Charlene Johnson, Newfoundland and Labrador’s finance minister, presented her government’s budget in the House of Assembly on Thursday, March 27. The budget offered a number of benefits for families, students, and seniors; it also planned for an increase of nearly $808-million in net debt in the upcoming year.
The single biggest fiscal challenge facing the Government of Newfoundland and Labrador is its unfunded pension liabilities, which constitutes almost 75 per cent of the province’s net debt. This has mostly stemmed from the fact that most public sector employees—81 per cent of them— have defined benefit pension plans that guarantee fixed payments. The magnitude of these payments depends on that employee’s salary. The provincial government’s problem is that the returns on money invested in public sector pension funds cannot pay for its promised benefits.
Newfoundland and Labrador’s unfunded pension liabilities have not gone unnoticed. The American credit agency rating Moody’s, for instance, warned about the province’s situation last year. And in 2012, then-Finance Minister Tom Marshall called its pension plans “unsustainable.”
The budget did not address the pensions shortfall. But Johnson has signalled her concern about the provincial government’s unfunded liabilities. The government may opt to increase contributions or limit benefits. Alternatively, it could delay dealing with the issue and allow a future administration to deal with an even worse problem.
Johnson’s budget also projected a $538-million deficit not accounting for unfunded pension liabilities. After the 2014-2015 fiscal year, the province will be left with a $9.8-billion net debt, according to the government. That’s over $18,000 of debt per resident of Newfoundland and Labrador.
Incurring this much debt is, firstly, morally inadvisable. By taking out public debt, present citizens are expensing government services to the future generations that will be stuck with it.
But, in a sense, the future is here. Newfoundland and Labrador’s massive public debt requires the government to pay a great deal of interest to those it has borrowed from. In fact, we spend more on debt charges and other financial expenses than on our Department of Fisheries, our Department of Justice—that is, on our police, courts, legal aid—and our Department of Tourism, Culture, and Recreation combined.
As more and more people retire with fewer workers to replace them, the provincial government’s pensions shortfall will increase our debt. This, in turn, will require the government to pay more to finance its borrowing, thus limiting its ability to pay for programs that help Newfoundlanders and Labradorians. The provincial government must act soon to prevent an impending debt crisis: unless it is willing to dramatically raise taxes or slash health or education spending, it will have to address its unfunded pension liabilities.