Government shouldn't overreact to deficit, says economist Wade Locke

While the province announced the biggest deficit in a decade on Tuesday, one economist in St. John's says it's important government doesn't overreact.

On Tuesday, Finance Minister Ross Wiseman announced the province expects the provincial budget deficit to hit $916 million as oil prices drop to five-year lows.

• N.L. deficit forecast jumps to $916M as oil prices plunge
• Slump in oil prices may slam provincial budget: Wade Locke

Wade Locke, an economist with Memorial University, says the province is likely to be in the same economic situation for the next two or three years.

However, Locke said it won't get much worse in the meantime, because we've likely hit the bottom of oil prices.

"We're pretty close to the bottom of the market now, and when you look at some of the things that are happening in terms of drilling, in terms of permitting, in terms of debt cost, in terms of capital expenditures and other areas as well, it looks to me like we're going to by mid-2015 we'll start to see substantial shortfalls in supply and we'll see prices going up significantly after that," said Locke.

According to Locke, there needs to be a balance the province has to cut spending somewhere in order to make up for the shortfall, but he said cutting too much could have a snowball effect.

"You cut expenditures too dramatically, then a lot of people will be laid off, their incomes will be cut, their confidence will be eroded, and that will show up in terms of housing markets and other things," said Locke.

"The reason you buy a house is because you have confidence you have a job in the future and that you'll be able to sell your house for a reasonable price in the future. If you don't believe that, that will show up very quickly in terms of people's willingness to buy houses."

Locke said it's important at this point for the provincial government not to over-react with big spending cuts, because it could make things worse in the long-run.