Austerity is not a word that has been linked lately to oil-rich Newfoundland and Labrador but that's expected to change Tuesday.

Finance Minister Jerome Kennedy will deliver the provincial budget amid forecast deficits totalling almost $4 billion over the next three years. Global economic woes, lower prices for commodities and a drop in world demand for offshore oil and Labrador minerals has slammed the provincial treasury. A return to surplus is not predicted before 2015-16.

Public service layoffs and program cuts have already started as anxious workers wait for more bad news.

"I'm expecting a pretty harsh budget," said provincial NDP Leader Lorraine Michael. "I don't think they should be cutting back. Cutting back will hurt the economy."

It's a view that was echoed last week in a report by the Canadian Centre for Policy Alternatives, a left-leaning think tank based in Ottawa.

The report, titled "Prosperity for All: An Alternative Economic Path for Newfoundland and Labrador," says the Progressive Conservative government should shun austerity. Cutting public sector jobs also puts at risk private sector jobs as the ripple effect of diminished buying power spreads, said Diana Gibson, a political economist and co-author of the report.

The focus should instead be on raising more revenues through more equitable taxation, she said in an interview.

Profits flowing out of country: analyst

She believes Kennedy should create a fourth tax bracket to draw more money from higher income earners as other provinces have done. Australia and Norway are among countries that get more cash from oil and mining companies through taxes on extraordinary profits, she added.

Newfoundland and Labrador's natural resources sector is heavily in foreign hands, Gibson said.

"Those profits are leaving not just the jurisdiction but leaving the country. Capturing a better share of that, a fair share for the citizens, would also make sure that money stays in Newfoundland and Labrador to help create jobs, economic growth and diversify the economy."

Avoiding deep spending cuts also makes sense because provincial economic fundamentals — private sector growth, growing capital investments, high personal income taxes and strong housing starts — all support a steady-as-she-goes approach, says the report.

"All of the indicators of economic strength are solid and cutting spending at this point — the implications of that, as we've seen with austerity all around the world, is a dangerous path," Gibson said.

New tax bracket unlikely

Asked about the report, Kennedy was pleased that it praised provincial efforts to pay down net debt from a high of almost $12 billion in 2004 to about $8.9 billion this year. But the idea of new taxes for higher earners fell flat.

Kennedy said he did some quick calculations and concluded that about 70 per cent of the population earns less than $40,000 while about seven per cent make more than $100,000 a year.

"There are so few people making more than $150,000 in our province that you wouldn't really get the bump that you would need. So essentially what they're suggesting is that we tax the middle class and that's something that we certainly don't want to look at."

Premier Kathy Dunderdale has touted a total of $500 million in tax cuts and $500 million a year for big public sector wage increases in recent years. Now on the bust end of a non-renewable, resource-reliant economy, she has made it clear that tax hikes are a last resort.

'Sustainability budget'

Dunderdale has warned for months that spending cuts will be laid out in what her officials are calling a "sustainability budget."

Still, the St. John's economy in particular is the envy of other parts of Canada, and major mining expansions for Labrador are planned.

Dunderdale has fended off Liberal Opposition accusations of reckless overspending as government staff and services increased with six surplus budgets in the last seven years. She says low university tuition rates, record employment and a move off oil to renewable energy through the Muskrat Falls hydro development are highlights of Tory rule.

"Mr. Speaker, we are responsible for one of the most booming economies in this country," she said earlier this month in the legislature, which returns Monday with a throne speech.

On Tuesday, her government will reveal the extent to which it will trim jobs and programs to match its new fiscal reality.