ST. JOHN'S, N.L. - A $1-billion hole in Newfoundland and Labrador's finances means the oil-rich province is staring down a deficit in Tuesday's budget after years of hefty surpluses.
"We knew our revenues were going to be down about $1 billion," Finance Minister Tom Marshall said in an interview. "The Atlantic Accord is over. Our equalization is over."
And oil production will drop over the next year because of refits affecting two of the three offshore sites that helped catapult the province to "have" status in Confederation, he said.
"As a result of that, we have to ensure that our rate of spending growth is curtailed in order to ensure that our spending in the future is sustainable."
Marshall said the province has racked up surpluses in six of the last seven years except for 2009-10 when it went $32.6 million into the red to shake off effects of the global recession and a drop in oil prices.
He has forecast deficits of about $400 million for this fiscal year and $211 million in 2013-14, with a predicted return to the black the next year as higher oil royalties kick in.
Much of the shortfall, on top of oil production losses, comes from the end of Atlantic Accord payments. Cash from Ottawa under the joint offshore management program put about $536 million in provincial coffers last year.
But the most updated predictions to be revealed in Tuesday's budget will be affected by the going rates for oil and mineral shipments, twin drivers of the provincial economy.
Independent experts consulted for last year's budget pegged the average price of oil at US$108 a barrel. On Friday, the price of Brent crude was reported at almost $119 a barrel.
The province relies on offshore oil earnings for about one-third of its revenues, prompting calls from some quarters for faster reduction of about $7.8 billion in net debt before those fields dry up.
Progressive Conservative Premier Kathy Dunderdale has already signalled that the province's big-spending days are over for now. In a speech to the St. John's Board of Trade earlier this year, and in a subsequent throne speech, fiscal restraint was a major theme.
"There are forces that would drive us right back to the era of decline that we have worked so hard and so effectively to leave behind," she told the board in January. "This will be a pivotal time in our province's history, and we must be vigilant to ensure we make the right choices."
Marshall stressed that net debt is down by about one-third from a high of $12 billion and that the province has received an A-plus credit rating from Standard & Poor's, an international independent credit assessor.
Still, per capita net debt of about $15,000 per person is among the highest in Canada — something Dunderdale has vowed to bring down to the national average within 10 years. And provincial unemployment is stubbornly high in struggling fishing outports where oil wealth isn't apparent.
The startling growth of unfunded pension liabilities is another issue Marshall has openly discussed. He began pre-budget consultations this year by asking for feedback on whether defined-benefit pension plans for public servants are sustainable.
Steve Power, chairman of the St. John's Board of Trade, says poor stock market returns and unpredictability have moved many private-sector companies away from such plans.
"We are concerned with the level of debt," he said in an interview. "Our unfunded pension obligations and other post-retirement obligations make up two-thirds of the debt."
Power said he hopes to see the province focus on ways to diversify the economy and create the skilled labour force needed to capitalize on offshore oil developments, mining expansions and the planned $6.2-billion Muskrat Falls hydroelectric megaproject in Labrador.
"We need a matching of labour skills with needs in the market place."
Provincial NDP Leader Lorraine Michael said now is not the time for an austerity budget that ignores what she says are acute needs for homecare, affordable housing and a universal child care program funded and run by the province.
"We have the resources to have a balanced budget, looking at different ways in which we can increase revenue while at the same time making sure that we have programs that are taking care of people."
Michael ran in the fall provincial election on a platform that would have charged a three-per-cent surtax on offshore royalties to pay for half of $142 million in health and social spending promises.
Dunderdale scoffed at the idea, saying it would risk future investment and require the rewriting of complex offshore deals.