The unsustainable lightness of Tom Marshall

Tom Marshall keeps a tight grip on the provincial government’s purse strings.

He has to do that.

The damn things won’t stay that wide open on their own.

In presenting the provincial government’s budget to the House of Assembly on Tuesday, Marshall announced that the Conservative administration of Kathy Dunderdale would continue the practice of unsustainable public spending set under Dunderdale’s predecessor, Danny Williams.

Overall government spending will grow by 4.9%;  that’s about twice the rate of inflation. 

A windfall in oil prices directly attributable to turmoil in the Middle East helped to erase a forecast cash deficit of $959 million and turn it into a modest cash surplus of $133 million. (Estimates 2011 p. iv)

For the past two years, Marshall claimed the government’s profligate spending came from the need to spend cash to fuel an economic recovery. 

Now he’s got a different excuse:  we can afford it.  Marshall told reporters that the provincial economy was “sizzling”. That’s nonsense, of course.  The economy is actually becoming increasingly fragile and public spending is sustained by cash coming from a volatile source, namely oil. Marshall seems to know that just like he knows the public debt is something he should be reducing.

Oddly, Marshall never seems to do anything about it. 

Marshall forecast that the province’s net debt will increase in 2011, largely the result of continued growth in unfunded pension and benefits liabilities in the public service.

And that’s despite repeated warnings from the province’s auditor general among others.  In 2009 a provincial cabinet minister resigned unexpectedly citing concerns about unsustainable public spending.  Earlier this year, Auditor General John Noseworthy repeated the same concerns;  interestingly enough he did it in a report on Fiscal Year 2009, the same year Paul Oram left cabinet.

Two years later, the provincial government is still on the same path.

- srbp -

Related:

• Fragile Economy:  Staying the course
• Fragile Economy:  reductio ad argentum
• Fragile Economy:  …and two steps back
• Fragile Economy:  now three steps back and loving it
• Fragile Economy:  hard numbers
• Fragile Economy: The Public Sector

The Dismal Science: Debunking the “federal presence” fairy tale

Far from being hard done-by when it comes to federal jobs in the province, Newfoundland and Labrador is pretty much on par, according to a recent study conducted by the Frontier Centre for Public Policy, and reported by the National Post.

You can find a news release summarising the report here, while the full report is available in pdf format.

Some provinces  - Prince Edward Island, New Brunswick, Nova Scotia and Manitoba – have significantly more than the national average number of federal jobs per 100,000 population.  Quebec, Saskatchewan, British Columbia and Alberta have less.

Newfoundland and Labrador and Ontario are only slightly higher than the national average.

The study effectively refutes claims that this province is receiving something less than its “entitlement’ to federal pork spending.  The comparative figures also demolish two reports released by Memorial University’s Harris Centre in 2005 and 2006.  The provincial government has used those studies repeatedly to bolster its claims for increased federal transfers to the province to offset what turn out to be imaginary grievances.

The Frontier Centre study refers to these federal jobs as a form of “stealth” Equalization.  That is, they contend that the federal jobs serve as a type of federal transfer to the local economy in each of the provinces. More importantly, though, the Frontier Centre contends that the transfer comes in addition to the formal Equalization program and is particularly heavy in the provinces it refers to as “major” have-provinces.

The study also notes that the have-not provinces with the highest ratio of federal government jobs also tend to have higher than average reliance on provincial public sector jobs generally. They compare provinces based on the number of public sector employers as a share of the total population.  Newfoundland and Labrador is third highest on that scale, with Prince Edward Island and Manitoba coming, respectively, first and second.

Looking at the same information but as a share of the provincial labour force, Newfoundland and Labrador is by far the province with the largest dependence on the public sector.  Almost 30% of the provincial labour force is employed by the federal, provincial or municipal government.

The Frontier Centre study puts the findings into a particular context, namely transfer payment reform:

The stealth equalization of unbalanced federal employment described in this paper is part of a much bigger problem —an approach to public policy in Canada that transfers money out of high-productivity regions into low-productivity regions.

Not only is this policy approach harmful to our productivity growth, it is also, quite simply, unsustainable. Historically, the taxpayers in three provinces—British Columbia, Alberta and Ontario, have paid most of the bill for high levels of public sector employment in the have-not provinces.

At the same time, the study does point to issues that are especially relevant to Newfoundland and Labrador, even if the report’s authors simply missed the poster child for their argument of unsustainable public spending and the dangers of reliance on what the author’s call “the state driven approach to economic development”.

Most residents of the recipient provinces are unaware of the extent to which their economies are state-driven and reliant on transfers. Beyond the official equalization money, massive amounts of revenue from elsewhere flow into these provinces from a number of different sources. Stealth equalization through federal employment is one important example—but there are others. Higher dependence on federal
government transfers to individuals and discrimination in ordinary  operating programs in favour of the have-nots are two more examples of ways Canadian public policy transfers wealth into the have-nots.

Most residents of Newfoundland and Labrador are unaware of the extent to which the provincial economy is state-driven and reliant on federal transfers in addition to overall public sector spending.

They aren’t alone, of course.  The current provincial administration operates as if going off Equalization was a tragedy of biblical proportions.

- srbp -

Related: 

• Fragile Economy:  staying the course
• Fragile Economy:  reductio ad argentum
• Fragile Economy:  The public sector
• Fragile Economy: …and two steps back
• Fragile Economy: …now three steps back and loving it

Hobson’s Choice #nlpoli

The provincial Conservatives love to spend public money. 

That doesn’t sound very conservative and it isn’t.  Politically, the provincial Conservatives in Newfoundland and Labrador are more like Republicans than the Progressive Conservatives who used to run the province in the 1980s. American Republicans like to cut federal taxes and jack up federal spending and then blame the resulting financial meltdown on the Democrats.

