Speaking Notes for an Address by
Paul D. Dicks, Q.C. Minister of Finance and Treasury Board,
Government of Newfoundland and Labrador to
the St. John's Board of Trade's Provincial Economic Overview,
January 21,1998

INTRODUCTION

I am delighted to speak to you this year about the provincial economic outlook. The Newfoundland economy proved more resilient last year than anticipated and may now be in a position to lead the country in economic growth, both this year and next. In addition to discussing our economic performance for the year just past, I will outline what Government sees unfolding in 1998 and discuss our budget policy in the context of the improving economic climate. We have also provided a copy of our Economic Prospects document for distribution to participants in Business Outlook `98.

THE ECONOMY IN 1997

In 1997, we experienced 3,000-4,000 job losses related to the end of Hibernia's construction phase. However, by December, Newfoundland was showing the second strongest employment growth of all provinces. The 4.8% year-over-year employment growth in December, representing a gain of 8,800 jobs, was the strongest growth that we have experienced so far in the 1990s. The resulting 2.8% decline in our December unemployment rate was the largest of any province.

These improvements reflect confidence on the part of consumers and businesses in Newfoundland and Labrador. In part, this can be attributed to the introduction of the HST on April 1^st last year. The combined federal-provincial sales tax was reduced 4.84% to 15%. This is the largest tax cut we have made since becoming a province of Canada. Not surprisingly, consumer confidence translated into the strongest retail sales growth in eight years . . . up 6.6% in the first ten months. The number of new car sales rose by 32.6%. Business confidence was evident from the 9.1% increase in business investment estimated for last year and in the number of new jobs created.

Production increases were recorded in key economic sectors. These included a 12.4% increase in the volume of fish landings in the first 11 months of the year; an increase of 3.8% in the volume of newsprint shipments; and a 9.4% rise in the value of mineral shipments.

While there were many positive features to our economic performance last year, we continue to face many challenges. Our unemployment rate declined but continues to run at about double the national average. Also, while employment increased last year, wages and salaries declined by 2.6% in the first nine months . . . likely reflecting the loss of Hibernia's high wage construction jobs which had paid double the average industrial wage. Since wages typically account for nearly two-thirds of gross domestic product (GDP), Government estimates that real GDP declined by about 1.3% last year. While still negative, this does represent an improvement of 1.4% from the 2.7% GDP decline which we had forecast at Budget time.

There are several reasons for the decline in GDP being less than expected. Commercial production of Hibernia crude actually commenced in November 1997 rather than in 1998. There were several hundred more Hibernia construction jobs than anticipated. The lower Harmonized Sales Tax rate provided a strong boost to retail sales. Groundfish landings were higher than expected with the May 1997 reopening of a limited commercial cod fishery along the south coast. Crab landings were also higher than forecast.

THE ECONOMY IN 1998

Looking at 1998, there is more cause for optimism than in recent years. This is evident from the strengthening employment trend. Interestingly, several private sector forecasters predict Newfoundland will lead the provinces in economic growth both this year and next.

Offshore Oil

The start of Hibernia production in November ranks as one of the most significant events of 1997. Production started ahead of schedule. Entering 1998, the platform was producing about 60,000 barrels per day. Mobil Oil believes that peak production will be achieved at 180,000 barrels per day compared to the previous estimate of 135,000. They have also increased the estimate of recoverable reserves from 615 to 750 million barrels.

Last week, the development of the Terra Nova oil field received approval from the Canada-Newfoundland Offshore Petroleum Board. Significant engineering work and seabed excavation are expected to commence this year. The excavation work is designed to protect the production well-heads from iceberg scouring. The drilling of production wells is expected to start in 1999. Terra Nova is estimated to contain over 400 million barrels of recoverable crude. Production is expected to commence by 2001 with peak daily production at 125,000 barrels.

In 1998, we will also see delineation wells drilled at the Whiterose field. Husky Oil, as project operator, will also evaluate the feasibility of extended well production tests. The Whiterose field could enter commercial production as early as 2002 or 2003.

Voisey's Bay

The Voisey's Bay mineral deposit contains the world's fourth largest nickel reserves and is one of the most significant discoveries of this century. It is one of the richest nickel deposits in the world, especially in the ovoid portion of the discovery. About 3,000 to 4,000 jobs will be created during the construction phase. During production, direct employment will be about 1,500 full-time jobs, rising to about 2,500 when mining goes underground.

Current low nickel prices have delayed the start-up date. The value of INCO's shares has fallen, prompting speculation that plans to build a smelter and refinery at Argentia could be reviewed. Let there be no doubt there will be no mine without a smelter and refinery. We can sell neither our resources nor ourselves short. Trading long-term economic and fiscal benefits for short term construction jobs in the interests of speedy development is a mistake this Government will not make.

Megaprojects in Perspective

Once Terra Nova, Whiterose and Voisey's Bay join Hibernia in reaching production, the value of their combined output will be over $4 billion annually. That is nearly as much as the Province's total exports last year. As well, there are other prospects for major developments including the Hebron and Ben Nevis oil fields on the Grand Banks. Western Newfoundland continues to be an exploration hotspot with potential for a major discovery. Discussions are underway with Quebec which could lead to formal negotiations on the development of additional hydroelectric projects in Labrador. A number of outstanding issues remain to be resolved. We will know within the very near future whether an agreement in principle can be reached. If so, formal negotiations will proceed on further development of the Churchill River and construction of a transmission line to the Island.

