NLIS 6
December 4, 2000
(Finance)

The following statement was issued today by Lloyd Matthews, Minister of Finance. It was also read in the House of Assembly:

Mr. Speaker, it is my pleasure to provide this House with a mid-year report on the economic and financial position of the province of Newfoundland and Labrador.

Economic Performance

In 2000, the province is expected to experience strong economic growth for the third consecutive year. Real GDP growth is on target with the budget forecast of 4.7 per cent. The economy of Newfoundland and Labrador has been among the country�s leaders in growth for the past few years and this year is no exception.

Strong performance is expected in the export related industries. Oil production is anticipated to be 50 million barrels in 2000 or 37 per cent higher than in 1999. Iron ore production is up 18 percent and newsprint shipments will approach near record levels following lower shipments in 1998 and 1999. Fish landings are expected to increase in 2000 and the value of fish production will be in excess of $1 billion for the second straight year. The tourism sector continues to build on successful promotions such as the Cabot 500 celebrations and this years Viking events. Non- resident visitors are expected to be at a record high level of about 415,000.

Recent economic indicators show that we are doing as well or better than expected in most areas. Retail sales were up 7.3 per cent from January to August 2000. Housing starts are up 10.2 per cent from January to September 2000. Labour income has increased 6.4 per cent during the period January to July 2000 compared with the same time last year.

Employment is now expected to remain stable at the 1999 level. The employment gains made in retail trade, tourism and other service industries were offset by lower than expected employment in crab processing. This was due to lower quotas, market preferences for sections rather than meat and new mechanization lines in plants. Higher inflation rates, due to increased energy prices, will cause real personal income and real retail trade to be slightly lower than expected at Budget.

The economic outlook for the province in 2001 remains strong. Real GDP is expected to grow by 4.3 percent which is in line with forecasts from the private sector. Employment gains are expected next year as the goods sector stabilizes and continued growth is seen in the service sector.

Fiscal Outlook

Mr. Speaker, while economic growth does not necessarily result in similar levels of revenue growth, I am pleased to report that overall our financial performance for the 2000-01 fiscal year remains on target with our budgeted deficit of $34.7 million, which included a contingency reserve of $30 million.

Our revenues remain on target with the budget forecast. Individually, some revenues, such as royalties from the offshore, are expected to increase from our budget forecast, while others, such as gasoline tax, may decrease. Increased royalties reflect a higher than anticipated world oil price while decreased gas tax results from the same reason, higher prices result in lower consumption. Other revenues remain stable and are expected to be on target with our budget projections.

This province has made substantial progress over the past few years to get its fiscal house in order. This was achieved through a program of responsible fiscal management and prudent spending. We must maintain the discipline which brought us fiscal stability and we must be vigilant to ensure we do not return to the days of unsustainable deficits. Pressures to increase spending exist and the Province will ensure these pressures are dealt with in a manner that is consistent with our ability to pay. This government, Mr. Speaker, will continue to maintain a balance between economic and social development initiatives to ensure that Newfoundlanders and Labradorians have access to healthcare, employment opportunities and education.

Equalization

Mr. Speaker, equalization provides substantial benefits to Newfoundland and Labrador and while these funds contribute greatly to funding provincial programs such as health, education and assistance to those in need, the program can work better. Despite the promise of our natural resources, disparities exist between Newfoundland and Labrador and other provinces and the existing equalization program is not working to reduce those disparities quickly enough. We wish to be less dependent on federal transfers. We wish to catch up with other provinces. We want to see a greater share of revenues from resource developments used directly in this province to enhance our economic prospects and provide quality programs for our residents.

Premiers have recognized the importance of the equalization process and have called on the federal government to strengthen its commitment to the program. Atlantic Premiers endorsed a reaffirmation of the principles of equalization and have called on the Prime Minister to enhance the program to ensure it fulfils its constitutional obligations. I am committed to working with my provincial colleagues in Atlantic Canada and across the country towards a process of meaningful, constructive dialogue with the federal Minister of Finance. The equalization program can be strengthened to make it work better, to make it more responsive to the needs of Newfoundland and Labrador.

