RETURN TO SURPLUS DELAYED BY ONE YEAR IN STATUS QUO BUDGET
- A month before Premier Furey steps down, and ahead of a provincial election due this year, the Newfoundland and Labrador government tables a stay-the-course budget, with no new tax increases but also no significant new spending measures. The deficit is projected to rise this year before turning into surpluses going forward on the back of significant expenditure restraint and a significant pickup in economic activity in outer years. However, for all intents and purposes this is a placeholder fiscal framework that will be significantly impacted by the evolution of the trade war, the imminent provincial electoral cycle, and the final version of the agreement with Quebec on new hydroelectricity payments.
- Budget balance forecasts: the deficit is estimated at -$252 mn (-0.6% of nominal GDP) in FY25 and projected to expand to -$372 mn (-0.9%) in FY26, before returning to surpluses that are expected to increase from $96 mn (0.2%) in FY27 to $571 mn (1.0%) by FY30 (chart 1).
- Economic assumptions: real GDP growth of 6.7% in 2024, expected to slow to 4.4% in 2025 and 1.6% in 2026. Oil price of US$73 in FY26.
- Net debt: revised down to 44.4% of nominal GDP in FY25 versus 45.3% in the mid-year update, and marginally rising to 44.7% in FY26 (chart 2).
- Borrowing requirements: increasing from $2.8 bn in FY25 to $4.1 bn in FY26.
OUR TAKE
Newfoundland and Labrador’s Budget 2025 expects another deficit in fiscal year 2025–26 (FY26) before returning to surpluses that are projected to grow over most of the horizon. The FY25 deficit was revised higher to -$252 mn (-0.6% of nominal GDP) in FY25 compared to the mid-year update, primarily due to lower oil royalties and increased health care spending. The deficit is expected to increase to -$372 mn (-0.9%) in FY26, as total expenditure rises by 5.1% year-over-year versus a more modest rise of 4.1% for total revenue. Health spending is projected to be flat, and the largest increases are for the Executive Council and Municipal and Provincial Affairs departments. The government is also seeking spending authority from the legislature for $200 mn to cover unforeseen expenditures in FY26, but has not built this contingency budget into the fiscal outlook. As a result, any use of the contingency budget would add to the projected FY26 deficit.
To return to the black beginning in FY27, ambitious spending restraint is projected for future years, including expense decreases in both FY27 and FY28. Revenue is projected to grow by an average 2% from FY26 through FY30, though pick up in the outer years as large new capital projects get underway. A worsened economic outlook owing to an extended trade war would pose headwinds to achieving this outlook, but there is potential for significant revenue windfalls from the Churchill Falls memorandum of understanding announced with Quebec in December 2024—hoped to be finalized next year.
The economic forecasts assumed for the outlook incorporate the negative impacts of tariffs imposed on Canadian goods entering the US and China, according to the budget. Provincial real GDP growth is projected to be 4.4% in 2025 and 1.6% in 2026, down from 6.7% in 2024. While growth is expected to slow over the next two years in the face of tariff and trade headwinds, the budget notes real GDP growth is projected to remain positive primarily due to increased oil and mineral production, with brent crude oil prices averaging US$73.90 per barrel in 2025. However, given the volatility and rapid pace at which the tariff environment is changing, the risks to the near-term outlook are likely more heavily weighted towards the downside.
Net debt levels are estimated to be $18.5 bn in FY25, higher than the $18.3 bn projected in the mid-year update. However, net debt as a share of nominal GDP in FY25 is estimated at 44.4% as opposed to the 45.3% presented in Fall 2024 owing to higher nominal GDP growth. Net debt levels in FY26 are projected to increase to $19.4 bn but only marginally increase to 44.7% as a share of GDP owing to slowing but still positive growth in economic activity.
Gross borrowing requirements are projected to rise to $4.1 bn in FY26 from $2.8 bn in FY25. This mainly reflects a significant increase in debt to be retired this year, but is also impacted by the higher deficit, an uptick in capital spending, and a prudent increase in planned cash holdings.
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