If Loyola Sullivan's worst case scenario comes true, Danny Williams will increase the province's accrual debt by an amount that is 76% of the total direct debt since Confederation.
Loyola Sullivan never flings words around carelessly, especially when it comes to numbers. He has a love of numbers and decimals and fractions that even a mathematician or account would find perverse. So if Loyola actually told CBC Radio on Friday that the accrual debt could hit $17.0 billion then $17.0 billion is well within the range of possibilities.
Let's take another look at Loyola Sullivan's deficit and debt projections and put it in perspective.
He told CBC Radio that "We're going to have significantly more [debt] over the next number of years," he says.
"We're going to have [a] $14-, $15-, $16-, maybe $17-billion debt before we stop this. So, it's a huge problem. Our problem is still growing." That is a direct quote.
If government was able to reduce the accrual deficit from its current level of about $500 million down to zero (a completely balanced budget) in the next four years, the provincial government would add $2.0 billion to the debt. The total debt at the end would be around $14.0 billion, up from the current level of near $12.0 billion.
(Deficit is how much more we spend than we take in during any given year; debt is the accumulation of all the overspending and any other long term borrowing. Direct debt is what the government owes directly. Accrual debt is the total of everything owed by government and its agencies and any loan guarantees and other liabilities backed by the Crown.)
In order to hit that $17.0 billion figure we would have to increase the debt by $5.0 billion. In other words, we would have to incur annual deficits averaging $500 million for another decade.
Observation 1: In order to hit that number for the debt, it would be 2014 at the earliest before the provincial budget would be balanced.
The Commitments:
A. The Budget. In last year's budget, Loyola Sullivan was careful to commit to balancing the books on a cash basis only by 2007-08. He said that "[i]n March 2007, this government will present the people of this province with a budget that is balanced on a cash basis and that will be sustainable into the future."
B. The Blue Book. Loyola Sullivan made reference to the Blue Book commitments in that speech. Specifically, the commitment was to:
- Eliminate the total capital and current account deficit by 2008;
- [Achieve] a net debt to GDP ratio of 40% or less by 2008; and ,
- [Make] [a]nnual payments to the public sector pension funds that will achieve real year-over-year reductions in the unfunded liability of public sector pension plans.
PriceWaterHouse Coopers comments: The Gourley report made the claim that the province could not balance its current and capital account by the same period. These are not exactly the same thing. "Cash" is sometimes used interchangeably with "current" meaning the money spent for salaries and operations.
On that basis the budget is already balanced and should remain balanced if not in surplus for the next five to eight years. As PriceWaterHouseCoopers reports (p. 34):
"These projections show that even with an assumed level of restraint on expenditure growth and growth in oil related revenues from a forecast $160.1 million for 2003-04 to $491.9 million in 2007-08, it will not be possible to eliminate the Province’s cash or consolidated accrual deficits within the next four years."
Assessment 1: There are contradictions between the Blue Book and current government commitments.
The current account has been balanced already consistent with Blue Book and the last budget.
However, the budget speech only committed clearly to balancing current account. There is no commitment to balancing the capital account nor is there a clear commitment to carrying through on the Blue Book promise of tackling the unfunded pension liabilities.
Mr. Sullivan's comments to CBC suggest yet another set of fiscal commitments that do not resemble those made previously except in broad outline.
Based on Mr. Sullivan's comments, government does not intend to reduce the unfunded pension liability in the short- to medium- term. It will also not achieve its commitment to balance the current and capital accounts before the next election. In fact, government may take up to a decade to achieve a balanced budget despite a commitment to attain current and capital balance within four years and achieve "real" reductions in the accrual debt and deficit.
Observation 2: In 2014, there will be less revenue life left in the offshore than we have now. That means the province will balance the books and have all the debt servicing costs associated with that at the very point when provincial government offshore revenues will start to decline.
Go back and have a look at the offshore revenue projections Wade Locke made in his public presentation in February. Locke projected that in 2014, direct offshore revenue would be slightly more than $200 million and would decline annually until 2025. Compare that to 2007/08 when projections have oil revenue being between $600 million and $1.1 billion, depending on the price of oil per barrel.
Observation 3: The current provincial government direct debt is approximately $6.5 billion according to statements from the provincial department of Finance.
In Mr. Sullivan's' worst case scenario (accrual debt = $17.0 billion by 2014), the provincial government debt during the Williams administration would grow by an amount equal to 76% of the accumulated direct debt from 1949 to 2004.
I am still sitting here with mouth agape at the prospect that the provincial government might actually be that far away from its commitments last year.
Maybe Loyola didn't mean it.
But did he not mean what he said last Friday or what he said last year?
