Wednesday, December 10, 2008

Newfoundland Budget Update

There were headlines a couple of weeks ago about how the province of Newfoundland was estimating to run a surplus of $1.28 billion or so for the fiscal year, on revenues of about $7 billion or so.

I have predicting budgetary difficulties for the province, so I was wondering what sort of adjustments had been made to the numbers due to the recent slide in oil prices. Surprisingly, the forecast for the remainder of the fiscal year is for oil to trade at $40. The government manages to post excellent numbers given that oil had averaged $105 over the first eight months of the fiscal year.

I suspect a full year at $40 would eliminate the surplus, more or less. Still, we're probably one of the brightest economic spots in the world right now. Disposable income growth of 5.8% this year, housing starts showing double-digit increases, etc.

Report is here. Off to my last class of the first term.

POSTSCRIPT: Simon was nice enough to leave a good comment which I missed:
Based upon what we understand today, if oil prices continue at below US$60 per barrel, we could be facing a deficit of several hundred million dollars next year, and could potentially be facing deficits in the years to come.

2 comments:

Simon said...

According to his ministerial statement:

We have recently witnessed the extent of the volatility of commodity prices as oil has dropped significantly from the almost US$150 per barrel prices we saw earlier this year, and is currently trading around US$40 per barrel. Some analysts are predicting that oil prices may go as low as US$25. Oil prices, production and the exchange rate are the three primary factors in the determination of royalties. There are no certainties in any of these factors. Based upon what we understand today, if oil prices continue at below US$60 per barrel, we could be facing a deficit of several hundred million dollars next year, and could potentially be facing deficits in the years to come.

Edward G. Hollett said...

On an accrual basis, oil prices below US60 would wipe out the surpluses unless the government implemented large scale spending cuts.

On a cash basis, the government has already been running deficits every year since 2005. They will likely run one this year unless - and this is an interesting point - they want to carry forward some cash to defray next years whopping deficit.

Oil production will decline over time, thereby reducing revenues unless prices keep going up proportionately. Rough numbers suggest that the oil revenue next year (with oil around US50 on average) would drop oil revenues by as much as 1.0 billion. factor in as well declines in other resource revenues and you have a significant problem.