Around these parts, the Reform-based Conservative Party, as the Old Man used to call them, blames everything on the Liberals.  That is the Liberals who, in case you missed it,  haven’t been in power in a decade.

Fragile Economy – The Public Sector

Last week, labradore comments on the size of the provincial labour force occupied by the provincial government public sector.  He capped it off with a chart (below) showing a comparison for all 10 provinces over the past decade.

All this brings home one of the points made here earlier this year in a series of posts on the increasingly fragile state of the provincial economy. More the provincial economy is dependent on trade with a single market, namely the United States.  There are fewer private sector industries driving the economy and, at the same time, provincial government spending has assumed an increasingly large role in the economy as a whole.

If you extend the picture back over the three decades for which data is available, you can see both the persistent over-reliance in Newfoundland and Labrador on public sector labour compared to the situation in other provinces as well as the increase in the public sector labour force over the past three years.

These charts go a long way to demonstrating the extent to which popular perceptions of local prosperity  are entirely wrong.  Whatever is going on locally is most certainly not the result of private sector economic development.

Rather there are more public servants making more money, 20% more, in fact over the most recent four year contract.  Couple this with the dramatic increase in overall provincial government spending – upwards of 60% in four years – and the picture is unmistakeable.

Those who want to talk about prosperity in the province or those who want to celebrate the province’s “have” status would do well to look at the three provinces with the smallest proportion of their labour forces working for the provincial government.  It is no coincidence that those provinces with the strongest economies are also ones in which the public sector labour force is a relatively small proportion of the overall working population.

That doesn’t mean that public servants and public services are unimportant.  Rather, the situation in Newfoundland and Labrador demonstrates the extent to which successive provincial governments in Newfoundland and Labrador – but most particularly the current one – have failed to create the climate in the province for sustainable economic development let alone diversification of the local economy.

What makes the current administration stand out, though, is that increasing the role of the public sector in the economy, whether through NALCOR or through admittedly unsustainable growth in public spending, is openly stated as the goal.

The fact that observers outside the provincial government have repeatedly failed to notice that this is occurring is another matter.  No surprise, though, that if they cannot even correctly identify the trend to growing fragility, they may not pay any attention at all to the very serious implications from policies that promote the hollowing out of the province’s economic underpinnings.

- srbp -

Whistling past the economic graveyard

The business world in a free market runs so extensively on psychology it's amazing that business schools around the world spend so much time on balance sheets, marketing and business plans.

Psychology is pretty much the reason why western government's responded to the American financial crisis with assurances that "the fundamentals" of the economy are sound.

However, in some instances, the efforts to describe the Canadian economy as somehow able to avoid any consequences of the move toward a recession south of the border became somewhat bizarre.

Take, for example, comments by Premier Danny Williams in an interview with the National Post:

"The fortunate thing about Newfoundland and Labrador and Saskatchewan in today's fragile economy is that our provinces are very, very well-positioned. We have strong economies, a lot of it based on natural resources, but we're going to weather this storm and weather it very well."

Finance minister Tom Marshall told reporters on several occasions that he doesn't see a problem find cash to build the Lower Churchill project. In other news stories, Marshall said he was concerned that lower oil prices would lower government revenues.

The Premier told VOCM listeners on Sunday night that the provincial "economy is growing very well."  That isn't accurate.  All economic forecasts - including the provincial government's own forecasts  - show the province having incredibly modest growth.  Some project the growth this year and next year will be scarcely above 1% and some have forecast growth at one half of one percent.  That is as perilously close to a decline as it can get.

At the same time, European countries are taking action to bail out where necessary and take other actions to avoid repercussions from the American downturn.  Odd is that, given that European countries are not as dependent as Canada generally or Newfoundland and Labrador specifically on the healthy American economy.

Iceland, once touted by some nationalists as a model for Newfoundland and Labrador to emulate, is in serious economic difficulty:

But in the financial world Iceland is now a hot topic of discussion for a different reason: many people suggest that it could become the “first national casualty” of the ongoing credit crunch. Until last year, Iceland’s economic track record in this decade had been phenomenal—its annual growth rate averaged close to four per cent over the past decade, and its per-capita gross national income is now higher than that of the U.S. This year, though, the country’s currency, the króna, has fallen twenty-two per cent against the euro; the economy has stagnated; and a global rating agency has put the nation’s three major banks on a credit watch. Now analysts are wondering whether the new Nordic Tiger will end up, instead, as “the Bear Stearns of the North Atlantic.”

Take, as but one example, an article from the weekend Globe and Mail.  It included this comment one one manufacturer from Newfoundland and Labrador:

Mr. [Lorne] Janes, president of Newfoundland-based Continental Marble of Canada, is already getting the cold shoulder from his customers in Florida, Maryland and California. “The reply I'm getting now is, ‘Lorne, save the phone call, don't call any more until this sorts out,'” said Mr. Janes, whose 12-employee company manufactures equipment to produce moulded stone countertops.

Janes wouldn't be alone.  A Bond Papers post from last July highlighted the extent to which the provincial economy is dependent on exports - especially energy exports - the majority of which heads to the United States. In 2005, the last year for which information is posted online at the provincial government website, 52% of international exports from Newfoundland and Labrador headed to the United States.

