Low oil prices mean 'real challenge' to reach budget goals: Ross Wiseman

Low oil prices are creating a big problem for the provincial government. 

With the province's finances so closely tied to the price of oil, each time it drops by a dollar a barrell it costs the government millions in lost revenue.

Oil prices have dropped by more than $20 a barrel since this summer, which is putting government's plans for a surplus budget into question.

• Watch feature interview on On Point with David Cochrane, Saturday at 7:30 p.m. NT

On budget day, then finance minister Charlene Johnson laid out a fiscal plan that relied upon oil averaging $105 a barrel for the entire year.

Even with oil prices in the triple digits, the province was still planning for a deficit of more than $500 million, but was projecting a surplus in 2015. 

Now, with Brent crude trading recently in the $85 range, that deficit is sure to increase.

During an interview on CBC's On Point with David Cochrane, Finance Minister Ross Wiseman sat down to discuss the impact that sinking oil prices are having on the government's finances.

"Our forecasted deficit this year, it will be difficult to meet that target," said Wiseman.

"What that new number becomes, it's difficult to predict at this particular point because we're not sure what's going to happen for the balance of the year."

Lowering expectations

The government has been targeting a return to surplus for three straight budgets, however it seems increasingly likely that the government won't achieve that this year or even in 2015.

"It will be a real challenge next year to maintain that target," said Wiseman.

"What a new number might look like, is difficult to say."

What a new number might look like, is difficult to say.- Ross Wiseman

A key factor in determining the province's short-term financial health rests with OPEC, the Organization of Petroleum Exporting Countries.

OPEC, the global oil cartel which has significant influence on global oil prices, has plans to meet to meet in November.

"If they choose to cut production, it will have a huge impact on supply and as a result of that the price will go up," said Wiseman.

"If they decide to maintain current levels of production then we are going to see continued instability until prices actually bottom out and prices start to regain some ground."

A further bottoming out could be a disaster for Newfoundland and Labrador.

Increased spending

Even if oil does rebound, the government has another budgeting problem which ironically is related to one of its key successes.

The pension deal with some of the major public sector unions means the government has to come up with billions of dollars over the next three decades to top up the sagging pension funds.

The deal requires government to provide 200-million dollars a year in special payments and 45-million more in employer contributions.

It's an expensive fix to solve an enormous problem.

However it means that, in the short term, it would take a drastic spike in oil prices or production to put the province back in a position where a surplus is possible.

That creates a situation where the new premier could face the electorate next year without the much anticipated surplus budget.

Since winning the last election in 2011 the current government has tabled nothing but deficits, meaning the financial record of an entire term has been written in red ink.

Big cuts not expected

Wiseman says the prospect of an upcoming election year won't impact budget planning.

"Whether there is an election in 2015 or 2017, we still have a responsibility to the people of the province to do what's right on their behalf," he said.

"So whatever we do today will not be done because there is an election next year."

So voters in Newfoundland and Labrador shouldn't expect a typical election budget next time around.

However, Wiseman said they shouldn't expect big cuts either.

Wiseman said he didn't want to overreact to what could be a short-term drop in the price of oil, and make deep spending cuts that could hurt the provincial economy.