19 March 2013

Structural Versus Cyclical: a quick look #nlpoli

Is the government facing a structural or cyclical deficit?

Good question.  Their economist says it is a structural problem but his comments to the Telegram on March 13 suggest he is approaching the problem as if it would sort itself out.

The whole structural versus cyclical question hinges in part on the question of government revenue when the economy is working at full output versus when it isn;t.  Well, in Newfoundland and Labrador, that is a bit hard to figure, especially when the government claims that locally everything is great but that it doesn’t have any money.

People get confused.

Well, one  way to start getting a handle on this is to look at the 2011 and 2012 budgets and the related income and spending.

You can find the information for this in the 2012 Estimates. 

What we are going to do is look at income without oil.  Oil royalty is the biggest income source but it is also highly volatile.  Oil royalty also represents the liquidation of a non-renewable resource.  One way of figuring out what the government can spend safely is to look at what the non-oil economy is generating in provincial government revenue.

Let’s look at the actual performance in 2011 first.

2011 Performance

Source: 2012 Estimates

Income

$7.459 billion

Minus oil royalties

$2.800 billion

Non-oil Income

$4.659 billion

Spending

$6.758 billion

Surplus (deficit)

($2.099 billion)

Net current and capital spending in 2011 was $6.758 billion. Revenue was $7.459 billion.  But let’s take out oil royalties of $2.8 billion.  That leaves us with non-il revenue of $4.659 billion. If we subtract the spending from the non-oil income, you get a deficit of $2.099 billion.

For those who argue that capital spending is an investment of non-renewable resource income, let’s take into account the $677 million in net capital spending.  That reduces the deficit slightly to $1.422 billion.

Now let’s take a look at the 2012 budget as presented.  bear in mind that the revenue figures turned out to be off by quite a bit.  We don’t know what the final spending numbers are yet so this is just a look at what the government planned to do originally.

They forecast revenue at $6.591 billion, with oil royalties of $2.224 billion.  Planned spending was $7.575 billion.  Budgeted capital spending was $1.408 billion.

That gives you non-oil income of $4.367 billion and spending of $7.575 billion.

Deficit = $3.208 billion

Ouch!

Let’s take that capital spending into account.  That deficit now comes out to be $1.800 billion.

Not pretty either.

Based on that definition, we’d have a very serious structural deficit problem in Newfoundland and Labrador.

This is a very rough first cut at it.  Over the next couple of days, we’ll look at the past decade (2002 to 2012) using some ideas about how governments should handle their non-renewable resource revenues.

-srbp-

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