Oil remains key for provincial revenues
The Sea Rose at the White Rose field on the Grand Banks. — Submitted by Husky Energy
A projected provincial deficit of $1.6 billion has shrunk to less than one-third of that amount due, in large part, to an unexpected increase in the amount of oil produced offshore Newfoundland and Labrador.
An extra eight million barrels or so resulted in an additional $265.5 million in revenue, helped drop the provincial deficit to $563.8 million, when added to a collection of unexpected tax revenues, mining royalties and reduced spending through job cuts.
For 2013-14, a total of 32.3 per cent of all provincial revenues are expected to come from oil royalties, requiring close consideration of oil production numbers, value and the possibility for diversifying revenue streams in future, to avoid sudden losses and gains tied to having an oil-based economy.
Provincial revenues are expected to be about $6.4 billion in the next fiscal year.
“Every $1 change in the price of a barrel of oil has a $26-million impact on revenue,” notes the province’s new 10-year sustainability plan, released with the budget.
The plan includes a collection of forecasts for the price of oil through the year 2022-23.
In addition to price, oil revenues can be dramatically affected by production numbers, as illustrated by the change in this year’s deficit.
Looking ahead, overall oil production is expected to drop off. New revenue streams are required.
Economist Wade Locke, who acted as an adviser to the Department of Finance in budget deliberations this year, said he had suggested a two per cent increase on sales tax as a means of generating additional revenue this year, when faced with the deficit of $1.6 billion.
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“They chose not to. And that’s fine. They didn’t have to this year. But I said to them basically … if you need to, that’s a $200-million revenue increase that can be used to avoid future cuts on expenditures,” he told The Telegram Tuesday.
Suggestions have been made for other tax increases.
Speaking with reporters, Finance Minister Jerome Kennedy dismissed the idea government might “tax the rich” on income.
“We don’t have enough people in this province to make any impact in that respect,” he said, adding the middle class are heavily taxed as it is.
As for corporate taxes, royalty regimes are already in place for existing projects.
“What these oil companies look for when they come into a province, territory or country is stability. They want to know that their agreements are being honoured,” Kennedy said, referencing the benefits this province has received from its producing oil and mining projects.
“Why would we, at this point, try to change a system that works and potentially jeopardize relationships?”
As for diversification, the Dunderdale government has stated, “the provincial government plans to reduce the province’s economic dependence on the oil and gas sector and diversify the economy as outlined in the Energy Plan. This is one of the reasons why the Muskrat Falls hydro development project is so important.”