As the United States economy slows, the effects on Newfoundland and Labrador will be felt directly and in some instances very strongly:

1. As demand for energy products declines, exports to the United States will also likely decline.  That will reduce provincial government revenue.
2. As the price of oil declines, provincial government revenue will decline accordingly.  If crude oil averages US$87 in 2008, the provincial budget will run into deficit to the tune of about $800 million.
3. Declining commodity prices and lessened demand for minerals, forest products and fish would affect the three traditional major economic drivers in Newfoundland and Labrador.
4. The American credit crunch - and the resulting tightening of capital available for major projects - will affect virtually all the major projects projected for Newfoundland and Labrador:

• The NLRC refinery project is already in serious trouble and may well be dead for all practical purposes.
•  Hebron is not yet sanctioned.  While many believe the project is underway, it is not.  Oil prices, increased costs and tight capital may delay project sanction.
• The Lower Churchill needs $9.0 billion in capital investment, capital which is growing increasingly scarce. The project currently does not have a single power purchase agreement.  PPAs are crucial for securing long-term financing. A decline in revenues from oil and gas developments and mineral production would adversely affect the provincial government's ability to cover the costs of doubling the provincial debt in order to build the project.

The Newfoundland and Labrador economy is not immune from the effects of a serious downturn in the American economy.  As much as politicians are tempted to say something different from that for political reasons, it would be far better to provide people with an accurate picture of the provincial economy and the interrelationship between international events and local economic well being.

The shock of finding out the truth if serious consequences follow will be far greater than if politicians didn't try to whistle a happy tune as they walk towards what - for some economic projects - might well be a graveyard of ambition. That shock will have far greater consequences than what would occur from telling it like it is right now.

-srbp-

The politics of logic and history #nlpoli

“Government does not work on logic,” a wise man once told your humble e-scribbler.  “It works on the basis of history.”

When faced with a new problem, people tend to do what they did before, not what might make sense in the new circumstances.

You can see that the preference for history over logic in Kathy Dunderdale’s comments on Monday about what she and her colleagues would do for communities where the town fish plant had closed.

Mr. Speaker, we are doing the same thing for these workers, and will do for others the same thing we did in Stephenville, Grand Falls-Windsor, and Harbour Breton.

That would include moving in some provincial government jobs to stuff some cash into the local economy.  So if adding more provincial government employees is an integral part of Kathy Dunderdale’s response to the problems in these six communities, you can be damn sure she won’t be chopping any jobs.

Then again, regular readers of these scribbles already knew that claims to the contrary were bullshit.

The rest of Dunderdale’s comment are just routine political drivel:

We are committed to communities in this Province that find themselves in economic distress. We do not always have the answers at hand. There are not easy answers to be found by anybody, but we walk the walk with communities, Mr. Speaker. We do not just talk the talk.

And when she was done with drivel, she just popped out some truly vacuous bullshit:

Wherever the journey takes these people, their government will be there with them, and we do our best to diversify the economy and meet their needs in the meantime.

Diversify the economy.

Yeah.

Well, the economic development record of the current crowd is exactly zilch.  They spent so much time obsessing over polls and the Lower Churchill after 2003 that they simply didn’t do anything to diversify the economy.  And what they did try – giving away public cash by the bag-full – simply didn’t work. They haven’t been able to pay people to create jobs here.

Here’s how SRBP put it a couple of years ago comparing government spending in the mid-1990s with the current practice:

The province’s business development and economic diversification efforts – ITT then and INTRD and Business today – take less of a share of the budget now.  That’s despite government claims that it has a plan to expand the economy and that the plan is in place.

Mind you, the amounts spent have increased.  For example, the cost of operating the departments has gone from about $50 million for the Industry, Trade and technology department to about $66 million spread over Business and Innovation, Trade and Rural Development today.

The amount available for business investment is also up:  $18 million then compared to $29 million. Even then, though, the province’s business department -  the vehicle through which Danny Williams was once supposed to personally reinvigorate the provincial economy – actually doesn’t do very much with the cash in the budget.  Sure there are plenty of free gifts – like Rolls Royce – or the apparently endless supply of cash for inflatable shelters.

But as the Telegram discovered two years ago, the provincial government spent nothing at all of the $30 million budgeted for business development in 2007. And earlier this year the Telegram confirmed that in the past three years, less than one third of the $90 budgeted for business attraction was ever spent.

The result is that we have a very fragile economy.

Government does not work on the basis of logic.  They go with what they did before.

Like that has worked so well  for them so far.

-srbp-

A Crisis. Or Not. #nlpoli

“Muskrat Falls is a project that will not impact net debt by a single dollar,” finance minister Tom Marshall said in a provincial government news release.

Unfortunately for taxpayers, they won’t pay the net debt.  That’s an accountant’s calculation of what the provincial government owes less any assets they could theoretically sell off if they had to clew up business in a hurry. 

What taxpayers will have to contend with is the total liabilities and Tom plans to make those liabilities get a whole lot bigger than they are today.  On the day that Tom Marshall predicted that his current budget will have a deficit three times what he forecast in the spring, Marshall also forecast billions more in borrowing to pay for Muskrat Falls and to pay for the government’s day-to-day expenses.

You’d think that a finance minister would understand that. 

Evidently, Tom Marshall doesn’t.

Either that or he thinks the rest of us are so stupid that they would accept his ridiculous comments as if they were true.

The Fragile Economy: finance minister complains about his own policies

Finance minister Tom Marshall thinks its time for the private sector to step in and boost the economy around Corner Brook.

“Other than construction, I would like to see more economic investment; I would like to see more businesses coming in and investing here,” he said. “It is jobs ... What we have seen is government spending, in a massive way, in this area.”

That’s from a story in last Friday’s Western Star.

Two observations come readily to mind.

First of all, that’s a great big “D’uh” there, Tom.  Your humble e-scribbler has been banging out post after post after post over the past six years on this very subject.  The number of posts on it has gone up in the past two years because the fundamental situation is getting fundamentally worse. 

