Residents of Newfoundland and Labrador will pay more taxes and higher fees while receiving less service as the new Liberal government grapples with an unprecedented fiscal crisis.

While revealing a budget deficit of $1.83 billion, Finance Minister Cathy Bennett said Thursday the crunch was created by previous Tory governments and a massive drop in oil production and revenues.

As well, Bennett said the 2015-16 deficit is now expected to reach a record $2.2 billion.

Finance Minister Cathy Bennett speaks to reporters before the release of her budget on Thursday. (CBC)

As a result, the public service will shrink by hundreds of positions, classroom sizes will increase, subsidies are being reduced, some government offices will close, and significant infrastructure projects have either been deferred or cancelled.

The Liberals have also rolled back several feel-good Tory measures, including a "baby bonus" of $1,000 paid to parents and a decision two years ago to scrap student loans in favour of grants.

Bennett's sobering 2016 budget, her first since the Nov. 30 election, is just the first of a three-step plan to overhaul spending, which could include even deeper layoffs in a fall "mini-budget" or in the 2017 budget next spring.​

As a sign of austerity, Bennett said cabinet ministers have already cut their own salaries by 10 per cent. She refused to say what the Liberals are expecting from contract talks with public-sector unions.

Bennett said the tough budget was made necessary by a "failure to plan" by former governments, and oil royalties that once accounted for 30 per cent of revenues dropping to just over seven per cent.

In fact, it's projected the province will make more from fees and fines this year than from oil royalties.

"The problems we are facing are institutionalized and structural, exacerbated by a lack of planning by the former administration," Bennett said.

The Liberals developed the budget based on the assumption that Brent crude oil will average around US $40 per barrel this year, less than a third of what it was in 2008.

The process also included what she called an "exhaustive" review of government spending that began soon after the Liberals were sworn in late last year.

"People will not tolerate public agencies that are not operating efficiently," she said.

Bennett announced a projected deficit of $1.83 billion on a total budget of just under $8.5 billion.

Without "decisive action" to reduce expenses and increase revenues, Bennett said, this year's deficit would have reached a record $2.7 billion.

The Newfoundland and Labrador government released a budget on Thursday that was filled with tax hikes. (CBC)

The net debt is expected to reach nearly $14.7 billion this fiscal year, with the province spending nearly $1 billion to service that debt, which is more than the province spends on education.

Bennett said further actions will be announced in a supplemental budget this fall, and the government is not expected to return to surplus until 2022.

Speaking with reporters Thursday morning in St. John's, Bennett offered a blunt assessment of the province's situation, saying she expects people to be disappointed by the measures.

"But I believe they will feel we've showed leadership of how we can solve this problem," she said.

Job losses

The public service will feel a hit, with 450 full-time equivalent positions being trimmed from agencies, boards and commissions.

In the core government, another 200 positions will be eliminated, though only 125 people will be affected directly. Further workforce reductions will be achieved through retirements and attrition, Bennett said.

"A number of initiatives and actions continue to be brought through analysis," she replied when asked why the public service, estimated around 46,000 people, appeared to have been spared the axe on Thursday.

The negative spinoffs from the budget, though, will lead to job losses beyond the public sector.

Officials say the hit to the economy from cuts to the public sector and tax increases will be about one per cent of GDP, and result in between 2,500 and 3,000 job losses in the public and private sector.

What's more, an average household in Newfoundland and Labrador will be paying nearly $3,000 more in taxes and fees per year.

"We've been telling people this will touch every single person in this province," Bennett said, adding that a new income supplement will be established for the province's most vulnerable citizens.

The leader of the largest public sector union in the province, NAPE's Jerry Earle, called the budget a betrayal.

"Months ago, the premier, the minister of finance and others were promising no job cuts, and here we are just three months later with upwards of 650 full-time equivalent job cuts, said Earle.

Bennett criticized former governments for doubling the size of the public sector since 2004.

"They continued to spend at a rate that was 20 to 36 per cent higher than other provinces and put no plans in place to deal with the fiscal reality we are now facing," she said.

Increasing revenues by hiking taxes, fees

The Liberals will increase revenues by about $650 million this year, and nearly $900 million in future years.

This will be achieved through a wide range of taxation, including a bump in the HST from 13 to 15 per cent, and across-the-board tax rate hikes for all incomes, beginning July 1.

The break that motorists have been getting at the pumps from lower oil prices will also end.

The budget includes a temporary increase of 16.5 cents per litre for gasoline, effective June 2, which doubles the current tax. Officials say this tax will be reviewed every six months.

The retail sales tax on insurance premiums will be reintroduced at a rate of 15 per cent, generating roughly $111 million annually.

The cost of tobacco products will also go up, and so will fees for government services. The cost to register a passenger vehicle, for example, will increase by $20.

A new temporary deficit-reduction levy is one of the big surprises in the budget, and is expected to bring in $126 million annually.

For anyone earning between $49,500 and $72,000, for example, the levy will total $600.

Bennett pledged that the government will begin phasing out this levy in 2018.

Reining in waste, creating efficient public service

The budget has left nothing untouched, with Bennett saying the "culture of spending" is over.

She said every aspect of government has been directed to "sharpen their pencils," including Nalcor, the province's Crown energy corporation, and Memorial University.

Bennett was especially critical of Nalcor, saying the Muskrat Falls project is a "very large piece of our borrowing."

When asked if the massive hydro-electric project was a mistake, Bennett said the risks of cancelling the project are "enormous," but added, "We're going to make the changes that allow our government to have strong oversight on that project."

In her speech, Bennett took aim at the salaries paid to Nalcor executives, saying they have grown beyond what taxpayers would consider reasonable.

CEO Ed Martin, for example, received a compensation package of more than $600,000 in 2015.

She added that Nalcor's board must bring their compensation, benefits and gender equity policies more in line with similar positions in the public sector.

The province is also cutting $14 million in funding to Memorial University, prompting questions about whether a lengthy tuition freeze will be lifted.

Bennett said the province has given MUN the money to maintain that freeze, but refused to say it was mandatory, saying it's "their decision."