NLIS 4 
November 20, 2001
(Finance)

 

The following statement was issued by Joan Marie Aylward, Minister of Finance. It was also read in the House of Assembly:


Mid-Year Financial Statement

I am pleased to provide this House with a mid-year report on the economic and financial position of the Province of Newfoundland and Labrador.

In the Budget Speech last March, I acknowledged that the province would be facing different economic and fiscal realities than those of recent years. Government recognized that a slowing national economy would impact on federal transfers and our own tax revenues, and the Budget reflected those changing circumstances.

Economic forecasts now project a significant slowdown in the United States and Canada for the last half of 2001 due to weakness in the manufacturing and information technology sectors, reduced consumer confidence and spending, and weak financial markets. 

The provincial economy is still expected to experience growth in 2001, however, we will not be immune to the effects of a global economic slowdown. We cannot function or think of ourselves in isolation in light of our dependence on the federal government for a substantial portion of our revenue as well as our dependence on the U.S. economy as our major export partner. Real GDP, which had been forecast to grow at an annual rate of 2.0 per cent, is now expected to be 1.2 per cent. The impacts of the general economic slowdown and terrorist attacks have been factored into the revised forecast.

The economic downturn has resulted in weaker than expected market demand and lower prices for key provincial exports such as iron ore, newsprint and fish products. Lumber exports will remain steady as expected.

Crude oil production from Hibernia is expected to be in line with the Budget forecast of 53 million barrels. The proponents for the Terra Nova project indicate that production should begin by the end of this year.

The impacts of the economic downturn have been compounded by the September 11th terrorist attacks. This is expected to further impact on export-oriented industries such as the fishery, newsprint, and mining for the first half of 2002.

Weakness in export markets has not yet had an effect on employment, housing starts or retail trade in Newfoundland and Labrador. Generally speaking, there is a lag between changes in export markets and changes in local economic indicators.

Employment is on track to reach a record high of about 211,000, surpassing the 1990 level of 207,400, and the unemployment rate should drop to 16.4 per cent, the lowest since 1989.

Real disposable income is expected to grow by 2.8 per cent, which should help boost consumer confidence.

While consumer activity declined somewhat in the days following September 11th, consumer confidence remains strong. For the first eight months, retail trade is up by more than 8 per cent over the same period last year, driven by strong employment growth, wage increases, tax cuts and low interest rates. Some slowing of growth is expected in the last four months of 2001, which will result in annual retail sales growth of about 6.5 per cent.

Housing starts through the first three quarters are up by almost 18 per cent. Starts are expected to slow in the fourth quarter and, on an annual basis, are expected to grow by 8.7 per cent to almost 1,600, the best performance since 1997.

As projected in this year's Budget, capital investment is expected to decline by 3.5 per cent due, in large part, to the winding up of the Terra Nova construction project, the one-time ferry purchase by Marine Atlantic in 2000, and the completion of several major health care facilities. Investment, however, should remain above $3 billion for the third straight year.

Preliminary population estimates indicate a decline of 0.6 per cent in 2001 due to continuing net out-migration. The province's population is now 533,761, down from about 580,200 in 1993.

The province's fiscal position depends greatly on federal transfers as well as our own-source revenues. While government's own-source revenues are on target for this fiscal year, equalization and CHST transfers are expected to be lower. Recent estimates indicate the province will receive $13.4 million less in federal transfers than originally budgeted thus far. We will not know our final transfer position for the current year until February, when further federal estimates are expected. 

Government must continually balance pressures to spend with the need for sound financial management. 

Our health care sector is grappling now with this challenge. This year's Budget added $50 million to the base budgets of the institutional and integrated health boards to stabilize board funding and allow them to operate within balanced budgets. This funding was on top of what government provided for inflation, funding for reclassification of health professionals and negotiated salary increases for public sector unions. Yet, as we have seen, the additional funding did not forestall operating deficits for many of those boards. We are working with the boards to deal with these deficits.