It is getting fundamentally worse – to hit the second point – as a direct result of government policy.  In everything from its energy policy to its disastrous seizure of private sector assets in 2008, the current administration has shown itself to be relentlessly opposed to creating an economic climate that attracts investment, promotes innovation and rewards entrepreneurship. 

The current fragile state of the provincial economy  - “fragile” is a word Tom Marshall used not so long ago, by the way - is a direct consequence of government policies.  Only a fundamental shift in those policies can move the province off the course it is currently on.

As it stands in early 2011, the current administration is firmly committed to continuing the policies that have contributed to putting the economy in its current parlous state.

We have seen the enemy, says finance minister Tom Marshall, and he is us.

- srbp -

The Decline of the Forest Empire #nlpoli

While an official with Corner Brook’s municipal government  understandably has to say wonderful things about the economy in the west coast city, a look at some numbers shows the city is feeling the effects of a larger problem in the province.

SRBP took a look at newsprint production levels and the value of newsprint exports from 2003 to 2012.  The numbers are all from the annual editions of the budget document called The Economy.

The picture is not pretty.

The Fragile Economy: staying the course

“Obviously, I don't like to run deficits, but if I've got to fight a recession ... if we've got to get the economy booming again, then I'm not afraid to spend money and we're not afraid to lower taxes to stimulate the economy - that's good public policy.”

Finance minister Tom Marshall often speaks about one thing and does another.  He’s famous for trotting out a debt clock during one budget consultation farce only to deliver a budget that did nothing to reduce debt.

This year Marshall has been trying to pass off deficit spending as if it was something new for this administration.  It isn’t. They’ve run cash deficits in all but two years since 2004.  If their current forecast holds, they will be adding a considerable amount of debt for the foreseeable future.

Adding debt is just staying the course for the Williams administration.

Premier Danny Williams himself has dismissed balanced budgets as meaningless. Marshall explicitly rejected any action like balanced budget legislation or having a debt reduction policy.

Marshall’s predecessor as finance minister - Loyola Sullivan  - talked about balancing the books on a cash basis – he only did it once – and possibly not balancing the accrual books for a number of years.  That was back in the early days of the administration when it looked like they were actually going to deal with some of the provincial government’s financial woes. But even for all that notice debt got within the first couple of years after Williams and the Tories took office,  they were willing to rack up additional public debt.

Since we are discussing debt, let’s dispose of one of the finance minister’s more laughable claims from budget day:

“But we have cash to pay for that deficit. We will not increase our borrowing. Our debt will go up, but we don't have to borrow for that.”

On the face of it people may well wonder how you can increase public debt while not borrowing money.

The answer is pretty simple and it goes to the heart of the public debt charade Marshall and his colleagues have been foisting for the past few years.

Marshall covered the half billion shortfall in 2009 from temporary investments – extra cash – the provincial government had on hand.  He didn’t have to go to the banks and negotiate a loan but he sure as heck borrowed the money:  he borrowed it from taxpayers.

As for the debt, what he is referring to is net debt.  Now for those who may not know, net debt is a calculation of what is owed compared to assets – cash, property and so on – that could theoretically be sold off to pay down the money that is owed.

Those temporary investments that the provincial government racked up over the past couple of years helped to make it look like the public debt had been paid down. That’s because they are exactly the sort of assets that would have bee used to figure out the net debt:  liabilities less assets.

So when Tom took the cash and spent it, the net debt could only go back up.  The net debt will go up again next year and the year after and any other year Tom winds up having to cover off over-spending.

Just remember, though, that the total liabilities haven’t changed much in the past few years. You can see that from a post last December on net debt and liabilities and in another post on net borrowings.

This is not a subject the Fan Clubbers like to talk about but it is real. it also just happens to be one of the major financial problems facing the province that isn’t being addressed by the current administration.

Just to give you a sense of how much the past two budgets have followed what we could call the Williams administration debt addition policy, take a look at just the current account spending since 2003.  That’s the money that pays the heat and light and delivers the services and salaries every day of every year. 

And just to really keep it in perspective think of it this way.  You can have a great net debt because you have a nice house, an expensive car and some jewels that could possibly be sold off if the bank called all your loans. 

But since the house and the jewels don’t generate any cash each year they don’t help you pay the bills today.  If you can’t afford food without whipping out the credit card you could be in a situation of being cash poor. Lots of nouveau riche business types are leveraged to the max.  They drive flashy cars but they don’t really have a copper to their name. So without considering the cash deficit, the net debt could be a very misleading figure.

Anyway, take a gander at this table.  It shows the percentage increase in current account spending every year from 2003 to the current budget.

Fiscal Year	Percent increase from previous year
2004	Zero
2005	5.3
2006	4.6
2007	8
2008	7.8
2009	10
2010 (forecast)	7

That’s right.

Except for that first year, there’s never been a time when current account spending didn’t go up by at least twice the national rate of inflation.  In some years spending shot up three and four times the rate of inflation.

This sort of spending is unsustainable.

This sort of financial state – all that spending coupled with all that untended debt – is unsustainable.

There are other consequences to the Williams administration economic policy, consequences that will become more obvious as this new series – The Fragile Economy – rolls out in the days ahead.

-srbp-

The Vibrant Unsustainable Super Energy Debt Warehouse #nlpoli

The Conservatives used to say that Newfoundland and Labrador was eastern North America’s energy warehouse.  Once Danny Williams ran for the hills and left Kathy Dunderdale in charge, she kicked everything up a notch.

Energy warehouse was too plain for Kathy, whose party ran on the slogan “New Energy” in the 2011 general election.

