Newfoundland and Labrador Economic Update 2017

Transcription

1 Newfoundland and Labrador Economic Update 2017 A Presentation to The Newfoundland Association of The Appraisal Institute of Canada Wade Locke Department of Economics, MUN May 12, 2017 Capital Hotel 1

2 Demographic Time Bomb: Declining Population Between 1961 and 2016, 154,576 more people left NL than moved to NL from other provinces, which average 2,836 per year and between 2015 to 2038, population expected to fall by 8.5% with low, 25% with medium and 1.3% with high

3 Per Capita Expenditure on Health Care NL (2013) Source: CIHI data An aging population would normally be expected to put more pressure on health care costs On average, it costs NL $5,061 per capita for health care costs If no other cost drivers change (doctor s salaries, cost of band aids, etc.), then in 20 years the median age (currently 45 years) person s health cost will more than double and will nearly double yet again in another 10 years after that Health care is so important to Newfoundlanders and Labradorians and is the biggest expenditure in the budget (36% of expenditure on the Health Care Sector) It is one of the most significant cost drivers for the government and it may be time to have a Royal Commission to look at all aspects of health care (funding, delivery, infrastructure and what we want 3 and can pay for) seems to make a lot of sense at this point in time.

4 NL GDP Per Capita Relative to Canada While the exploitation of oil meant that NL`s economic activity relative to that for Canada has been improving since 1997, but in recent years the downturn in prices has had a significant impact upon NL GDP per capita relative to that for the country as a whole As share of NL economy oil has fallen by half of what it was at peak 4

5 NL Housing Market Aging population, lower employment, higher taxes (including HST), lower expenditures and lower confidence do not bode well for the housing market 5

6 Wages 6

7 Employment Crisis There is a noticeable decline in employment and a noticeable increase in the seasonally adjusted unemployment rate in the last three years, which pre dates the fall in the price of oil. Employment levels expected to be 42,300 lower than they were in 2013, when annual and monthly employment peaked. This represents a 12.9% reduction in employment levels from 2013 to To put this in perspective, in the last three years, employment fell by 4.2% from peak or there are 10,100 fewer people working in 2016 than in

8 Employment Oil Sector Employment in the oil sectors and support industries has been since

9 Investments in the Offshore 9

10 Relative Importance of Oil to NL 10

11 Oil Prices The change in oil prices go a long way to explaining the current fiscal situation Notice that oil prices currently are averaging $3.50 less tan predicted in budget. This could add another $80 million to the provincial deficit 11

12 Oil and Government Revenue Oil royalties have fallen from $2.8 B at peak to just above $500 M in This fall of $2.3 B with no change in expenditure explains the deficits that we have been running recently In fact, if it wasn`t for the unexpected increase in the price of oil and extra production, the deficit would have been another $350 higher 12

13 Expected Fiscal Position Based on Budget If everything goes to plan, the government predicts we will be back to balance in Still will a debt of nearly $17 B 13

14 NL is Already Challenged in terms of Borrowing 14

15 Expenditure Reductions Without Layoffs SCHEDULE III: EXPENSES BY OBJECT difference salaries and employee benefits $3,278,921,000 $3,697,271,000 $418,350,000 operating costs $1,238,459,000 $1,256,926,000 $18,467,000 grants and subsidies $1,664,180,000 $1,529,023,000 $135,157,000 debt expenses $1,112,322,000 $1,112,039,000 $283,000 professional services $513,015,000 $506,353,000 $6,662,000 amortization $274,543,000 $267,498,000 $7,045,000 property, furnishing & equipment $32,465,000 $30,629,000 $1,836,000 valuation allowance $2,591,000 $432,000 $2,159,000 total expenses $8,116,496,000 $8,400,171,000 $283,675,000 Zero Based Budgeting $65.9 Change in Management Structure $30.8 Savings from Extended Government Agencies $41.9 Annualized saving from 2016/17 $68.1 Net Saving, including actuary calculations/accrual adjustments $77.0 $283.7 Over $400 M in reduction in salaries and employee benefit has to do with an accounting adjustment for prior unrecognized experience losses (gains) Teachers Pensions Plan in budget because of change in governance structure of the Teacher`s Pension Plan Need to be careful with how this is interpreted 15

16 Production from Existing Projects 16

17 Half of Existing Projects Produced 17

18 Reserves and Resource "Reserves" are proven by drilling testing and interpretation of geological, geophysical and engineering data and are considered recoverable "Resources" are volumes expressed at 50% probability and are assessed to be technically recoverable but are not delineated and economic viability not established 18

19 Value and Production Variable 19

20 Offshore Production by Project 20

21 Oil and Gas Future Promise In 2016, 25 B bbls and 21 TCF potential & received $758 M in bids 2019 Statoil exploration plans for the Flemish Pass and the White Rose WHP are indeed good news and will create some short term economic stimulus if they proceed, but we are a long ways away from any significant contribution to the current fiscal situation faced by the province In 2016, land sales for identified 25 B bbls & 21 TCF resulted in $768 M in bids. In 2015, land sales for identified B bbls & 113 TCF resulted in $1.2 B in bids

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23 United Nations Convention on the Law of the Sea Article 82 The coastal State shall make payments or contributions in kind in respect of the exploitation of the non living resources of the continental shelf beyond 200 nautical miles from the baselines from which the breadth of the territorial sea is measured. 2. The payments and contributions shall be made annually with respect to all production at a site after the first five years of production at that site. For the sixth year, the rate of payment or contribution shall be 1percent of the value or volume of production at the site. The rate shall increase by 1percent for each subsequent year until the twelfth year and shall remain at 7percent thereafter. Production does not include resources used in connection with exploitation. 3. Adeveloping State which is a net importer of a mineral resource produced from its continental shelf is exempt from making such payments or contributions in respect of that mineral resource. 4. The payments or contributions shall be made through the Authority, which shall distribute them to States Parties to this Convention, on the basis of equitable sharing criteria, taking into account the interests and needs of developing States, particularly the least developed and the land locked among them. This has real implications for NL and for intergovernmental fiscal relations within Canada 23

24 Mining Potentially Positive 24

25 Muskrat Falls Substantial change in cost which requires some kind of explanation 25

26 Change in Demand Significant Change in demand within six months and not explained. Had this been known at sanction, there probably would not have been a project 26

27 Muskrat Falls Time for Answers Former Muskrat Falls engineer calls for forensic audit to examine 'absurdly low' cost estimates CBC website May 10, :00 AM NT A senior engineer who worked on Muskrat Falls says Nalcor Energy should be subjected to a thorough forensic audit to find out how the Crown corporation arrived at the "ridiculously low" initial cost projection for the hydro megaproject. "The unit prices used to generate the estimate were far too low and did not represent the reality of harsh construction environment of central Labrador," the engineer said. "The risks were vastly understated and the contingencies absurdly low. The engineer whose identity CBC News has agreed to protect, because he is not authorized to speak publicly about his work on the project believes that "the purpose of this estimate was not to generate an estimate for project implementation, but secure project sanction." If there is any truth to this assertion, then it does call for some kind of independent inquiry. This statement implies a deliberate act that goes beyond inexperience or lack of competence and there is no obvious motive for such an act and an act that would be uncovered with time as real costs were incurred These types of allegations have been hanging over the province for a long time. 27

28 Conclusion There is lot of potential, but it between 5 and 10 year away. We have a demographic challenge, a fiscal challenge, a debt challenge and an employment challenge how we resolve them We need to get some comprehensive answers about Muskrat Falls. The current allegations being reported in the media are serious and appropriate answers are needed 28