Nfld. & Labrador·Analysis

Hard, hard times again — sort of: Why a lot of N.L.'s fiscal problems are self-inflicted

Newfoundland and Labrador is shedding jobs as it deals with an unprecedented debt and a sluggish economy. But it's a crisis the government should have seen coming.

Newfoundland and Labrador has dubious distinction of having, per capita, the largest public service

Dwight Ball led the Liberals to victory in late 2015 but quickly found himself managing an economy in decline. (Bruce Tilley/CBC)

Dwight Ball, the affable pharmacist who has been Newfoundland and Labrador's premier for the last 15 months, said something remarkable Wednesday while swinging an axe through several hundred government jobs.

"We're human, too. This impacts us," said Ball, who clearly has shown no relish for the more brutal parts of dealing with an oil-dependent economy during a collapse in petroleum prices.

Then he added, "I wish we had had better information going into the election campaign last year."

That's an eyebrow-raising statement, and not because the election campaign was actually in 2015.

More to the point, Ball — or anyone who was following the news even somewhat closely in the last five years — ought to have known the provincial government had not only become too reliant on oil but had become accustomed, if not addicted, to sky-high prices in an industry that is notoriously cyclical.

Middle management latest target of cuts

Ball's job on Wednesday was to announce that about 300 jobs were being eliminated.

The cuts were expected, as government over the last six months had eliminated top executive jobs. This week's target was middle management.

Richard Alexander of the Newfoundland and Labrador Employers' Council says N.L. has no choice but to curb its spending dramatically. (Eddy Kennedy/CBC)

Next is the rank and file, which could be the toughest cut of all.

But Richard Alexander, who heads the Newfoundland and Labrador Employers' Council, says the province has no alternative.

"Government has to stop spending money it doesn't have," Alexander told CBC. "It's as simple as that."

Except that it's not simple at all to hit the brakes on an entire government. Last April's budget focused largely on raising revenue, pushing through a wildly unpopular series of fee and tax hikes that sparked instant outrage, and also gave N.L. the highest rate of inflation in the country.

Since then, the focus has been on cutting spending, particularly as the Liberals come to terms with a debt that is threatening to reach $14.7 billion. (A large chunk of that comes from the Tory-initiated Muskrat Falls megaproject now under construction in Labrador, which its long-time critics see as a multi-billion-dollar folly.)

Businesses in downtown St. John's say trade has dropped since oil prices took a dive. (Eddy Kennedy/CBC)

Even with this week's cuts, the current annual deficit projection is still $1.58 billion.

Ball, though, had campaigned on a feel-good platform that had promised to not only, somehow, avoid layoffs but also, somehow, improve public services.

A bit of hindsight

The Liberals' campaign seemed to be wishful thinking, given the state of things.

The party came into power just as oil prices hit their trough. By late 2015, thousands of people who relied on the oil industry for employment or trade were out of work, many of them stuck with hefty mortgages and payments on pricey trucks and recreational vehicles.

Premier Dwight Ball and Finance Minister Cathy Bennett outlined cuts to the management ranks of the public service on Wednesday. (CBC)

It would be churlish to say that those spendthrift workers were the only ones who got seduced by sunny paydays of an oil industry but then got burned by the bust.

The entire Newfoundland and Labrador economy sizzled because of oil. Housing prices soared, salaries took flight, help-wanted signs appeared on every corner, and the Newfoundland and Labrador government found itself awash in petro-dollars.

A lot of that money went to sensible things, such as paving roads and fixing leaky roofs, but the government got used to having more cash than ever before. That had a dramatic effect on the size and pay packet of the public service.

Former premier Danny Williams, seen on election night in 2007, governed during an oil boom that provided windfall revenues for the government. (Andrew Vaughan/The Canadian Press)

After being a Grinch while taking on the unions in a bitter public service strike in 2004, then-premier Danny Williams was later allowed to be Santa when the government dished out whopping 21.5 per cent wage hikes over four years across the public service.

And did government ever get bigger. Every department and Crown agency grew, sometimes significantly. Before Wednesday's cuts, Newfoundland and Labrador had the dubious distinction of having the highest ratio of public servants to the population, with 94 public servants for every 1,000 people. (The Canadian average is around 67.) After the cuts go through, that number will come down to all of 93.4.

No wonder, then, that Ball and Finance Minister Cathy Bennett on Wednesday used the words "flatter and leaner" repeatedly to drive home what they want the public service to become.

Extraordinarily optimistic assumptions

The assumptions that government made even after the go-go boom years of the 2000s turned out to be extraordinarily optimistic. In 2014, even as deficit spending was spiralling ever higher, the then-governing Tories based their budget plan on Brent crude — the type of oil tracked in N.L.'s offshore oil industry, rather than the more common West Texas Intermediate — sticking around the $105 US mark.

Government has to stop spending money it doesn't have. It's as simple as that.- Richard Alexander, Newfoundland and Labrador Employers' Council,

It didn't, of course.

Just weeks later, it started a free fall that would put the government into a quagmire from which it has yet to emerge. In their last two years in office, the Tories added deficits of more than $2 billion.

Small wonder that Ball and his Liberals have had their hands tied since taking office in midst of a searing financial crisis.