With Kathy running the place, it became a super warehouse.  “We are an energy super warehouse,” said Kathy countless times. 

The New Energy Party even clipped this bit of Kathy from the House of Assembly for its website back in 2011:

Mr. Speaker, this Province is an energy super warehouse. We have what the world wants. We will bring it to market. We will supply our own people, Mr. Speaker, and we will earn from those resources for generations to come.

“We will supply our own people, Mr. Speaker.”

The Bigger Picture #nlpoli

Whatever the provincial government is doing about its own spending or the provincial economy generally or whatever it is up to starts at 9:00 AM.

They announced an invitation-only event by Twitter a week or so ago that made it sound like the Premier would be the key player all day.  On Friday, the official announcement made it plain Ball is showing up for the kick-off and wrap-up. Another announcement had him with another minister doing a funding announcement at 10:00 AM.

Oh yeah, and that invite-only thing had transmogrified into a case where "the general public" can participate by live video using social media.

There you have it:  can't tell you what they are doing because they do not know what they are doing, otherwise known as "making-it-up-as-they-go."

No encouraging at all, but let's skip over that sort of eye-roll inducing stuff and think about some of the bigger issues.  We can then keep an eye open to see how they turn up - *if* they turn up - in this stunt at The Rooms.

Public sector job growth outpaces private in NL

From labradore:

In the five years since the recent-historic low, in early 2006, of about 55,600 public-sector employees, the public-sector labour force has increased by about 11,500 or over 20%. As a share of total employment, the public sector has grown from 26% to 30%.

The twelve-month average ending in June 2011 was 67,100 — an increase of 4100, or 6.5%, from the same period twelve months earlier. This represented an increase of over half a percentage point in the public sector's overall share of the employed labour force.

Then there are the pretty charts showing the public sector employment, federal, provincial and municipal, in thousands of people:

and the private sector:

 

So when you have digested the full impact of that little bit of information, consider what the Muskrat Falls project is really all about: the megadebt will be worth it because it will “bring significant employment and income to the residents and businesses of Newfoundland and Labrador.”

 

- srbp -

Related:

• The Fragile Economy;  … and two steps back
• The Fragile Economy:  hard numbers

The Fragile Economy confirmed

BMO Capital Markets lays out the scope of the problem:

Newfoundland & Labrador [sic] saw a sharp 10.2% real GDP contraction in 2009, the worst performance in Canada. However, improvement in the mining sector and a reversal of some temporary factors will drive 4% growth in 2010 and solid 2.8% growth in 2011.

Problem? sez you, wiping the purple freshie from your lips. 

Growth returns. 

Here’s the problem:

However, the biggest economic driver in the province in the next two years will be construction activity. Government infrastructure spending will total about $1 bln in FY2010/11, helping boost total
capital spending an expected 23% in 2010. Provincial government infrastructure spending will amount to more than $5 bln over the next several years, keeping the economic fuel burning into 2011. At more than 3% of GDP, the Province’s infrastructure program is among
the largest in Canada relative to the size of the economy.

It is definitely not good when the public sector is driving the economy to such a degree.

And as for all the rosiness in BMO’s outlook. 

Well, let’s just say they obviously haven’t done any detailed analysis of the local economy especially if they think the recent population growth is driven by anything other than migrant labourers returning home from other parts of the country.

-srbp-

 

-srbp-

The Fragile Economy: …and two steps back

In 2007, the contracts manager at Metalcraft Marine, a Kingston Ontario boat builder noticed the growing number of reports from the united States that predicted a looming downturn in the American market.

The threat was potentially devastating for a company that did 95% of its business manufacturing small patrol boats for American government agencies.

The company shifted its marketing focus to South America, the Middle East and Asia.  The work paid off:  revenues in 2010 will be 50% higher than 2007 based on new customers outside North America.

Inertia

Meanwhile, since 2007, the provincial government in Newfoundland and Labrador has been working alongside the other eastern Canadian provinces to increase trade with the United States. There is now a whole trade focus on the south-eastern Untied States complete with junkets and conferences. 

Just this weekend – April 2010 -  the Premier co-hosted the latest conference for the south-eastern project.  This is the same trade venture. incidentally, that drew Paul Oram to Georgia when he was the business minister. His grasp of recent events in the province is breathtaking.  Well, breathtaking that is, if you have no idea what he is talking about.  If you do have half a clue, you’d wonder what planet he was from to have cocked everything up so badly.

Now to be fair, the whole idea for this venture seems to have been cooked up back before 2007 when it looked to some like the growth in the United States economy would know no end. By the time the bureaucrats and politicians managed to get themselves organized, the first signs of looming trouble were showing up.  And by October 2008 when Oram was in Georgia, the entire arse had fallen out of the American economy.

By then, of course, or even by 2007, the bureaucratic juggernaut couldn’t be stopped even if someone wanted to.  And now three years after the first one, a whole bunch of people get together regularly at taxpayer expense to talk about how nice it would be if the private sector companies in the respective jurisdictions did a little business with one another. 

These trade affairs never seem to do much more than talk, of course and set up permanent offices employing public servants to help co-ordinate future meetings.  That’s what happened with the Tobin-era Irish junket-fest, revived by the Williams crew or the Team Atlantic missions to anywhere that has warmth and sun in the wintertime.  But the purpose of this discussion let’s run with the assumption used by governments, namely that these trade missions and junkets actually work.

Increasing Dependence on a Single Market

Politicians who come into office without any idea of what to do usually wind up following the flow.  This American trade idea is likely no exception. 

You see, the United States has been the province’s major foreign trading partner for decades.  In 1999, two thirds of all exports from Newfoundland and Labrador  went to the States. By 2006, that proportion had climbed to 75%.  Even in 2008 – the last year for which the provincial government provides statistics – 71% of exports from Newfoundland and Labrador went into the American market.

