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Budget Speech

Restoring Fiscal Health

Mr. Speaker, we must bring the deficit progressively and strategically lower each year in order to protect the province’s credit rating. While our economic prospects remain strong, this alone will not insulate government from having to maintain a responsible fiscal position. The consequences of a rating decline would be higher interest rates, reduced access to capital markets and increased exposure to foreign exchange fluctuations. For example, if our credit rating fell below investment grade this year, and our borrowing rate increased in the range of 2 to 3 per cent, it would cost us from $200 to 300 million in additional interest payments cumulatively to 2007-08, money that we could not raise except by cutting public services. The sense of urgency has been communicated to us by our fiscal agents. It is far better that we address the situation now on our own terms than let others dictate severe measures later.

We face an historic challenge, and the actions we take must be equal to that challenge. We entered the 2003 election campaign with a commitment to eliminate the cash deficit by 2007‑08 and to put the accrual deficit on a steady downward trend. Mr. Speaker, we will honour those commitments. Their achievement will be the responsibility of this government. In March 2007, this government will present the people of this province with a budget that is balanced on a cash basis and that will be sustainable into the future.

To eliminate the cash deficit and rein in the accrual deficit, the province needs two things: spending control and stronger economic growth. Our plan will accomplish both.

Financial Targets

 

Cash Deficit Forecast

Mr. Speaker, our plan begins the process of restoring fiscal integrity in 2004‑05. It initiates measures now that will contribute to a deficit reduction strategy over the next four years. It puts in place a program renewal initiative to be completed before the next budget that will go beyond seeking more efficiencies and should be a catalyst for change by re‑focusing government programs and services to also be more relevant, effective and citizen‑centred.

By delivering on our commitment to present multi‑year fiscal plans, the government has given the people of the province a clearer picture of the province’s true fiscal outlook and the flexibility we have to act on people’s priorities.

Our efforts to reduce the cash deficit have not been easy. We have had to make some very difficult decisions. And we have more difficult decisions to make.

Mr. Speaker, in developing our fiscal plan, we applied four general principles.

First, given our already-high rates of taxation and the need to preserve competitiveness in the economy, we avoided increases in personal income tax, sales tax, and business and payroll taxes.

Second, given the importance of economic growth, we emphasized strategic spending in areas that will boost economic development.

Third, given the importance of protecting the vulnerable in society, we avoided expenditure reductions in areas of critical social services and added new strategic expenditures.

Fourth, we emphasized the importance of seizing efficiencies by reducing administrative and overhead costs while protecting front‑line services.

Mr. Speaker, the path we are taking is a tough course, but it is the right course.

Spending restraint and some very limited revenue measures will eliminate the cash deficit by 2007-08.

We are on target for a zero cash deficit in 2007-08 because of the tough deficit control decisions we are taking, starting this year.

We have started at the top. Government has reduced the number of ministries and the number of executive positions.

We will delay opening The Rooms for one year for a savings of $2 million.

We will cancel work on the West Coast Exhibition Centre in Corner Brook for an estimated savings of $4.8 million.

Pricewaterhouse Coppers Cash and Accrual Deficits

 

The Budget Plan - Cash and Accrual Deficits

We are canceling several health projects, namely the extension to the Grand Falls-Windsor hospital, the James Paton Hospital redevelopment in Gander, and the health centre at Grand Bank.

We are canceling the new elementary school for L’Anse au Loup and postponing work at Herdman Collegiate in Corner Brook, Leary’s Brook Junior High in St. John’s, and Mobile Central High in Mobile.

We have asked Memorial University and the College of the North Atlantic to each identify $2 million in expenditure reductions this year.

We have asked the Newfoundland and Labrador Liquor Corporation to identify $5 million in savings over the next four years. We have also asked the Corporation to produce another $6 million in revenue to government this year.

We will decommission and close the Salmonier Correctional Institution, which would require major repairs to remain open, and close a unit at the Newfoundland and Labrador Youth Centre at Whitbourne that is not needed because of a decline in the number of residents at the facility.

