Why is Newfoundland different?

Someone asked me why I exclude Newfoundland and Labrador from this piece on the demographic crisis.  The answer is…. oil.

It is true that the demographic crisis in NL is just as bad if not worse than the Maritime Provinces but its massive search oil revenues means that its government will be able to pay the cost of public services even with a stagnant or declining level of other taxation.      In the rest of the Maritimes, the need for more provincial and local government revenue to pay for public services even as more and more people retire is a serious problem.  The income of the average retired person is something like 40% lower than a working person – and this reduces the ability of government to extract tax from them to pay for public services.    The only other source of revenue is transfer payments from the feds and I don’t see those getting much more lucrative in the coming years.

In my opinion, then, the Maritimes need significant new business investment – that creates economic activity, jobs and taxation to pay for public services.    New Brunswick, as an example, has not added a single (net) new private sector job in over 3 1/2 years while the annual provincial budget is up by a billion dollars (2008 to the 2011 budget).

Some have said we should tax companies more as one way to generate revenue but I think that is a dangerous gamble.  The province generates  almost $10 in taxes from individuals for every $1 in taxes from companies.    This is pretty similar to other provinces as well.   Significantly raising taxes on companies (the $1) would likely imperil the $10 – as the $10 is generated mostly from employment income off the business activity (although don’t underestimate the taxes paid by the public sector – this is a huge chunk of government revenue which should be netted off the gross cost of the public service).

And there isn’t much wiggle room on personal income taxes as well.

So, unless we strike it rich with oil or gas  – we need to have an economy that is generating enough new corporate and personal tax to pay for the increase costs of public services.

From 2001 to 2001, the NB budget grew by 62%.  Personal income tax revenue grew by 41%.     As we see more retirement (at the peak of their wage earning years) and a tightening up on public sector jobs (which accounted for a large share of the 41% increase), it should be fairly clear to folks that more tax revenue is going to have to come from the private sector.

Newfoundland is not faced with the same challenge.

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2 Responses to Why is Newfoundland different?

  1. Ed Hollett says:

    Sorry to burst your bubble but the provincial government has boosted spending to unsustainable heights, shows no sign of wanting to control spending increases and is now planning a massive megaproject that will suck up bags more oil cash.

    The provincial government is runnign significant cash deficits and the gross public debt is the same now as it was in 2003. The Muskrat Falls projects will increase that on the order of another 50% or so.

    Newfoundland and Labrador is different but not in the way you meant.

  2. scott says:

    Sorry to burst your bubble but the provincial government has boosted spending to unsustainable heights, shows no sign of wanting to control spending increases and is now planning a massive megaproject that will suck up bags more oil cash.

    Another case of the natural resourse curse known as “Dutch disease.” Be nice to see the folks on the rock investing in infrastructure, tax structures and industries that would give them not only a comparative advantage, but gowth which is longterm and sustainable.

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