To put it another way, take a look at the export value compared to the province’s gross domestic product (GDP):  the  total value of goods and services produced in Newfoundland and Labrador. In 2008, about half the GDP went to the Untied States. The GDP in 2009 was 22 billion.  The drop was pretty much all due to the collapse of the American market.

Now that level of dependence is not as bad as Metalcraft's problem in 2007, but it certainly should have made someone within the provincial government sit up and take notice.  After all, the provincial government’s own statistics analysts produced the figures cited above.  The level of dependence on the American economy is not a state secret.

Rather than trying to increase trade with the United States, Newfoundland and Labrador would be strategically better advised to diversify its markets. But since 2003, the provincial government has been doing exactly the opposite. 

What’s more, the provincial government  - in an apparently capricious move -  specifically rejected getting involved with a major international trade initiative aimed at diversifying the markets for local goods and services. 

Sure Paul Oram took a jet to India in 2008, but the very next year, the provincial government rejected a major national effort designed to open the European union to free trade with Canada. A few million dollars worth of seal bits trumped what had managed to become, by 2008, close to a couple of billion dollars of trade into the European Union. The prospect of more trade with the Europeans opens opportunities for new business throughout the province not to mention offering the chance to resolve some long-standing trade issues in the fishery.

However, none of that seems to have had any impact on the group of politicians and bureaucrats determining the province’s economic policy.  So it is that the European opportunity was neglected, to put it mildly, while the American continues.

Markets?  We dun need no stinking markets?

Now this is not the first or only time such a situation has occurred since 2003.

The provincial government took a hand in smashing to bits the only internationally competitive fishing enterprise based in the province.  Fishery Products International continues as a brand.  The brand, along with the international marketing arm went to a Nova Scotia-based company.  Another section, a seafood marketing arm based in the United Kingdom also wound up on the block, snapped up just as quickly by someone else with far greater vision than the provincial government and the band that sliced the company to pieces.

Now it does not matter if the provincial government actively worked to destroy FPI or if it merely went along for the ride because it lacked a coherent fisheries policy of its own.  The end result is the same:  The parts of the company that could have helped to diversify markets for local seafood are gone to others.  The unprofitable and problematic bits – the processing bits – remain in the province and continue to be highly problematic  although they are now held by a smaller company with far less global clout.

The others are doing quite well for themselves.  John Risley, vilified by the Premier during the FPI debacle, personally runs a successful company that last year turned a profit of $25.8 million despite the downturn in the American market and the high Canadian dollar.  A key part of the success is the FPI stuff Risley bought with the same Premier’s agreement.

Oh to be in that room

There is no small joke in discovering that the Biloxi conference co-hosted by Danny Williams is sponsored,in part, by AbitibiBowater. Williams’ expropriation gambit of AbitibiBowater’s and other’s assets in 2008 has turned out to be a legal disaster for the provincial government and may well prove to be as big a financial mess too.

Irrespective of that, though, there is something fitting in having Williams hosting an event designed to encourage trade while it is sponsored by a company which is the poster-child for the Williams administration’s erratic, contradictory policies. 

It is one thing to sell products in another market.  Another key component of trade missions is attracting new investors.  What could more readily turn off investors than the spectacle of a provincial government seizing control of assets, revoking permits and unilaterally quashing legal action? 

Williams did not just lay waste to AbitibiBowater’s presence in the province with his December 2008 surprise.  The expropriation bill also seized assets belonging to two other companies:  the Italian multi-national ENEL and St. John’s-based Fortis.  There is still no sign of any settlement with any of the parties affected, including those like ENEL and Fortis which appear to have been collateral damage in whatever war lay at heart of the expropriation.

One step forward and two steps back

Two decades ago, the Government of Newfoundland and Labrador recognised both the problems faced in the province and the opportunities posed by changes in the global economy. The Strategic Economic Plan aimed to make fundamental changes in the economy, diversify industries and markets.  The plan was a step forward.

Two decades later, the province is two steps back.  The SEP and all the knowledge that lay behind it are tossed aside. 

As the old adage goes:  fail to plan.  Plan to fail. 

The results are there for all to see:  increasingly, the provincial labour force is dominated by people whose jobs depend on tax dollars, rather than on jobs that generate tax dollars.

 

The provincial government now accounts for almost 25% of the employed labour force in the province.  This is not just the result of the near collapse of the forest sector and the steady decline of the fishery:  public sector employment like public sector spending generally continues to grow apace. Curiously enough, the Williams administration started out with a policy of reducing the public service.

Since 2003, the only development projects that have taken place were all either begun before the current administration took power or build modestly on existing work.  Nothing new has turned up despite the creation of an entire department supposedly devoted to generating new economic development.

More of the provincial economy in 2010 depends on exports to the United States than a decade ago. About 71% of all foreign exports now head to the United States.

Oil generated one third of the provincial gross domestic product in 2009;  that’s about seven billion dollars in a $22 billion economy. Total provincial government spending for 2010 is about seven billion.  As industries like forestry and the fishery have withered or faltered, the provincial government has stepped in to take its place.

The provincial economy is increasingly driven by public sector spending which, itself cannot be sustained at current levels.

There are ways to correct the course the provincial government has currently set.

That is where this series will turn next.

-srbp-

The Fragile Economy: reductio ad argentum

Political parties that come into power without direction tend to fall back on a couple of crutches to help them get through.

One is inertia.  They just keep going with what happened before.  Sometimes they just take ideas pushed up by the bureaucracy but that is really just another form of carrying on with the set of assumptions everyone knows.

