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

The 2002 Budget was about balance - a balance between investing in the economy of the province and investing in the people of Newfoundland and Labrador. This was achieved while maintaining a responsible financial position.

Economic Update

At budget time, the global economy was still in a state of uncertainty in the aftermath of September 11. Our economic forecast reflected the challenges this uncertainty brought, and I reported an expectation of modest economic growth. While national and international indicators remain mixed, I am pleased to report that Newfoundland and Labrador�s performance has been stronger than expected.

Real GDP, which had been forecast to grow in 2002 at a rate of 3.7 per cent, is now expected to rise by 7.5 per cent - the strongest among Canadian provinces. While this growth results primarily from offshore oil production, other sectors of the economy have also contributed.

It is important to understand that GDP growth does not necessarily translate into cash for the treasury but it does indicate the potential of the economy to generate revenue in the future.

A growing economy has had positive effects on labour markets over the past several years. Employment is expected to grow by 1.3 per cent, surpassing last year�s record high of 211,000 to reach a new record of 214,000. The unemployment rate is at its lowest point since 1989, and other measures such as labour force participation continue to show growth.

Real personal income is expected to grow by 2.5 per cent. This will encourage consumer confidence and continue the trend of growth in retail trade, which should exceed $5 billion in 2002. Consumer confidence is also being demonstrated in substantial growth in the construction industry. Housing starts are projected to be over 2,200, an increase of 24 per cent - the best performance in this sector since 1994.

Fiscal Update

While economic growth does not necessarily translate into the same level of growth for provincial revenues, the improvement in the provincial economy is having a positive impact on our finances. Midway through the fiscal year, revenues are up $50 million from budget projections.

Our own-source revenues, which include such items as taxes and royalties, are now forecast to be $33 million over the budget projection. About $14 million of this increase is due to increased oil royalties, a result of higher prices and higher production volumes. HST revenues are up by almost $11 million, reflecting the strength in the retail sector over the past number of years.

Transfers from the federal government account for about 40 per cent of provincial revenues. Equalization, the largest transfer to Newfoundland and Labrador, is impacted by economic activity, not only in this province, but activity throughout Canada. At present, federal transfers are anticipated to be $17 million above the budget forecast; however, further transfer estimates, expected in February, could have a substantial impact on the final year-end position.

While provincial revenues show steady growth, reflecting the strength of our provincial economy, government also responded to the necessity for new spending. Expenditures to date have increased about $19.5 million over the budget forecast and were directed to priority areas such as the provincial drug program, forest fire suppression and the move from Great Harbour Deep. These expenditures reflect government�s commitment to appropriate investment in the people and economy of the province.

The overall effect of these changes is positive. In March, I forecasted a prudent, responsible deficit of $93 million. The deficit is now expected to be $63 million, an improvement in our financial position of $30 million. We will not be complacent, however. We will continue to closely monitor our revenues to ensure they remain on target and we will continue to exercise restraint regarding expenditures.

We are committed to sound financial management, and these results demonstrate this. Our 2002 Budget was about a balance, and we are achieving this. Sound government is creating economic opportunity that we can all share in. We will continue this course.

Outlook for 2003-04

The global economic climate continues to be uncertain, and we will monitor outside economic influences closely, particularly in Canada and the U.S. Notwithstanding this uncertainty, we expect economic growth in our province to continue in 2003.

Activity related to the Voisey�s Bay project will increase, offshore oil production is expected to rise and activity related to the White Rose project will build.

Expenditure growth will also continue. The third year of the public service collective agreement increases will be reflected in 2003-04, as well as the impact of the settlement with provincial physicians and the normal requirement for government investment in people and economic growth.

The province is facing an increased deficit next year. The size will not be fully known until the new year, when we are better able to assess the level of transfer payments, fully consider and evaluate our expenditure requirements for next year, and assess the impact of the Romanow report on health care.

Government will examine all its options in consultation with the people of the province and the results of these deliberations will be reflected in the 2003 Budget.

Budget presentation practices vary among the provinces and continue to evolve. Some do not include all government organizations such as health boards and school boards. Some do not include the interest expense on their unfunded pension liability.

Commencing with the 2003 Budget, it is government�s intention to include an accrual-based summary budget, on a consolidated basis, which will include most government organizations, which comprise the government�s reporting entity. This will be in addition to the cash-based Summary of Borrowing Requirements which is currently provided in The Estimates.

Conclusion

The province has managed the fiscal challenges of 2002 in a responsible manner, maintaining appropriate control on government spending while still investing in people and in the economy. Good management has brought good results: our provincial-source revenues have been increasing, reflecting a growing and vibrant economy.

We will continue to advise Newfoundlanders and Labradorians of significant developments in the province�s financial and economic position, bringing information before this house as it becomes available.

Government will continue to be both responsible and responsive, in managing provincial finances. We have balanced our responsibilities. We will stay our fiscal course in confidence: confident in the advice we received from the people of the province, confident in our record of sound, practical government, confident that we have invested in the people of the province and confident in our future.

The Economic Review 2002 is available at: //www.economics.gov.nf.ca/review2002/default.asp

2002 11 18 2:55 p.m.