrels to 85.2 million barrels. Total projected oil royalties are $1.24 billion, about $374.6 million more than projected in the spring budget. 

Coady said the unexpected personal and corporate income tax increases — about $300 million and $400 million, respectively — reflect a national economy that is stronger than expected and will normalize next year.

"It is important to note that the 2022 increases in corporate and personal income revenues are due to significant improvement for the outlook for 2022. This is not expected for 2023," she said.

Projected oil revenues will also change in the 2023 budget.

"Yes, we're taking in more revenues this year, and that's contributing to our surplus, but what I will say is when you budget next year you'll be looking at a different scenario," she said.

Interim NDP Leader Jim Dinn said a surplus is welcome news but suggested it's due more to luck than anything else.

"I think in many ways if you underestimate something in the budget … anything looks good when it turns around," Dinn told reporters Wednesday.

"But let's be honest, we've caught a break. Oil revenues are up, we have a war in Europe, which is driving the revenue up. But in the long run, we also know that depending on oil revenue is highly volatile."

PC Opposition House leader Barry Petten said the surplus is good news, with major problems afflicting the province.

"We still got 125,000 people without a family doctor, we're still paying carbon tax, we're still paying sugar tax, people are still sleeping on the streets," he said.

"So it's good, we won't say it's bad, but I mean how did we get here? It's not good fiscal management."

Mary Shortall, president of Newfoundland and Labrador's Federation of Labour, said she hopes the provincial government is thinking "long and hard" about how the surplus can be used to improve the economy and avoid the cyclical boom and bust that can come with oil revenues.

"It's one thing to balance the books, but it's completely another thing about balancing the economy," Shortall said. "And with inflation so high and interest high and the big fear that recession is going to hit us … I think government needs to be very, very cautious."

Future Fund

Coady announced the provincial government will contribute $157 million to a fund it will eventually use to pay down debt. Last week, the provincial government announced details of legislation to create what it's calling a "future fund," where it plans to deposit a portion of oil royalties and revenues from the sale of assets over $5 million.

According to the update, the provincial government will contribute $107 million from oil revenues this year — an amount calculated by a formula within the legislation — along with a one-time $50 million contribution.

For the next 10 years, the future fund can only be used to pay down debt, or in the event of "extraordinary circumstances." After a decade has passed, the provincial government can use the money for "strategic investments," Coady said.

Jaclyn Sullivan, executive director of the Employers' Council of Newfoundland and Labrador, called the fund a responsible way to use the money — rather than just increasing spending as soon as the money comes in.

Dinn said he hopes more will be done with the fund outside the oil and gas sector, adding his party is looking forward to plans from the government on how the economy could be diversified.

 "What we've called for and put forward is a need for a just transition plan which is going to look at that, at the future, where we go. And for a time when … we won't have the benefit of oil," Dinn said. "To be honest with you, it's going to come down to how do we protect the future and protect workers."

An improved — but volatile — situation

Coady said the province is seeing "solid" signs of economic growth, but she pointed to rumbles of a global economic recession that could signal potential future difficulties.

The provincial government previously hinted at the improved outlook when it announced one-time cheques for residents who earn $125,000 or less would be delivered this fall. Coady said the provincial government is still "holding the line" on other expenses.

Coady said Newfoundland and Labrador's unemployment rate, at 8.2 per cent, is the lowest it's been since records began in 1976. Projected population growth is 0.7 per cent higher than expected.

With the rate so low, Sullivan said, it's important for the government to help businesses that are still struggling through COVID-19 downturn.

"When they come out with policies, and government comes out with policies all the time that impact business, that, you know, that impact on business is considered," Sullivan said. "How do we make it easier? How do we make their lives easier so they can grow and expand and continue to generate that economic wealth."

She added that making sure the budget remains in surplus should be the government's top priority.

"We've heard a lot of talk about this [but] we haven't seen any of that translate into spending reductions on our books."

Housing starts were up by 44.4 per cent during the first three quarters of this year. Real GDP is now forecast to grow by 0.9.

The consumer price index, which measures changes in prices, has risen by 2.6 per cent, a reflection of inflation.

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