The collapse of health regions and education districts into just a handful is just such an idea.  Faced with an apparent financial problem – which the new Williams administration should have known all about before they got to office, by the way – the novice Premier took a couple of suggestions pushed forward by bureaucrats as a way of saving cash.

Poof:  four health regions and five education districts. The changes didn’t actually deal with the problem nor does it appear they were thought through. Yet they were quite accepted quite readily as the election commitment of growing our way out of economic tough times  - “Jobs, jobs, jobs” - was replaced by the staples of cuts, freezes and re-organization.

That’s not really all that surprising.  After all, this was an administration that had not even been able to figure out what its departments were going to be called.  That decision wouldn’t arrive for another month.

The noobs elected in October 2003 took five months to get enough material together to present to the House of Assembly.  But even then, the overwhelming majority of the bills were modest amendments to existing laws that had been in train before the election. 

Those that weren’t already planned by the old administration didn’t produce dramatic changes of direction for government. Amendments to the Elections Act, for example, mandated that a by-election had to be called within 60 days when a vacancy occurred.  The old version dated from the early 1990s and set the maximum at 90 days.

For a government that supposedly had a plan and was keen to get to work on its new agenda, there wasn’t much sign of that new agenda from the first session of the legislature.

Aside from a toothless lobbyist registry, the Transparency and Accountability Act was the only major new piece of government business. Duly passed after a cursory debate the government then didn’t bother to put the law into force until two years later.  Even then, the bill only took effect two afters later still, that is, four years after it was passed.

Another new bill, the Court Security Act, is still not in force and likely won’t be implemented.

It’s only when one goes back and looks at that first session in hindsight that one can see exactly how little new material the brand new government brought to its first legislative session.

Directionless governments also have difficulty making decisions.  Most governments find decisions difficult to make because they issues involved are enormous and the opportunity to make a tragic mistake is great. Contrary to what people may think politicians are sincere people trying to do what they think is best. But in a directionless administration, all those sincere people have to struggle to agree on what “best” actually means.

Now by directionless, we mean nothing more than a group of people who have not learned how to work together effectively as a team.  Lack of direction may also arise where political power generally or on a given issue is so diffuse that no one individual or group of individuals can get enough support among colleagues to move in a particular direction.

Directionless governments tend to decide in favour of the lowest common denominator.  On some issues the LCD is no decision.  But, more often than not, agreement is easiest to reach if it involves spending money.

Take a look at the current administration and you can quickly see the prominent role money plays.  In fact, money is the only real measure of anything.  news releases typically refer to how much money will be spent and how much has been spent.  When asked about how important a subject like the fishery is, a typical Williams administration reply will focus on how much money has been spent on fisheries-related issues.

A by-election is fought based on how much money the premier and his party delivered to the district.  Puzzled at a by-election loss, the Premier will note how much money the district received and then roll his eyes up dismissively at the rejection.

The final Hibernia South agreements were not good enough in themselves. Rather, the estimated valued of the deal had to be inflated by an entirely artificial means.

Everything - not just principle - converts to cash. Indeed, so pervasive is the reference to money that you likely took it for granted.  But from this point onward, you will likely have a hard time looking at any news story from the provincial government and not seeing the focus on, the near obsession with cash.

There are other examples of how the current administration lacks focus and direction.  Equalization, the delays and cost over-runs throughout government, the health care cuts that sparked last fall’s crisis,  the break-up of Fishery Products International:  all are signs of an administration which lacks a coherent view of the problems it faces and a cohesive organization that can tackle them successfully.

Knowing how the current administration has a problem finding its way is one thing.  The consequences for the province and its people are something else.

-srbp-

The Fragile Economy series:

• “Staying the course”
• Next –    “…and two steps back”.

15 ideas (and more) – Setting the Table

Our economic vision for Newfoundland and Labrador is that of an enterprising, educated, distinctive and prosperous people working together to create a competitive economy based on innovation, creativity, productivity and quality.

Strategic Economic Plan, 1992

Our social vision for Newfoundland and Labrador is of a sharing society which balances its economic and social interests, cares for its disadvantaged, nurtures its human and physical environment, celebrates its quality of life and traditional values of individual respect and community responsibility and provides opportunities for personal and collective achievement.

Strategic Social Plan Consultation Paper, 1995

 

Within a mere two decades, Newfoundland and Labrador transformed almost two centuries of economic backwardness into unprecedented growth.

And yet, as we enter the second decade of the 21st century, a number of factors, some identified in the early 1990s, threaten to rob Newfoundlanders and Labradorians of the bright future they worked to achieve through careful planning, steady work, and a steely determination to endure.

Public sector debt remains at record levels.  Rather than reduce debt, the current Conservative administration plans to increase the debt burden still further by building an economically unsound megaproject.  What’s more, the most recent economic forecast predicts that the current administration’s policies could triple the debt within a decade.  That is on top of the burden from the  Muskrat Falls megaproject.

Changes in the province’s population, forecast in the early 1990s, have started to create pressure for new government spending and more government spending.  Just paying the interest on the growing debt will rob money that could be helping to pay for those new services.

The highly competitive global economy that has emerged in the past 20 years, coupled with fall-out from the recent recession, will demand even greater inventiveness if businesses in Newfoundland and Labrador will meet the challenges these changes present. 

Yet, over the past decade government policy has fostered greater social and business dependence on government hand-outs.  The result is a fragile economy that will grow less robust and more susceptible to set-backs.

