01/16/2013 11:42 EST | Updated 03/18/2013 05:12 EDT

Newfoundland gets new finance minister as expected cash crunch looms

ST. JOHN'S, N.L. - Newfoundland and Labrador Premier Kathy Dunderdale appointed a rhetorical bruiser as finance minister Wednesday as a cash crunch looms over potentially tense public sector contract talks.

Natural Resources Minister Jerome Kennedy, a scrappy former defence lawyer, swapped places with Finance Minister Tom Marshall in the surprise mini cabinet shuffle.

Some observers called it a warning shot to public service union leaders.

"Most people see Kennedy as a hard-nosed, tough negotiator," said provincial Liberal Leader Dwight Ball. "I think people will see him as a tougher negotiator at the table than Marshall would have been."

Dunderdale told a news conference that the switch is to give two of her most powerful senior cabinet ministers a fresh start after an intense year.

"I'm going to test the old adage that a change is as good as a rest," she said.

"So we're doing a change-up. And sometimes having to work on a file from a different perspective can be just that — very refreshing."

Kennedy's sometimes edgy approach most recently made headlines in December when, during a prolonged debate on the Muskrat Falls hydro megaproject, he called Liberal member Eddie Joyce "a fool."

"In fact, what I said was that he doesn't have Grade 6 and he is a fool. I withdraw it," Kennedy said by way of retracting the remark in the legislature.

It's not the first time he has been parachuted into the Finance Department during a rough patch.

He presided over testy contract talks with the province's nurses in 2009, the same fiscal year the government went into the red by $32.6 million as it shook off a global recession and falling oil prices.

It was the only deficit in the last seven provincial budgets until this year's predicted shortfall of $726 million — almost triple what was forecast last spring. Again, the province has taken a heavy hit from the global economic downturn as oil prices slumped along with demand for minerals.

When asked about the tone he'll take with union leaders, Kennedy said: "I look forward to working with them. They have to understand that we're in an economy where there are not going to be any huge raises."

The province relies on offshore oil royalties for more than one-third of its revenues.

Dunderdale is warning that the higher than expected deficit will mean cuts to the public service and programs.

"We're going to have to tighten the belt significantly further in the next couple of years," she said. "And that's a responsibility that's going to lie with every cabinet minister because you have to look within your own department to find those savings, to find a better way of doing things."

The province is also on the hook for unfunded public pension liabilities of just over $3 billion in 2012 — up from $2.7 billion the year before, according to audited financial statements released Wednesday.

"Our pension plans are going to go bankrupt," Dunderdale said. "We've put $4.4 billion into the pension plans over the last number of years. We're not in a place where we can do that every four years, every five years.

"There are hard conversations that have to be held in this province, you know, with unions but with the people of the province generally about how we do business."

It's a sobering fiscal message for a province that has only recently vaulted to 'have' status on an oil-fuelled economy.

Provincial job, housing and capital investment numbers are the envy of other parts of Canada. But Dunderdale's Progressive Conservative government anchored its budget last April to independent oil price predictions of US$124 a barrel. Instead, the price has hovered far lower at about US$109.

For each dollar the price goes down, it costs the provincial treasury about $20 million.

Carol Furlong, president of the Newfoundland and Labrador Association of Public and Private Employees, is representing up to 18,000 workers in several groups ranging from educational staff and health professionals to marine services and highway maintenance staff.

She could not immediately be reached Wednesday, but has signalled that union members who are in a financial position to strike would rather negotiate a deal.

"We want to go in and negotiate a collective agreement," she said in a recent interview. "It will really be up to government, I suspect in many ways, whether we have a strike or not."

Furlong has also said there's doubt about the government's fiscal forecasts and suspicion that they could be geared to mute expectations in bargaining.

Lana Payne, president of the Newfoundland and Labrador Federation of Labour, said that having a healthy and stable public sector could help soften the volatility of a commodities-dependent economy.

"Austerity could cause more damage," she said in an interview. "We're seeing exactly that happening in Europe. Governments have taken the position that they're going to really slash public sector spending and services, and it's taking them as a result a very long time to pull out of the recession.

"There are many economists saying this is the wrong direction to go."