These developments are all extremely positive. However, despite the excitement engendered by megaprojects, the total number of direct jobs created by Hibernia, Terra Nova, Whiterose, and Voisey's Bay will be about 4,000. Indirect and induced spinoffs could result in an additional 8,000 jobs being created. However, there will still be an employment shortage to be filled, particularly in relation to jobs lost in the fishing sector and in many of our rural communities. We must continue to diversify our economic base so that we are better insulated from severe economic shocks such as the groundfishery collapse. We cannot afford to be complacent. We must stimulate business formation and lay the groundwork for sustainable economic growth in key business sectors of the Provincial economy.

Tourism

Tourism is one of these sectors. Last year, the Cabot 500 Celebrations were a major tourist attraction. Non-resident visitors increased by 21% in the first nine months for a gain of nearly 55,000 tourists. This boosted hotel occupancy rates in St. John's from 57% to 73%. The number of residents leaving the Province by automobile declined 7% in 1997, indicating that many residents opted to remain at home for the celebrations rather than vacationing outside the Province.

Significant marketing exposure resulted from the worldwide publicity surrounding the Cabot 500 Celebrations. This is expected to boost attendance at significant tourist events over the next several years. These include the 1999 Canada Winter Games in Corner Brook, the 50th Anniversary of Confederation, and Viking 2000. This year, Softworld 98 is being held in St. John's. This will be not only a key event for our developing IT sector but also a stimulus for business travel with as many as 500 companies from various parts of the world sending representatives to the Province.

The Fishery

Fish landings rose in 1997 for the third consecutive year. Landings employed 10,500 fishermen while processing, which recorded the longest season in history, provided jobs for 10,300 fish plant workers. The export value of fish products amounted to $525 million.

Crab and shrimp quotas increased and there was a limited reopening of the commercial cod fishery on the south coast. While capelin landings declined somewhat, the herring catch increased. More growth is expected this year. The shrimp fishery alone has the potential to add $100 million in value. Several companies have committed substantial capital budgets to this resource; recently, FPI announced it would invest $11 million to convert its former groundfish facility in Port Union to a modern shrimp plant.

The Provincial Department of Fisheries believes there is substantial potential for growth in the aquaculture segment of the fishing industry, particularly in salmon, steelhead trout, and mussels. Farm raised salmon in the Bay d'Espoir region alone generated several hundred jobs and had a commercial value of $5.7 million in 1996. The growout of juvenile cod also holds considerable potential. To assist the industry in research and development, education and training, Government recently announced funding for three facilities. These include an Aquaculture Research Facility at the Ocean Sciences Centre in Logy Bay, an Aquaculture Teaching Facility at the Marine Institute, and an Aquaculture Resource Centre at Bay d'Espoir.

We are concerned that existing funds for the TAGS program will be exhausted by August of this year while major groundfish stocks will remain closed to commercial fishing for some years to come. The federal government is fully aware that the Province could not manage the crisis that would result from terminating TAGS. Expenditures would rise considerably for programs such as Social Assistance while our revenues would fall due to out-migration and associated declines in equalization payments. For these reasons, we are optimistic that the federal government will accept its responsibility and replace the TAGS program with a new series of measures to assist those who have been displaced from the fishery.

Mining

The mining industry should continue to perform well. The value of mineral shipments increased by 9.4% last year, enough to make this a "billion dollar" industry. The main impetus was an increase in iron ore and other mineral shipments. 1998 will see the first full year of production from the new antimony mine at Beaver Brook in central Newfoundland, and additional capital investment in the iron ore sector.

Mineral and Oil Exploration

In the wake of the Bre-X fiasco and lower metal prices, junior exploration companies are having more difficulty raising capital. Nevertheless, exploration spending in this Province, while below the peak of 1996, remains above the average of the 1980s and early 1990s.

Oil and gas exploration is on the rise, both on the Grand Banks and in western Newfoundland. Seven parcels of land, four on the Grand Banks and three off the West Coast, were offered in a recent Call for Bids. All parcels received bids. The seven bids selected involved work expenditure commitments totalling $98 million.

Forestry

The forest products industry expanded production in 1997 and should continue to do well this year. Lumber production was on par with, or slightly better than, 1996 and the volume of newsprint shipments increased by 3.8%. Newsprint prices strengthened over the past year and average prices in 1998 are expected to exceed those of 1997.

The two paper companies in Newfoundland continue to invest in the industry. Abitibi-Consolidated is modernizing its No. 7 paper machine in Grand Falls to produce better quality newsprint. Kruger's Corner Brook mill will benefit from a $25 million capital program in 1998 B one which will see capacity boosted by nearly 8%.

Non-Resource Export Successes

Exports are critical to our economic livelihood and, while resources play a dominant and visible role, it is important to remember that about 45% of our exports relate to products other than newsprint, fish, and minerals.