Mr. Speaker, with the major changes in the delivery of income support over the past few years, much of the existing service delivery network, originally designed in the 1960s, has become outdated. Transportation systems have improved since then, and advances in communications and computer technology have opened up new ways of doing business. Instead of clients having to visit an office to have their needs met, they may use mail-in applications. Soon, use of telephone technology will allow clients to access the Income Support Program from their own homes. Payments to clients will be made more efficiently from a new client automated payment system. These advances will enable government to consolidate and close 20 Human Resources, Labour and Employment offices across the province over the next six months. With these changes, it will be possible to place a greater emphasis on enhancing the delivery of employment and career services.

We will reduce Municipal Operating Grants by $5 million over three years beginning with a $2.1 million reduction on the first of January 2005. In year one, only 14 municipalities will be affected. Municipalities with smaller revenue bases will not be affected.

We will eliminate winter and summer cabin road maintenance for a savings of $800,000.

We will cancel the “We’re Doing It Right Here” campaign for a savings of $500,000.

We will implement a range of fee increases with a view to cost-recovery.

Among the fee increases announced today, I would like to draw attention to motor vehicle registrations. It is widely acknowledged that we face a significant challenge in this province to invest adequately in public infrastructure. The PricewaterhouseCoopers report pointed out that 35 per cent of our paved roads are more than 20 years old and it costs ten times more to reconstruct a road than to carry out regular maintenance. It has been past practice to delay regular maintenance, like re‑paving, to save money in the short term. However, all this neglect does is create much bigger expenditures later. No money could be found within the existing budget to invest in preventative maintenance. Yet it makes much more sense to spend one dollar now if we know it will save us ten dollars later. The logical place to look for money for roads was to vehicle owners and drivers or fuel taxes. We chose to raise the necessary funds through vehicle registrations. This allows us to allocate an additional $7 million in this budget to the provincial roads program, increasing the total funding allocation by 30 percent from $23 million to $30 million. This incremental investment is particularly important at this time since the money the province has received under the Roads for Rail Agreement since 1988 is exhausted.

There are no increases in the rates of personal income tax or corporate income tax in this budget.

The only contribution to deficit reduction from the tax system will come from the taxation of tobacco, a discretionary spending item. The burden smokers place on the health care system is well known, as is the impact high rates of taxation have on encouraging people to quit smoking and discouraging young people from starting. The way tobacco is marketed has necessitated a realignment of how we tax tobacco. The tax rate on fine-cut tobacco is much lower than on manufactured cigarettes given the actual quantity of tobacco now utilized in a home-rolled versus a manufactured cigarette. This creates what amounts to a tax loophole that we are starting to close today. Effective midnight tonight, the tax rate per gram on fine-cut tobacco will increase from 15 cents to 20 cents. The tax rate for each manufactured cigarette will increase from 15 cents to 16 cents. These rate increases will raise an additional $11.3 million a year.

These are just some of the measures we are taking this year in order to protect the province from the consequences of the spiraling deficit.

Mr. Speaker, an inevitable result of any significant fiscal restraint exercise is some impact on jobs. Almost two thirds of government’s discretionary expenditures are salaries. There will be fewer positions in the public sector as a consequence of the measures in this budget. We have taken extraordinary measures and incurred significant costs to protect jobs. Our fiscal advisors have warned us that significant measures would be needed this year to protect our fiscal position from grave damage. Because the deficit is so great and because wages constitute such a large portion of annual spending, this year’s budgetary measures will necessitate a workforce adjustment.

Out of the entire public service of 32,000 employees, the number of bargaining unit positions impacted is about 400, or slightly more than one per cent. Every effort will be made to offset the impact on employees through attrition. It is estimated that 1,500 positions will become vacant this year through retirement and natural turnover. We will work diligently with departments, boards and agencies to reduce the number of actual layoffs and to help displaced employees find alternate employment

Over the next four years to achieve our deficit targets and to keep our commitment to no massive layoffs we estimate there will be 4,000 fewer positions throughout the public service. With over 6,000 positions estimated to become vacant over the next four years through retirement and normal attrition, we will make every attempt we can to have an orderly reduction in the size of the public service. It remains our intention to minimize the number of layoffs in any downsizing. Obviously, some people who retire will have to be replaced as their positions involve contributing to a public service that must be maintained. Retirements and attrition do provide the opportunity, however, to replace employees who are leaving of their own choice with employees who are displaced elsewhere. Programs are being put in place to manage this matching exercise so displaced employees will have the opportunity for re‑employment elsewhere in the public service. We are committed to working with our unions to ensure a successful outcome.


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