2. Missing revenue numbers: Interestingly the provincial government only mentioned three specific revenue sources which are performing above budget estimates from last spring. Unmentioned was revenue from mineral revenues other than oil. Last year it was big enough to warrant a mention. This year: zip. Either mineral revenues are on par or down or the government is saving that for the spring to offset some bad news.
3. The political value of lowballing: Underestimating revenues and overestimating costs is an old trick to make your budget performance look better than it really is. This year – for the first time in three years – the provincial government’s practice of lowballing oil revenues didn’t really work out as planned.
In prior years they could forecast deficit spending and be reasonably assured oil would perform beyond the expectations. At the end of the year planned borrowing was replaced with cash spending. That’s how deficits never really appeared. It’s also how the Premier could keep claiming that surpluses were being directed to debt reduction and that – as this update claims – there is a magical plan at work which delivers even in relatively bad times. The faithful sop it up They even go so far as to claim the Premier can’t be blamed for the downturn even though they give him all the credit for the cash rolling in when it rolled in.
This update gives an excellent example of how to inflate performance by lowballing. There’s $70 million missing from the spring budget projection for oil royalties.
Okay. He can’t. But he also can’t claim the credit for the great times in the past couple of years since he didn’t deliver those either. The faithful can be spotted by the purple freshie stains on the corners of their mouths.
4. The extras cash revenues (corrected): Note that the budget update gives the budget estimate for oil royalties $70 million below the actual number from the Estimates.
Forecast | Revised forecast | Difference | |
Oil Royalties | $1.789 billion | $2.202 billion | $413 million |
| Personal income tax | $674.8 million | $831.8 million | $157 million |
| Sales tax | $631.589 million | $664.589 million | $33 million |
Total variance | $603 million |
5. Surplus or deficit? This all goes back to an issue raised here last September. Given that the accrual surplus is now revised to be $722 million higher than forecast, there are a few bucks missing from the update. Even at $722 million in additional revenue, the budget would still be short on a cash basis by $72 million. Given recent practices, and given that this year there are no anticipated savings through spending cuts, the cash deficit could easily run to upwards of $200 million by the year end.
6. Prophetic words from last June:
In order to produce a surplus of the size predicted - but predicted only in political statements - oil prices would have to continue at double the figure of $87 a barrel used to come up with the budget. So far, it looks pretty good for oil to be somewhere over $130 on through the end of this year, but you never know what will happen with oil prices, especially after the American elections in November and the new president is sworn in late in January 2009.
Okay, so at the time, it looked like oil was going to stay high. And in making the comments, your humble e-scribbler was also pointing to the difference between an accrual surplus – including cash that really isn’t there – and the cash situation which might under certain circumstances require new public debt to make things balance.
The key point, though, is that you never know with oil prices. Shortly after that post, oil peaked at $147; incidentally that’s not $145 or $150 as reported in a couple of spots in the news release and update document issued by the provincial finance minister today. As it turned out, oil prices started falling in late summer and with the credit crunch, the drop accelerated. In the end the provincial government can report an accrual surplus that looks amazing but on a cash basis, they’ll likely wind up having to borrow cash to settle all the accounts.
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