Finance Minister Jerome Kennedy says the new budget avoids job cuts and increases spending, in part to kickstart the Newfoundland and Labrador economy. ((CBC))

Once flush with oil-fuelled cash, Newfoundland and Labrador said Thursday it is willing to take on a massive deficit in the coming year, while expecting a return to balanced books in relatively short order.

"We're cautiously optimistic that the economy will rebound," Finance Minister Jerome Kennedy told reporters Tuesday before he brought down a budget that not only avoids cuts to jobs and programs, but also raises spending on health, social services and infrastructure.

The government, though, is taking some calculated risks, with assumptions that the economic crisis will ease before the end of the fiscal year, and that "all things being equal," as Kennedy put it, the province will be in a position to balance its books two years from now.

"We've made a conscious choice as a government … not to cut our programs, to show our public service that we value them," said Kennedy, whose government has signed four-year wage pacts with most public servants that include cumulative raises worth about 21 per cent.

After four consecutive surpluses — the government revealed Thursday that its latest surplus will top a stunning $2.4 billion — the government is now expecting to run a deficit of $750 million in the 2009-10 fiscal year.

The budget expects oil royalties, which have fuelled a massive economic expansion in the province in recent years, to drop by $913.5 million. Officials cited not only lower oil prices but also a drop in production at the three platforms off the island's east coast.

The government is expecting oil to trade at an average price of $50 US over the coming year. Last year, it pegged the price at $87 per barrel.

But the province's troubles involve more than just a sudden slump in the oil business. The province is expecting gross domestic product to drop like a stone, with a decline of 7.7 per cent "as a result of a decline in exports of minerals, newsprint and oil."

As well, the government lashed out at the "unilateral action of the Harper government" that meant a loss of $414 million in anticipated revenues from the 1985 Atlantic Accord.

While the province also expects the unemployment rate to climb a point to 14.2 per cent, it is expecting some silver linings, including increases in housing starts, retail sales and disposable income growth.

'Clearer skies ahead'

The government maintains the coming shortfall will be short-lived.

"Despite the current economic storm clouds, we see clearer skies ahead," said Kennedy, who brought down his first budget since taking over the finance portfolio last fall.

To help power the province through the economic crisis, Newfoundland and Labrador is hiking its spending significantly. Kennedy's budget includes record spending of $6.7 billion, with an increase of $519 million to government programs across all sectors.

The province had already announced an $800 million infrastructure program, which will fund projects that include school and hospital repairs, new public housing, highway paving and maintenance and health equipment.

"Our government recognizes that during difficult economic times we must take measures to stimulate the economy, not to weaken it," Kennedy said.

The government, which is expecting the economy to turn around before the end of the year, is also counting on boosts coming from what it called "significant investment" from private companies. In particular, it points to Vale Inco's pending construction of a hydromet processing plant in Long Harbour, which will begin later this year. A formal deal on that development was signed just this Wednesday.

The government is also expecting development of the Hebron offshore oil project, which will become the fourth field offshore to go into production, as well as expansion of the existing White Rose field.

Debt drops below $8 billion

Amid a flurry of spending, the government also revealed that it is finishing the current fiscal year with a surplus of $2.4 billion — well ahead of its target last year of $544 million. The surplus is the result not only of spiking oil prices in the early months of last year, but also because the government drew down revenues through the Atlantic Accord, a federal-provincial agreement that recognizes Newfoundland and Labrador as the principal beneficiary of the offshore oil industry.

As with previous years, much of the surplus has been targeted to debt reduction. The government said its net debt now stands at $7.9 billion, which is about $4 billion less than the standing of just four years ago.

Kennedy told reporters he feels there is a "remote" chance that the price of oil will gain enough strength to wipe out the deficit in the upcoming fiscal year. Kennedy said picking the $50 price setting, which is more conservative than other estimates, is "sensible and reasonable."

On a per capita basis, the debt now works out to about $15,500 per person, a figure that Kennedy said "is still high by national standards."

The government, meanwhile, revealed the effect of market turmoil on its pension funds. The government said its forecast for the coming year includes a drop of $383 million to those funds.

Health, social services given priority

Many of the government's chief spending priorities involve health and community services, including the creation of a new department to focus solely on child, youth and family services. The announcement had been made Wednesday in the speech from the throne.

Wiseman said the creation of that department will take time, though he emphasized that child protection, foster care and other services will continue as they have.

"Nothing changes for these children today or tomorrow," Wiseman said.

The budget also includes substantial changes in how the province's home-care system works. The government is restructuring its assessment process, which will mean better access for low-income couples and individuals, as well as raises for home support workers. Agencies have long complained that they cannot hire and keep workers because government rates are so low. Over the course of the coming year, hourly pay rates will increase by $1.21 per hour.

As well, the government spelled out details of numerous spending increases in health infrastructure.

The government will spend $1 million on planning for two new youth treatment centres. One, which will address addictions, will be built in Grand Falls-Windsor, while the other will help youth with complex mental health issues. Wiseman said that facility will be built on the northeast Avalon Peninsula, and that both could open in 2010.

Not specifically addressed in the budget is what government will be paying nurses and doctors.

The Newfoundland and Labrador Nurses' Union is poised to return to the bargaining table next week after holding a strike vote with its members. The union has rejected government's insistence that it accept the same four-year wage template that other unions have approved.

Meanwhile, the province has not yet begun formal bargaining with the Newfoundland and Labrador Medical Association, which has also said that substantial improvements will need to be made to address retention issues, particularly for specialists.