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March 4, 2016

The CARE (Collaborative Applied research in Economics) initiative of the Department of


Economic Announces that it is commencing a Research Study on Defining Realities of the
Fiscal and Economic Trade-Offs Being Faced by Newfoundland and Labrador
This exercise will take approximately six months to complete. When complete, the final report
will be presented publicly and made available on the CARE website. While the study team will
be announced later, the research plan, which involves some collaboration between the
Department of Finance, Government of Newfoundland and Labrador and CARE, is outlined
below.
Issue 1: The Economic Context Past, Present and Future

This section, utilizing publicly available information, will involve a descriptive analysis of
how the Newfoundland and Labrador has evolved in the past 20 years.
It will also, in collaboration with the Department of Finance and utilizing information
available to the study team, develop forward looking high, medium and low scenarios
for the short-term (within two years), the medium term (within five years) and longer
term (within 20 years).
The historical review will provide context from where Newfoundland and Labrador has
come, while the forward-looking scenarios will provide a context for future
opportunities and help define the parameters that will constraint future economic,
fiscal, social and demographic policies.
An understanding of where the economy has been, how it is evolved and where it might
go will be beneficial in shaping fiscal policy with a forward-looking strategy that will
allow Newfoundland and Labrador to focus on policies of the future and not policy of
the past. For example, the need to ensure sufficient jobs and an industrial policy
focused on the same can be replaced by a focus of how to ensure that sufficient skills
and people are available to meet the demands of the economy while enhancing the
efficient use of resource.

Issue 2: The Demographic Context Past, Present and Future

This section will review how the demographic characteristics of the province have
changed and the challenges that this has presented for policy education, health,
poverty, populations strategies, immigration policies and retention policies.
Using demographic profiles available from or developed by the Department of Finance
and/or Statistics Canada and a review of the relevant literature, this section will discuss
the implications of the demographic profile for public policies (taxation, public
expenditure on health, education, and immigration), the economy (housing, the labour
force and economic development).
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Issue 3: The Fiscal Context Past, Present and Future

This section will review the past (the last 20 years) and current fiscal circumstances.
Specifically, this will involve an analysis of the evolution of public expenditures by
source and government revenues by source. This analysis will also consider debts and
deficits and how they have evolved in both as-spent dollar terms and real terms.
Scenario development and simulation analysis: oil and gas, other natural resource and
other provincial government revenues will be simulated, utilizing various price and
production scenarios.
This forward-looking analysis will draw on the demographic and economic profile
developed and/or utilized above. This will also involve collaboration with the
Department of Finance and the use of Statistics Canadas SPSM simulation model.
This section will all assess the role that commodity prices play in provincial fiscal and
economic policies.

Issue 4: Economic Issues Associated with Government Debt and Deficits

This will start with a literature review.


It will provide a situational analysis of what is happening in other jurisdictions.
It will consider precedents from other jurisdictions with respect to debt and debt
reduction strategies.
A description of various debt and debt servicing indicators and how NL has fared in this
regard will be included.
This will include a technical discussion of the economics of government debt, debt
servicing and credit ratings.
There will be a distinction between cyclical and structural deficits to help put debt
retirement into its proper context.
There will be a distinction between good debt (productive infrastructure investment)
and bad debt (borrowing to meet current account expenditures).
This will contain an assessment of putting in place firm legislatively-determined debt
targets versus using discretion and adopting a general strategy with a vision for debt
reduction in the medium and longer term.

Issue 5: Legacy or Heritage Funds what are they and do they make sense in the
Newfoundland and Labrador Context?

This chapter will start with a literature review of the issues. It will describe the various
types of funds that are or have been in existence. How they work? The pros and cons
of these types of funds and whether these are appropriate in Newfoundland and
Labrador given its current and anticipated economic circumstances.

As well, this discussion will consider how legacy and heritage funding in a resourcedependent economy can be utilized as a risk management strategy in the presence of
volatile commodity prices.

Issue 6: Competitiveness, Infrastructure and Taxes

Review of the literature on the role of the public sector on competitiveness.


An analysis of key economic indicators and what they mean for competitiveness in the
Newfoundland and Labrador context. This will use NL Stats and Stats Canada data.
Implication of piling on taxes for competitiveness and excess burden and the role of tax
cuts versus debt reduction.
Literature review on elasticity of tax base to tax rate changes.
Implications of cost of public programs for competitiveness.
Horizontal, vertical and intergenerational equity.
Labour cost and human capital issues, demographics and out-migration/in-migration.
The role of infrastructure on productivity and competitiveness.

Issue 7: Diversification, Regional Economic Development, and Social Cohesion

How does this work in practice and in other jurisdictions? Are there lessons for
Newfoundland and Labrador?
Is this a way to reduce the rural-urban divergence?
What are the economic issues associated with natural versus forced diversification (both
industrial and geographic)?
This section will also consider how public services, such as education and health can be
utilized to attract and retain people within the province.
As well, this section will consider the trade-off between resource-driven, industrial
policy versus royalty optimization.

Issue 8: Innovation

In addition to spending reductions and tax increases, a jurisdiction can improve its fiscal
situation by increasing the rate of innovation. Based on previously conducted work on
Newfoundland and Labradors productivity, this section will assess the state of R&D and
innovation in the province using Statistics Canada and NL Department of Finance data.
In addition, this section will review the Newfoundland and Labrador innovation system
more broadly, identifying leverage points and bottlenecks that foster and impede innovation,
respectively. This can include an overview of academic research and business R&D,
networking and innovation facilitation, financing, public policies, procurement, end-user
demand, and other factors.
This section will compare Newfoundland and Labrador to other jurisdictions with similar
characteristics.
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Finally, this section will review innovation in areas of significant public expenditure (e.g.,
health, education).

Issue 9: What do we know and what do we want A way forward

This will consist of a random opinion survey to determine what people know about
various expenditure and tax information within the province and the economic
interrelationships in general. This will also solicit information on peoples understand of
various fiscal trade-offs and willing to accept or not these trade-offs. An analysis of the
factors that affect these perceptions will also be performed. As well, the survey will
have a geographical dimension to it to determine. This survey and the associated
analysis will help us assess whether people really understand governments role and
whether this role should be smaller within the context of mature and sustainable
economy. It will also enable us to examine whether there is a gap between perception
and reality pertaining to the role of government.