In the non-resource manufacturing sector, the Marystown Shipyard, which Government successfully privatized last year, has a full order book. The new owner has entered a binding commitment to provide work equivalent to 600 full-time, full-year jobs for each of the next three years. These 600 jobs will make a significant contribution to total employment in the non-resource manufacturing sector. This sector comprises some 350 companies with 6,000 full-time employees. More than 100 companies now export their goods to other parts of Canada, over 40 sell into the U.S. market and over 30 sell into other international markets.

Services have become an increasingly important component of total exports over the past ten years, and presently account for more than one-half of the Province's non-resource exports. The tourism and IT sectors make a significant contribution to service exports. Canada's 12^th largest IT professional services firm, Newtel Information Solutions Limited, is located in Newfoundland. This firm won the Board of Trade's export development award last year.

The Career Academy, with 15 campuses across Canada and $25 million in annual sales, is another Newfoundland based company which contributes to service exports. This company was named by the Financial Post as one of the 50 best managed private companies in Canada. CHC Helicopter Corporation, headquartered in St. John's, is one of the world's largest operators of helicopter services.

There has been rapid expansion in non-traditional exports and there is every reason for the trend to continue, indeed strengthen, with the economic strategy we have put in place . . . a strategy that should benefit all types of companies in the Province.

APPROACH TO ECONOMIC DEVELOPMENT

Our strategy is this: to create a business climate that allows firms to realize a competitive advantage, accommodates entrepreneurial ideas and cultivates innovation. Government's commitment to this strategy has already been demonstrated by a number of initiatives that have been implemented to date.

These include the EDGE program, reduced corporate income tax rates, changes to the Mining and Mineral Rights Tax Act, generic royalty regimes for the oil and gas industry, major regulatory reform intended to streamline the paper and compliance burden to businesses, and the Harmonized Sales Tax. One of the HST's main benefits to business is the availability of input tax credits, enabling Newfoundland and Labrador firms to gain a competitive advantage over companies in provinces that maintain their own sales tax.

A recent KPMG study ranked St. John's as the least-cost location for business among 42 cities in the U.S., Canada, and Europe. It evaluated a host of factors affecting business costs including cost of land, labour, electricity, and transportation. While it may come as a surprise to some, the KPMG study took account of differences in corporate income tax, property tax, capital tax, sales tax and, last but not least, payroll taxes. Given the favourable showing for St. John's, and by extension, the Province, this is a study that should assist our future business prospecting efforts.

THE BUDGETARY ENVIRONMENT

Creating the right climate for business also means ensuring the financial integrity of the Province. Government is building on the substantial and steady progress made in recent years to bring down the deficit, while protecting essential public services. We remain firmly committed to fiscal responsibility.

We continue this year to make progress in reducing what has been a persistent structural deficit. To address this problem and achieve a balanced budget, we initiated a multi-year fiscal planning process. Our first three year plan will lead to the implementation of less costly ways to provide public services while improving the effectiveness, quality and delivery of core programs. It will also strengthen our revenue base.

Our goal is to achieve consistently balanced budgets in the foreseeable future. The three-year budget plan targets are being met. This year, for the second year in a row, there were no mid-year budget adjustments and there will be no unplanned downsizing.

While economic growth, as measured by GDP, will be strong over the next few years as a result of major projects such as Voisey's Bay, Hibernia and Terra Nova, Provincial Government revenue growth will be weak. This paradox can be explained by the operation of our resource tax regimes and the equalization program.

Mineral and oil tax regimes provide for a payback period which allows project owners to recover capital costs from production revenue. While developers are recovering their capital costs, Government's tax and royalty collections are low. Once the payback period is over, resource royalties rise as a share of project revenues. These types of regimes are universal and must be maintained if we are to remain competitive

As revenues from resource developments increase, equalization transfers from the Federal Government decrease. As much as 84 cents of every revenue dollar received by the Provincial Government will be deducted from equalization transfers.

It will be a number of years before we begin to derive significant fiscal benefits from these projects. Prudent budgetary measures must remain a priority for Government despite the optimistic economic outlook. We must all understand why government restraint must continue while the provincial economy is improving.

CONCLUSION

In conclusion, we should all be optimistic about our economy and public finances. This optimism, however, must be tempered by the realization that while we are experiencing economic growth, we are still in recovery. The collapse of groundfish stocks and the resulting moratorium imposed in 1992 were the most devastating economic blows to the Province since Confederation. Although employment has shown recent strength, it has yet to recover to pre-moratorium levels. Furthermore, even with substantial economic growth over the next few years, employment is not expected to reach pre-moratorium levels in the near term.

We are moving in the right direction. Strong economic growth in 1998 will be accompanied by further employment gains. Offshore oil production will be a major contributor to GDP. We expect production gains in fish, mineral and forest products coupled with growth in services exports and non-resource based manufacturing.

I have every confidence that the ingenuity of the business community, appropriately supported by Government, will enable us to achieve further economic expansion, increased business profits and additional employment and opportunity for all the people of Newfoundland and Labrador.

Thank-you.

Economic Prospects - A Review and Outlook Newfoundland and Labrador