Newfoundland and Labrador is poised to cut spending as Premier Kathy Dunderdale describes the civil service as being a prime target.

"We have a pretty heavily populated public service," Dunderdale told CBC News.

The government revealed in mid-December that its projected deficit for this fiscal year has mushroomed to about $726 million, well above the target deficit set last April of $258 million.

Even though Newfoundland and Labrador's economy has been outperforming many other provinces — and is expected to do well in 2013 — Dunderdale said the cabinet nonetheless must make tough choices because its earnings have fallen well below target.

"It's the best of times, it's the worst of times, according to my finance minister," Dunderdale said during a year-end interview with On Point with David Cochrane.

"My head is squarely on where we go in the next year financially," she said.

Dunderdale had made similar warnings a year ago. The governing Tories avoided large-scale layoffs last spring with a budget plan that relied on borrowing but which also included a wide-ranging review of all government services.

Dunderdale said it will be difficult for the government to bring its books in line without adjusting the size of the public service, and that will have consequences for public services.

"Over half our budget goes to health, education and human resources, so that's where we have to look when we're going to save money," she said.

Last year, the government had expected the price of Brent crude to trade at an average of $124 per barrel over the year — a target that has not been reached, and which remains well above actual prices.