Finance Minister Tom Marshall warned Thursday of cuts to the public service and programs next year as he cited a steep drop in oil and mineral earnings.
"The volatility that's inherent in commodity prices is not a factor that's under our control, but in the face of new fiscal challenges we must respond," Marshall told a news conference.
At issue is the price of Brent crude oil, which at around US$109 per barrel is far lower than the US$124 per barrel on which the provincial budget relies. And some analysts are predicting prices will stay low well into 2013 as economic woes in the U.S. and Europe reduce demand on the global market.
For every dollar that oil goes down, it costs the provincial treasury almost $20 million.
The Progressive Conservative majority government had anchored its budget, as it has for the last nine years, using an independent average oil price provided by New York-based consultant PIRA Energy Group in consultation with other experts.
"I don't pick what the price of oil is going to be," Marshall said. "We rely on the best experts out there.
"We look at what they say and we plan accordingly."
In the legislature, Liberal Opposition Leader Dwight Ball quipped during question period that Marshall may want to seek new experts and asked how he'd "lost complete control" of provincial finances.
The government depends on offshore oil for about one-third of its revenues and is poised to approve the Muskrat Falls hydro megaproject in Labrador that would cost the province at least $6.2 billion.
"This is an example of how we can, and how we must, diversify our revenue base," Marshall said. He stressed that Muskrat Falls is an investment that's expected to earn dividends of more than $20 billion over 50 years starting in 2017.
Despite fiscal troubles brought on by worldwide forces, the provincial economy is among the strongest in Canada with capital investment of up to $9.7 billion this year along with strong housing starts and retail sales, he said.
Provincial unemployment is down to 12.5 per cent — an improvement although it's still highest in the country except for Nunavut.
Net debt is now expected to hit $8.9 billion, up from $8.5 billion predicted last spring, but still down from a high of almost $12 billion in 2004, Marshall said.
He also talked of the need to whittle spending and keep a lid on government hiring and salaries as the province prepares for what could be testy contract talks with its workers. Publicly funded pension plans continue to be "significantly" underfunded and will go broke unless the province and unions compromise, he added.
Carol Furlong, president of the Newfoundland and Labrador Association of Public and Private Employees, said her union is representing up to 18,000 workers in several groups ranging from educational staff to health professionals to marine services and highway maintenance staff.
"Financially we're well ready for a strike," she said in an interview. "However, that is not the position that we take. We want to go in and negotiate a collective agreement. It will really be up to government, I suspect in many ways, whether we have a strike or not."
Furlong said there's widespread skepticism of the government's fiscal forecasts and suspicion that a "Grinch-like attitude" just before Christmas could be to mute expectations. The province made a choice to divert $600 million to help fund Muskrat Falls — a project that won't be unfairly shouldered by government workers and should not cut into public programs, Furlong said.
Opposition NDP Leader Lorraine Michael questioned the government's handling of provincial finances.
"You have certain needs, then you do multi-year planning for those needs, how you're going to pay for that. And you just don't do crisis planning with regard to your expenditures," she said.
"They say that they're fiscally responsible. I think this today shows that they are fiscally irresponsible because they're not doing that planning."
The province will now have to borrow more to finance a cash down payment of about $2 billion on Muskrat Falls, Michael said.
"I understand the minister said the dividends will pay for the loan. Well, the dividends aren't going to start until 2017 and the loan is going to have to happen before then."
Michael compared Muskrat Falls and its potential cost overruns to a home renovation that the province can't afford.
"Can we as a province have the luxury of planning a project like Muskrat Falls with the reality that we're facing today?"
Nancy Healey, CEO of the St. John's Board of Trade, said she believes the hydro development will ultimately be a good investment. But she raised concerns about the extent to which provincial spending is outpacing revenues.
"We need to start looking at what government is doing, what services and programs it's offering and say: 'Are they sustainable?'
"Here we're in the most robust economy we've ever had, with great GDP, yet we still can't balance the books. So we're going to have to get very serious about this now."
Healey pointed to countries around the world that are now in dire straits after failing to manage and reduce debt.
Premier Kathy Dunderdale asked cabinet ministers last July to call off all but the most vital departmental travel in an effort to save cash. The measure was on top of a review announced earlier this year to cut administrative fat and inefficiencies across departments that together saved about $20 million, Marshall said.
He opted for two years of overspending rather than austerity as he tabled his budget last April. He blamed a $1.1-billion hole in the province's finances due to a dip in oil production during refits and maintenance plus the loss of federal cash as the Atlantic Accord expired.
The joint offshore management program with Ottawa put $536 million in provincial coffers last year.
Marshall had predicted a return to the black in 2014-15 with a $44-million surplus as higher offshore oil royalty rates kick in. On Thursday, he declined to revisit those numbers.
Note to readers: This is a corrected story. An earlier story said that Muskrat Falls would earn $50 billion over 50 years.Suggest a correction