In a few weeks, Ball's second budget will show just how serious he is about getting the government's fiscal house in order.

Have we turned the corner?

But what about the rest of the economy? Has the corner been turned, or is there worse yet to come?

There are economic indicators and projections — not to mention beliefs — that support both views.

Pubs and restaurants in downtown St. John's have seen a noticeable drop in business in recent months. (Eddy Kennedy/CBC)

Take, for instance, news this week about vacancy rates for office space in St. John's, which has been transformed by the oil industry since the Hibernia platform pumped its first barrel in 1997.

Vacancy rates for top-tier office space have doubled in the last couple of years. For the next tier, it's even worse, with vacancy rates tripling.

Overall, St. John's hasn't seen office vacancies this high since December 2002, which was — perhaps not coincidentally — shortly before the oil boom really got rolling.

St. John's a textbook example of real estate economics

But things are not necessarily as bad as you might think.

That zooming vacancy rate does not reflect a collapsing private sector but rather the result of a recent building boom that put several new office buildings in the city, including purpose-built structures for companies that work in the offshore oil industry.

Plenty of new office space was built in St. John's since the oil boom started more than a decade ago, like this Fortis Inc. building downtown. (Submitted)

"What we're seeing in St. John's is really a textbook example of real estate economics at play," said Matthew Smith, a Halifax-based manager with consulting company Turner Drake and Partners.

"When things are good, the demand is really there for these buildings"

As new premium space came on line, tenants in second-tier locations moved up to nicer digs, he said.

When the bottom fell out of oil in 2014, oil companies were the first to cut back harshly, leaving St. John's with plenty of space "just in time for when it may not be really needed any more."

4th oilfield about to come on stream

There are upward signs on the horizon. In May, a massive oil platform will be towed from Newfoundland's Trinity Bay to the Grand Banks, which will allow the long-awaited Hebron field to go into production, possibly before the end of the year.

That will mean four fields will be in production in Newfoundland and Labrador's oil industry, which cannot hurt provincial coffers.

Also not hurting: the gradual improvement in oil prices. The improvement is not enough to solve problems but is higher than the current budget estimate.

The Hebron platform, seen in Trinity Bay in early 2017, is expected to go into production before the end of the year. It's one of several hopeful signs on the horizon for the province's economy. (ExxonMobil)

There have been other positive signs for the East Coast oilpatch. Earlier this week, CBC News reported that a deal is near for what's called the West White Rose project, which would be big enough to need a gravity-based plattform (similar to the design used at Hibernia and Hebron) of its own to draw out oil for years to come. (Husky Energy refuted the report, saying it's still weighing its options.)

Exploration, which had been dormant in recent years, is ticking once again. Statoil, which somewhat controversially decided take away its marbles from the Alberta oilsands and put them instead in Newfoundland's offshore, announced earlier this month it will drill in two different parts of the Flemish Pass Basin later this year.

Statoil made a significant discovery — called Bay du Nord — in 2013, which the local oil industry sees as a megaproject on the horizon.

Difficult road ahead for workers

The horizon is well and good for the local oil industry, but there are significant problems in the short term.

Hebron's move to production has meant the end of a massive job-generating construction phase. Thousands of other people have lost their jobs working in the oil industry at home and in Alberta.

Earlier this week, the United Association of Plumbers, Pipefitters and Welders said about two-thirds of its 1,500 members alone were still out of work. It's a facet of how Newfoundland and Labrador has been bucking a national trend: while other provinces have been adding jobs, N.L. has been shedding them. In December, the province's workforce was down 5,700 jobs from the year before. Its unemployment rate is 12 per cent, the highest among the provinces.

Construction on several high-profile projects, including the Muskrat Falls hydroelectric project in Labrador, has ended or will soon wind down. (Nalcor)

Things may get even worse. Buildforce Canada, which tracks construction jobs, projected in January that about 5,000 N.L. workers will be involuntarily out of the industry over the coming decade. That accounts for just over one in every five current jobs.

Things look dismal in other areas. Earlier this week came a shocking assessment of the health of the province's key shrimp stock, which is about one-seventh the size it was a decade or so ago.

Hard times? It's in our DNA

But is this the end of the road?

Don't count on it. Newfoundland and Labrador has been through far worse times and, indeed, has the concept of "hard, hard times" — the name of a folk song that is still revered, even though the deprivation it describes is far in the past — in its cultural DNA.

This is, after all, a place that's survived the collapse of the cod stocks, seen industrial saviors come and go, and even (in the pre-Confederation era) had its legislature vote itself out of existence to deal with bankruptcy.

All of this may make you want to drown your sorrows in a beer, but you may well find that you're drinking alone. Bars and restaurants in St. John's say business has dropped off significantly as people wait for a rebound.

"People are watching their money," says Brenda O'Reilly, who owns two popular establishments in the downtown St. John's entertainment strip.

"As taxes go up, disposable income goes down, and, of course, the first to go is the hospitality sector, particularly restaurants and bars."

There's no fatalism from O'Reilly, though, who has seen a downturn or two before.

"Entrepreneurs like myself are very optimistic. We always find a way."


John Gushue

CBC News

John Gushue is the digital senior producer with CBC News in St. John's.

With files from Terry Roberts and the St. John's Morning Show


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