25 November 2008

Three guys and a magic eight ball

The Premier's first scrum of the new House of Assembly session yielded a huge number of interesting points.  CBC has posted it for your viewing pleasure.

1. Back to the future.  There are echoes in this scrum of the infamous January 5 massacre in which the Premier unilaterally froze public sector wages in response to a largely overblown warning of imminent financial collapse. [Update:  "Premier vows public sector wage freeze". 05 January 2004.]

Most media outlets are going to focus on the possibility that government would abandoned its own wage hikes in the public sector if things got bad enough. CBC did already.  Ditto voice of the cabinet minister and NTV.

It's right there in front of your face and there is immediate news value in the conflict.  Remember what makes news?  Money, power and conflict for three and when you get into this sort of thing - a Premier warning public sector unions actively involved in collective bargaining that he might just yank back his own offer -  you bring together a nice package.  Hence this sort of quote is pure gold:

"You know if we get into several-hundred-million-dollar deficits, then that makes the whole question of collective bargaining a big issue," he said, answering reporters' questions after the first day of the fall session of the House of Assembly.

[Update:  This is not the first time the Premier has used a message about government finances to threaten unions.  He did it in late October with the nurses.  Meanwhile, go back and check the scrums and news reports when this massive wage hike was introduced or when the nurses asked for more cash.  How many times did the Premier and the finance minister talk about being able to handle the 20% wage hike they imposed?  Did they ever mention the possibility that they might not be able to manage it?]

2.  The Big Picture stuff is done.  That's almost a direct quote and no one should miss putting that fact together with the public sector bargaining threat noted above.  By Big Picture, the Premier clearly means revenue and spending projections for next year and looking out two to three years.  The only stuff left to do is the actual departmental allocations and the traveling farce called "consultations".

By Big Picture, you have to understand that all the numbers thrown around by the Premier aren't just ones he pulled out of his ear.  These are the numbers the provincial government is working with for its projections.

3.  What's the big thing about reading?  Danny Williams likes to mention that he is reading stuff, although he is never clear what he reads.  He said "books" in the scrum - economics books to be specific - and then switched to journal articles and magazines and anything else he could lay his hands on. 

Sarah Palin talked about reading too, at least until reporters started asking her what she read.  How long before someone actually asks the Prem for some specifics on what he reads?

4.  No coincidence at all.  Remember the comment here about the overwhelming similarity between Wade Locke comments and those of the Premier and his newly minted finance minister?  Apparently no coincidence at all since the Premier admitted that economists from the university are on the Hill consulting.

At some point, reporters will have to clarify Locke's relationship with the provincial government.

5.  "No one could foresee what was happening here."   No one foresaw the drop in oil prices according to the Premier. He is evidently not reading the right things

6.  PIRA.  That would be the PIRA Energy Group, a consulting firm to the international stars. Their prediction in July was that oil prices would drop, but remain above US$100 a barrel based on "strong medium-term oil market supply/demand fundamentals."

7.  Production.  Count how many times the Premier mentions oil production, the possibility of increased production over projections and the importance of oil production levels  - conservative estimates according to the Premier - to the government budget. 

We know the provincial government has built its entire financial plan on oil revenues.  It's a house of cards, as the current economic crisis shows.

The budget was based on anticipated oil production in 2008 of 120 million barrels. Statistics from the Canada-Newfoundland and Labrador Offshore Petroleum Board show that oil production this year has averaged 10.3 million barrels per month and is therefore on track to deliver total annual production in this fiscal year of 123.6 million barrels. 

The highest offshore oil production level was last year when it hit 134 million.  In order to get the higher production the Premier keeps talking about - and therefore equal last year's record  - there'd have to be about oil would have to average over 12 million barrels per month in the last six months of the year.

Next year, production is expected to fall by 15% and that would give 2009 annual production of about 105 million barrels.

Remember those numbers.  We'll use them again in a minute.

8.  There's a notional surplus... The provincial budget projection was for a $544 million surplus.  That's presumably on an accrual basis. The same figures turn up in the Dominion Bond Rating Service assessment. Here's the thing:  it includes $360 million in completely fictitious money from the 2005 federal transfer deal that has already been received and spent.

9.  and a cash deficit.  Every time someone says the province is on track to meet budget targets, people in the province should worry.  We've covered this dozens of times at Bond Papers because on a cash basis, budget targets means $794 million in new borrowing.

Based on the new numbers, we can revise our calculations from October slightly.

Over the first half of the year, let's assume oil averaged about $120 a barrel.  That's a figure the Premier has tossed out and it's a little higher than the $115 Wade Locke mentioned.  That gives about $1.26 billion in oil royalties in the first half of the year.

In the second half of the year,  we can safely assume oil at an average of CDN$72 (US$60 + 20% dollar premium) and CDN$87 (US$72.5 + 20% dollar premium) for the purposes of our calculations.  We can also anticipate that other revenue sources (taxation etc) are not going to outperform original projections by any great amount. If they were looking that good, the Premier wouldn't hesitate to use them to bolster public confidence.

On that basis, the provincial budget would come up - respectively  - $478 million and $320 million short.  Compared to the projected $794 million shortfall that's not a big amount.  Spending restraint and a little extra cash here and there could balance the books on a cash basis. 

Don't count on that, at least if the last two fiscal years are anything to go by. 

10.   Then there's next year.  If we hold the budget exactly as it is this year  - anticipated spending and revenue - and vary only oil, we can get a sense of how big a financial problem the provincial government has helped create.

Oil production is expected to come in at about 105 million barrels in 2009.  Peg oil pessimistically at CDN$72 (US$60 + 20% premium) a barrel and you get oil revenues about $500 million less than this year's estimate.

That projected $794 million deficit (cash basis) this year becomes $1.294 billion in the red next year.   Unlike previous years where the trend was positive and the budget figures were low-balled, odds are much higher that the low-balls turn out to be dead-on if not downright pollyannaish optimistic.

If AbitibiBowater closes its mill in Grand Falls-Windsor, and mineral prices fall off, that deficit number would get bigger not smaller. As well, the prospect that Rio Tinto might adjust its capital expenditure plans next year could reduce some anticipated activity in Labrador west.  All of that is just a local manifestation of the recession expected in the United States and Canada, our major trading partners.

Bottom line:  we aren't protected by some magic bubble. These are rough calculations, to be sure and the figures aren't readily available to allow a more accurate and detailed assessment.  At the same time, the people who do have that information aren't sharing the accurate assessments.  The Premier's scrum on Tuesday covered such wide territory that one could easily imagine the finance department is relying on three guys and a magic eight ball for its planning.

Thankfully that isn't the case, at least based on the well-earned reputation of the finance department officials for deadly accurate forecasting and sound budget management. That's pretty close to what PriceWaterHouseCoopers said in their financial assessment in late 2003.  Then again that was before the current crowd took over. Things haven't been quite as accurate or as clear since then.

Let's just pray that the future as suggested by the calculations here doesn't turn out to be as bad as it looks.  If the current political crowd took credit for the boom delivered by things beyond their control - like oil prices - they can hardly expect people to think that a major fiscal problem in government isn't also theirs to own.