The answer to these challenges can be found in the principles that lay at the heart of the 1992 Strategic Economic Plan: 

• We must foster a change in people.  We must renew genuine pride, self-reliance and entrepreneurship. We must once more become outward-looking, enterprising, educated and innovative. 
• We must change government.   Our people do not need saviours or demigods.  They can run their own affairs.  We must introduce fundamental democratic reforms.  Decisions about education, health and economic development must be made closer to the people directly affected by them. The role of government is to create an environment in which the private sector can develop economically and environmentally sustainable  businesses.
• We must change relationships. We must replace the chaotic, secretive and highly centralised government of the past decade, with mature, professional and open government based on sound long-term planning and a genuine understanding of the province’s long-term interests.  Beyond that, we must forge new relationships among governments, business, labour, academia and community groups of the sort envisioned two decades ago. We must build a strong relationship between the federal and provincial governments in order to deliver government services as efficiently and effectively as possible while ensuring that the people who pay for those services can hold the right government to account for what they do.

The ideas that will follow in posts over the coming days and weeks are nothing more than the starting point for discussion.

Only through vigorous, free-wheeling public debate can we build a mutual understanding among all the people of the province on both the necessity of change and of the specific changes themselves.

Change is not a luxury.

Change is not merely possible.

Change is essential.

- srbp -

Next:  Building the Fishery of the Future

Unsound financial management – the Dunderdale acknowledgement #nlpoli

It’s not hard to find the toad of truth in the swamp otherwise known as the ruling Conservatives’ record on public spending since they took office in 2003.

You can find it because since 2009 they like to admit every now and then that their spending habits are “unsustainable."

As nottawa reminds everyone, Premier Kathy Dunderdale has now acknowledged that:

“[o]ur spending at the rate that we've been doing over the last eight years — and it has been very necessary for a number of very good reasons to do that — is not sustainable in the long run.” [CBC online story]

But when Mark claims that “[u]p to now, Tories (and others) have disagreed with that assessment” he is not exactly right.

In 2009, Paul Oram was the first Tory cabinet minister to acknowledge publicly that “unsustainable” thing.

As your humble e-scribbler noted at the time, those words must have received the blessing of the Premier’s Office since cabinet ministers under Danny Williams couldn’t break wind without permission from Hisself’s posse.

Fnance minister Tom Marshall.chimed in with an unsustainability admission.*

And then they just kept up the same old habits.

It’s not surprising therefore that the public sector unions just won’t react to Kathy Dunderdale’s comments that the unions must not expect big wage increases in the upcoming round of negotiations.  Local CBC has been pounding away for a couple of days trying to make a story out of this but so far they’ve come up with zip.

The unions know the sad Tory record of saying one thing and doing another.  They also know that the Tories are still in a pre-leadership phase.  Danny’s gone.  Kathy’s a fill-in. 

If they thought about it for a moment, they’d also know that the local economic boom the Tories like to praise themselves for is actually a function of public sector spending.

That’s right.

It isn’t oil.

It’s a massive increase in the number of public servants since 2003,  fantastic wage increases, and unprecedented increases in  public spending. Roads and buildings are just part of it.

That unsustainable public spending is what has been sustaining the provincial economy. Under the Tories, the provincial economy is considerably more fragile than it’s ever been before. 

Any effort by the Tories to get their spending under control – to get it to sustainable levels - will put a chill through the place.  That will inevitably lead to a chill in the local economy.  The chill won’t just hit St. John’s where most of the public servants and the construction industry lives.  The chill will be felt everywhere and that will put a chill on the Tories’ political standing.

All that is the answer to Doug Letto’s questions in his essay on the “massive obstacles” Kathy Dunderdale is facing:

Can she and the government say no? Consistently?

No.

And no.

And everyone knows it, including Kathy.

Muskrat Falls, incidentally, is nothing more than the best example of a party addicted to unsustainable public spending.  The project will increase the public debt to new record levels but that is irrelevant to the province’s Tories.  They want all those jobs to keep the economy humming.

You can easily find the toad of fiscal truth in the swamp of Tory financial mismanagement since 2003. The truth is – as Kathy admitted herself – their spending is unsustainable.

The part Kathy didn’t say is that she won’t be able to do anything but keep it up.

- srbp -

* Changed wording to clear up sentence meaning in the context of the post.  Original post had wording left over from earlier draft.

Government Spending and GDP #nlpoli

A couple of weeks ago, finance minister Ross Wiseman said that he can’t cut government spending because it is such an important part of the economy.

Wiseman said government spending amounted to about 30%  of the province’s gross domestic product.  He was absolutely right, if you measure the gross domestic product based on expenditures within the province. 

As regular readers of this corner know, provincial government spending has become an increasingly important part of the provincial economy under the Conservatives. This reverses a very clear trend that has been underway for some time.   When you look at the numbers, it’s pretty clear.

Some help for the St. John’s Board of Trade #nlpoli

…who have suddenly discovered that the provincial economy is in serious need of diversification: a 2010 series called the Fragile Economy.

• Staying the course (March 2010)
• Reductio ad argentum (April 2010)
• …and two steps back (April 2010)
• Now three steps back and loving it (April 2010)

If they really want to get a handle on economic diversification, BOT chair Steve Power and his colleagues could start by reading the 1992 Strategic Economic Plan.  What the Board of Trade has been slavishly been supporting since 2003 is diametrically opposite to the 1992 SEP and its call for diversification based on  – gasp! – entrepreneurship, competitiveness, and innovation.

Frankly, it’s been pretty bizarre since 2003 to have a bunch of business owners who endorsed excessive public sector spending and clammed up about entrepreneurship, competitiveness and other subversive ideas.  In November 2010, here’s what the chair at the time said:

Chairman of the Board of Trade, Derek Sullivan said government contracts give a competitive advantage for local businesses and “can be a very powerful and reliable revenue stream.”

-srbp-