03/06/2013 03:47 EST | Updated 05/06/2013 05:12 EDT

Job and spending cuts loom as Newfoundland politicians return to legislature

ST. JOHN'S, N.L. - Newfoundland and Labrador politicians head back to the legislature Thursday facing tough decisions as deficits of almost $4 billion are projected over the next three years.

It's a stark new fiscal reality that has already spurred the majority Progressive Conservative government to freeze members' wages and start trimming the civil service as it scours departments for potential savings.

The expected shortfalls of $726 million this year and $1.6 billion in each of the next two years is a stunning about-face. This newly "have" province soared to six surplus budgets in the last seven years on a head of economic steam driven by world oil and commodity demands.

But the global slowdown, a drop in oil and mineral earnings, lower offshore production and overly optimistic oil price predictions have all conspired to stop that gravy train in its tracks.

The government says it must bring spending in line with reduced revenues despite a still hot economy in St. John's.

It's looking to cut jobs just as it enters potentially fractious contract talks with its civil service. Bargaining is underway with several groups, ranging from health professionals to highway maintenance staff to education workers.

"The budget will certainly be the prime focus as it is in any spring session," said Darin King, the government's house leader. "We're going into a challenging situation but we've been there before. And unlike many other governments, our government has demonstrated over the last 10 years that, when there are challenges fiscally, we're up for the task."

The toughest part will be getting through the next several months with as little effect as possible on government workers and services while trying to avoid labour disputes, King said.

"We're exploring all options to see where there might be savings that can be realized without impacting people or programs directly.

"You're not always going to be able to avoid that, but we're certainly going to do our best as we move through the next budget cycle."

Carol Furlong, president of the Newfoundland and Labrador Association of Public and Private Employees, is representing up to 18,000 workers as various contract talks progress. The union has built up the largest defence fund in its history but Furlong said she hopes it won't be needed.

"It is not our intention to strike. It is not our goal, and we would prefer to negotiate a collective agreement that we can recommend to our membership."

In better times, the Tory government hiked spending on public-sector wages, health care, education, roads and construction projects.

It committed in December to spend at least $6.2 billion on the contentious Muskrat Falls hydroelectric project in Labrador, even as net debt is set to hit $8.9 billion this year. That's up from a projected $8.5 billion in last April's budget but still down from a peak of almost $12 billion in 2004.

Unfunded public pension liabilities of just over $3 billion in 2012 — up from $2.7 billion the year before — are another growing concern.

Forecasting a budget that relies on offshore oil earnings for one-third of provincial revenues has been a rocky process. Just last spring, the government anchored its spending blueprint on an average Brent crude oil price of US$124 per barrel. That independent projection, arrived at using advice from New York-based consultant PIRA Energy Group along with other experts, turned out to be way off.

Brent crude was selling for closer to US$111 a barrel on Wednesday and has hovered around that amount for months. For each dollar oil drops below the forecast price, it costs the provincial treasury about $20 million.

"When you go back in the history of their budget announcements, they've never been right," said Liberal Opposition Leader Dwight Ball.

He said he'll be asking questions about how the government calculated such dramatic deficit projections. Forecasts in last spring's budget were for much smaller shortfalls with a return to the black by 2014-15 on the strength of higher rates for offshore oil royalties, he noted.

Ball also favours smaller government. He figures the 48-seat legislature could effectively run with 40 members and that government departments could also shrink.

Kelly Blidook, a political scientist at Memorial University of Newfoundland, said making one of the smallest legislatures in the country even smaller would only reduce debate and democratic scrutiny. "From a non-economic perspective, I would have to say it's kind of a poor idea.

"If you're at all concerned about the power of the premier's office or the centralization of power, making the legislature smaller is going to enhance those things."

NDP Leader Lorraine Michael said she has heard plenty of grumbling from around the province about what she called the government's fiscal mismanagement.

"People are starting to get very, very frustrated. And I would expect that this is going to be not the winter of our discontent, but the spring of our discontent.

"I think people are going to start saying they've had enough."