Making Choices - The 1998 Pre-Budget Public Consultation
Our Economic Situation
As we anticipated, 1996 and 1997 were difficult years for our economy. The outlook for 1998 and following years is better. Though some sectors, such as the groundfishery, still face uncertainties there are good reasons for optimism.
We have made a major leap forward with the commencement of oil production at Hibernia in late 1997. Hibernia is the catalyst that will see development of Terra Nova and Whiterose, as well as a resurgence of exploration activity in the offshore. The delay in the Voisey's Bay development will push the economic benefits ahead to future years, with a lower impact in 1998 than first expected. While delayed, the project still promises to make a significant contribution to our economic growth and future prospects.
Offshore oil and mining developments do require large investments by their owners, which have positive impacts on our economy. However, during the payback period when developers are recouping their capital costs from production revenues, our tax and royalty collections are low. This is typical of royalty regimes and ensures we are internationally competitive in attracting investment. After payback, which can take several years, our resource royalties take a greater share of project revenues.
Other sectors expected to continue to perform well include tourism, information technology and manufacturing. Although the northern cod stock has not recovered, the shellfishery should see good growth in 1998 with increased production and employment. A replacement for the TAGS program remains an important issue to be resolved in 1998.
The tax cut implemented with the Harmonized Sales Tax in 1997 was followed by strong growth in retail trade and car sales. The HST should continue to stimulate the economy in 1998 and beyond, and fosters a better climate for business investment and job creation in the Province.
Although the economy could perform reasonably well over the next few years, this will not translate into significant new revenues for government or meaningful improvements in our fiscal position. This should be coming, but is still several years away.
As our economy expands from development,our tax base grows. But much of the new tax revenue is offset by decreases in federal transfer payments. Equalization, paid to us while we do not have the tax base to generate our own revenues at the average level of other provinces, is reduced as our economy improves. For example, we could lose on average 84 cents of each dollar in tax revenues generated by major resource developments. This is the paradox of economic development for government, a stronger economy creates rising public expectations, but government revenues do not grow to meet these expectations.