COMMENTARY: Newfoundland Government Should Use Hydroelectric Deal to Help Repair its Finances

By Alex Whalen

There are many reasons why the recent memorandum of understanding (MOU) on hydroelectric power between Newfoundland and Labrador, Quebec and the federal government has become a major political drama: historical grievances, high stakes and vigorous debate over the level of provincial benefits.

Yet amid all this debate, one critical element seems to be missing from the discussion in Newfoundland and Labrador. What will the provincial government do with the cash?

According to the Wakeham government, the new proposed deal results in $49 billion in benefits to Newfoundland and Labrador over its lifetime. There’s lots of debate about that number, but whatever the actual number it will be in the many billions of dollars if the deal is finalized. This represents a boon in a province where the entire economy (as measured by GDP) was about $43 billion last year, and where the provincial government will spend about $11.5 billion this year. It’s understandable that the government and provincial residents may be excited about such a large influx of cash.

Unfortunately, similar recent windfalls have led to larger government, high taxes and mounting debt.

Consider the evolution of the oil industry. Having ramped up in the 1990s, oil and gas has become the largest industry in Newfoundland and Labrador. Between 2007 and 2024 (the earliest and latest years of available data), the industry has spent $57.4 billion in capital expenditure in the province, $18.8 billion in operating expenditure (mainly wages and salaries) and sent $27.2 billion to the provincial government in royalties (in addition to other taxes paid and economic activity generated).

And yet, the government used most of this new revenue to increase spending. In fact, from 2004/05 and 2015/16, the government increased spending on programs by 43.6 per cent (on a per-person basis). When that revenue inevitably fluctuated, the government did not correspondingly reduce spending, and since 2008/09 (a particularly robust year for oil) it’s ran budget deficits in all but four of the last 17 years. Consequently, Newfoundlanders and Labradorians face both high taxes to service a large government and the largest per-person government debt burden in the country.

But there’s good news. The Wakeham government can learn from this experience and enact policies that will help generate long-lasting benefits for residents.

First and foremost, the government must prioritize budget balance. Currently, the government plans to continue to outspend its revenue, adding substantially more debt. An influx of cash won’t fix this problem unless Premier Wakeham commits to spending control and balancing the books.

Once the government returns to budget balance, it can use surpluses to pay down debt, which will reduce debt interest costs and create fiscal room for tax relief for individuals and businesses who currently face some of the highest income tax rates in North America.

The Wakeham government should also reverse course on its policy to pause contributions to the province’s Future Fund. Using revenue from natural resources to build a large fund, which can then deliver dividend cheques to residents, is a practice that has benefitted residents in other similarly-situated natural-resource-rich jurisdictions including Alaska.

When hammering out the details of this new proposed hydroelectric deal, the level of benefits remains the first important consideration. But it’s equally important to determine what the government in St. John’s will do with those benefits and if it will avoid past mistakes that have led to runaway debt, chronic budget deficits and high taxes on Newfoundlanders and Labradorians.

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