In the last six years, government has increased health care spending by 38 per cent, an investment of $381 million. We cannot maintain this level of unprecedented growth in funding given the province's finite resources. In fact, no government could ever sustain this growth, even those with much greater fiscal capacity than our own.

Collective agreements with our public sector unions also put some pressure on the treasury. These agreements included a 15 per cent wage increase over three years. The additional cost associated with the public service salary increase this fiscal year will be around $30 million. Government will honor the negotiated public sector wage increases. Public servants deserve the increase and government is proud of the agreement.

As a result of the additional cost of the public service salary increase, the drop in federal transfers due to a slowing economy and additional costs associated with servicing foreign currency debt, we now expect an $80 million deficit this fiscal year, up from the $30 million originally budgeted. Our final fiscal position will depend on maintaining effective control of our expenditures and our final revenue position, which we will assess in February.

We have undertaken certain measures to curb our deficit situation including the implementation of a freeze on non-essential hiring and travel. In addition, government announced it would defer the third year of its three-year personal income tax reduction strategy. As we said when we announced the initiative, reductions in personal income tax would be assessed annually and would only occur if the province could afford it.

Even though the third year of our program is being deferred, taxpayers continue to realize savings as a result of the previous two years of tax reduction measures. Cumulative savings from provincial and federal tax reductions since 2000 will return $321 million to the provincial economy next year, $198 million through provincial measures and $123 million through federal measures.

Notwithstanding these responsible measures, we recognize that government is in a difficult position heading into 2002-2003. We are in the process of reviewing options to address the challenges ahead as we prepare our next Budget. 

The global economic situation continues to be volatile and is being monitored closely. The recovery, anticipated in the second half of 2002, should allow production in export-oriented industries to recover.

Private sector forecasters predict real GDP growth for Newfoundland and Labrador to be 4.5 per cent for 2002. This is consistent with our view and will mark the fourth year of strong growth since 1997. 

Growth in 2002 will be concentrated in the oil industry. The combined production from Hibernia and Terra Nova should increase, we expect White Rose construction to begin, pending government approval, and offshore exploration should increase.

Voisey's Bay and the Lower Churchill are not factored into our forecast for 2002. Development of these projects would represent an incremental benefit to the province's economy.

Overall, the economy of the province is more diversified now than at any point in our recent history. We believe consumer confidence and spending will remain strong, driven by gains in employment, new major project activity, increased capital investment and wage gains. Retail sales growth is expected to be somewhat lower than in recent years. 

Employment growth of 0.7 per cent is projected for 2002. Growth will be restrained by the winding down of construction activity related to the Terra Nova project and the impacts of the global economic slowdown.

Net out-migration will continue to decline in 2002, as it has for the past three years, slowing the rate of decline in the province's population. Next year, however, the number of deaths is expected to exceed the number of births for the first time in the province's history, and this will contribute to a 2002 population decline in the range of 0.3-0.4 per cent.

It is clear that the province is facing uncertainty heading into 2002. 

We have taken appropriate actions to address our deficit situation this year. Government spending as an economic stimulus is not the answer to the short term economic uncertainty, it will only add to any uncertainty. Previous tax cuts will continue to benefit the Newfoundland and Labrador economy as will our continued commitment to sound fiscal management.

We will continue to advise the people of the province of any further new information on the province's financial and economic position as it becomes available.

Indeed, government will again be seeking the views and advice of the people of this province in how best to respond to the challenges ahead. I will be announcing soon the details of our pre-Budget consultations, which will be held in the coming weeks and months. 

Government will continue to be responsible in how we manage the finances of this province as we prepare our Budget plan for 2002.

We are proud of our province, we are proud of our governance and we will proudly continue our fiscal prudence.

Thank you.

The Economic Review 2001 is available at: www.economics.gov.nf.ca/review2001

2001 11 20                          1:55 p.m.


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