Second in a series of two guest columns
By David Vardy and Ron Penney
Thanks to COVID-19, there have been extensive layoffs in the private sector. EI and other financial support programs will replace some of the lost income, but not all. Many businesses will close. The tourism season will be lost. The fishing industry will be badly affected. Personal income taxes will obviously decline.
Because of this loss of income, people will buy less even when retail stores reopen. Sales taxes will go down as people defer large purchases and buy only the essentials, many of which are tax exempt.
Offshore royalties will decline. The U.S. Energy Information Administration (EIA) predicts that Brent crude oil prices will average $33 per barrel in 2020, half of what was predicted in our 2019-20 budget. The uncertainty about the restart of Terra Nova production brings more downward pressure on royalties.
Liquor profits will decline.
Our already dismal demographic picture will worsen. Out migration will accelerate. The population will decline further and our population will be older, putting additional pressure on our health-care budget.
It is true that the impacts of the pandemic will be negative for the entire country and the other provinces, but our starting point is much worse.
We suspect that we were already looking at a billion-dollar deficit for this fiscal year, prior to the pandemic. This will worsen by billions of dollars. Based on revenue shortfalls alone, we estimate that our deficit could easily rise from $1 billion to a range of $3 billion to $4 billion. There is no evidence that government is taking remedial action, having delayed the annual budget to an indefinite date.
We know, because of Premier Dwight Ball’s March 20th letter to Prime Minister Justin Trudeau, that at that point we were unable to borrow. According to the premier, that initial crisis has passed and we are now able to borrow, no doubt with the unprecedented assistance of the Bank of Canada. Our credit rating will almost certainly decline in the coming months, increasing our costs of borrowing.
So, we are faced with a critical situation and the day of reckoning is fast approaching.
To use the analogy of the treatment options for COVID-19, we were in intensive care even before the virus hit us; now we are on a ventilator, where the evidence is only 20 per cent survive.
The fiscal capacity of the federal government is not infinite. While there may well be help for the financial problems we share with our sister provinces arising out of the pandemic, both the capacity and the willingness of the national government to assist us with our legacy debt and Muskrat Falls, both of which are our fault, are far less likely.
As an example, the Financial Accountability Office in Ontario has just released a fiscal scenario which projects a deficit of $41 billion for Ontario in 2020-21, up from a deficit of $10.8 billion in 2019-20. Revenues are projected to be down by $22 billion while spending will be up by $8.8 billion. Ontario’s revenues are generally more stable than ours given our high reliance on sinking oil revenues.
We will need to demonstrate to the federal government that we have a long-term plan to get out of this. Our provincial government needs to engage our citizenry by establishing an external advisory council of our best and brightest, working on a volunteer basis, to help us face the situation and create a long-term plan for fiscal sustainability.
Appointing Paul Mills is a good first step. We have both worked with him in the past and hold him in high esteem. He would be an excellent person to act as the executive director of such an advisory council, which should report to the premier, not the clerk of the Executive Council, as is presently the case.
Our House of Assembly also needs to be engaged through the appointment of a select all-party committee on economic recovery.
We do have one concrete suggestion regarding Muskrat Falls. The federal government unwisely guaranteed the debt of the project. The ratepayers cannot pay the rates required to pay off that debt, particularly as we slowly recover from the impacts of the pandemic. We didn’t have the capacity even before this all happened.
The Government of Canada must assume responsibility for that debt and convert it to an equity position in the project, becoming a partner with us. The $4 billion we borrowed will be our contribution and become part of our provincial debt.
The first step to solving this problem — the greatest since we lost responsible government in 1934 — is a collective acknowledgment of the state we were in before the pandemic and how much worse it is about to become. And then we need to show the rest of Canada that we will put our own house in order, and outline the help we require to do that.
Dave Vardy is a former chair of the Public Utilities Board and former clerk of the Executive Council.
Ron Penney is former city manager for the City of St. John’s and a former Newfoundland and Labrador deputy minister of justice.