Mr. Speaker, Provincial and Territorial Ministers of Finance are meeting next week to discuss a range of issues, including the equalization program. I intend to engage my colleagues in a discussion of the merits of the program and opportunities to make it stronger. This will form the basis of an approach to the Federal Minister for fundamental change.

Tax Reform

Mr. Speaker, in 2000 the province embarked on a responsible and sustainable three year personal income tax reduction strategy. As a result, residents of this province are benefitting from $42 million of Provincial tax reductions in 2000, the first year of the reduction plan. Next year, taxpayers will save $60 million compared to1999. Combined with tax reductions announced by the federal government, over the three year period $400 million will be put back in the hands of Newfoundlanders and Labradorians and into the economy of the province. This will have a direct impact on the economic growth of the province.

I will be introducing a Bill in this House shortly which will give effect to the tax reductions for 2001 and which will move the province to a different method of determining provincial income tax - Tax on Income. I will speak to this Bill when it is introduced later in this session.

Mr. Speaker, in the fall of 1999, this government embarked on an extensive consultation process to renew the Province�s economic agenda - the jobs and growth agenda. A consistent message heard was that government must look at new ways of enhancing access to investment capital. As a direct result, the 2000 Budget committed to the introduction of a Venture Capital Tax Credit Program. In October 2000, following a process of consultation, two new initiatives were introduced which are designed to encourage venture capital investment in all areas of the Province. The Direct Equity Tax Credit and the Labour-Sponsored Venture Capital Tax Credit respond directly to the message that this government heard from the business community - that government should encourage investment in businesses throughout the province by offering incentives to invest in the ideas and plans of entrepreneurs.

The Direct Equity Tax Credit provides a 20 per cent credit against provincial personal income tax for investments made in eligible businesses operating in the Northeast Avalon region. Based on feedback received during the consultation process, this rate will be sufficient to address the needs of businesses in this area. Recognizing, however, that there is a greater challenge to raising investment capital in other areas of the province, we are providing a substantially higher tax credit rate of 35 per cent outside the Northeast Avalon region.

Information sessions are currently being held across the province to ensure a high level of understanding of the benefits of this tax credit program. I am greatly encouraged by the response to date and am confident both programs will meet our objectives of encouraging investment by residents of the Province in local enterprises, particularly in rural areas of Newfoundland and Labrador.

Mr. Speaker, the province�s tax regime is moving in the right direction. In 1997, we lowered our sales tax rate from 12 per cent to eight per cent. The introduction of the HST was responsible for putting in excess of $100 million annually back in the hands of Newfoundland and Labrador taxpayers. It has stimulated a substantial increase in retail sales since its introduction and has contributed to an increased level of consumer confidence in the province. In 1998, the province introduced a Film Tax Credit designed to encourage growth in the local film industry. In each of the last three budgets, government has reduced the payroll tax so that, currently, 94 per cent of businesses in the province do not pay the tax. Our corporate income tax regime remains one of the most competitive in the country. These measures, combined with the recent personal income tax reductions and the equity tax credit programs, will ensure the province�s economic and employment prospects continue to improve.

Spending Priorities

At the same time as the province has been implementing measures to ensure a competitive and sustainable tax regime, we have also focused on priority spending. We have spent strategically in such areas as health, education and assisting those in need. For example, spending on health care has increased approximately 25 per cent since 1995-96, a $125 million school construction and redevelopment program has been undertaken and the Strategic Social Plan is being implemented. In addition, Mr. Speaker, the province has implemented the HST credit and the seniors credit, both of which target relief to individuals and families with lower incomes.

We have maintained a balance between prudent spending in key areas which people have told us are priorities and ensuring that we maintain a fiscal position which will enable us to compete nationally and internationally and still provide quality services to our residents.

Conclusion

Mr. Speaker, we are seeing the benefits of the actions taken over the past few years. We will not sacrifice the progress we have made. For all residents of this province, current and future, we will strike the right balance between investing in key areas of our economy and social programs and maintaining a responsible financial position. We have been, and will continue to be, prudent in our spending and operate within our means. It is with this resolve that we will be able to provide Newfoundlanders and Labradorians with the opportunities to reach the prosperity of which this province is capable.

2000 12 04 2:00 p.m.