30 March 2010

NL economy “fragile”: Williams’ finance minister

“When there is uncertainty, when the economy is fragile, government steps into the breach.”

That’s the way finance minister Tom Marshall explained the reason behind the Williams administration’s plan for three more years of deficit spending including a projected deficit in 2010 of nearly $1.0 billion on a cash basis.

Marshall made the remarks in an interview with CBC’s Debbie Cooper Monday evening.

In his budget speech Monday, Marshall forecast accrual deficits of between $156 and $194 million to follow the accrual deficit of $294 million in 2009.  Marshall gave no forecast of when he expected the provincial government to balance the books again or return to surplus.

In the past, Marshall has explicitly rejected the idea of balanced budget legislation.  Earlier in March, Danny Williams dismissed balanced budgets saying that delivering “balanced budgets is just achieving a number.”

During the interview Marshall referred to the deficit for the year just ended as being half a billion dollars,  after a string of surpluses which he said totalled almost four billion.

But that’s an odd mixture of numbers. Since 2007, the provincial government has kept two sets of books, delivering the finance minister’s budget speech on an accrual basis and delivering the Estimates on a cash basis. Marshall and one-time finance minister Jerome Kennedy typically have referred only to the accrual numbers.

They never mention the cash numbers since they show deficits in all but two years since 2003. And last year’s deficit of $494 million was on a cash basis.  That’s the half billion Marshall mentioned.

But on a cash basis, the Williams administration only produced a cash surplus  - the same figures Marshall used - in two years since taking office in 2003.  In every other year, the Williams administration had to borrow to make ends meet.

Marshall’s 2010 budget forecast that trend to continue.

clip_image004_thumb[4] The green lines in the chart represent deficits.  In Fiscal Year 2006, the shortfall was $707 million, followed by $88 million in 2007.  There was a cash surplus in 2008 of roughly $820 million.

Marshall delivered a $494 million deficit in 2009 and forecasts a cash shortfall of $949 billion in 2010.  It doesn’t take a rocket scientist to realise that if Marshall is only half right in his deficit forecasts for the next three years, the Williams administration will add $1.5 billion to the province’s debt load over the next three years.

Even the deficit forecast for 2010 of $959 million is based on oil averaging US$83 over the next 12 months.  If oil were to average US$70 a barrel -  as it did in 2009 -  the deficit would balloon by another $500 million.  In other words, oil royalties would be only $1.6 billion compared to the $2.1 billion forecast.

And if all other projections held, the 2010 deficit would be more like $1.4 billion in a single year rather than what Marshall forecast on Monday.

None of that includes any debt incurred by the province’s energy company to pay for construction costs on its share of oil projects or the Lower Churchill. Both would show up on the provincial government’s books since NALCOR energy and its subsidiaries are owned wholely by the provincial government. At the same time, the province’s oil and gas company isn’t required to pay any royalties to the provincial treasury like other oil companies.  Instead, NALCOR will pocket the cash, pay off debt or use it to fund other projects which also likely won’t generate any money for the provincial treasury.

The apparent surpluses Marshall claimed during his interview were actually paper transactions resulting from the accounting practice of distributing the one time advance cash transfer payment from Ottawa in 2005 over the fiscal years in which the money was actually earned.  In 2008, an apparent surplus of almost $2.5 billion on an accrual basis produced an actual cash surplus of only $820 million.

The one-time transfer was used to reduce unfunded pension liabilities.

No other money was received under the 2005 deal before it expired in 2009.  The provincial government will receive one last cash download as a result of the 2005 agreement but that amount is based on the 1985 Atlantic Accord.

Approximately $1.8 billion in temporary investments apparently held by the provincial government would not be enough to cover the likely cash deficits over the next three years, based on current budget projections. 

There is no explanation for Marshall’s claim during the CBC interview that the provincial government had the cash to cover the anticipated shortfalls.