18 March 2013

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.

Show us the money

They don’t just love to spend taxpayers’ money. They like to brag about how much they spend. Hisself did it in the interview about the reform-based Conservative Party. And here’s finance minister Jerome Kennedy in the  House of Assembly last week:

What we have done over the last number of years, Mr. Speaker, is we have increased – more than doubled – our heath spending, increased our education spending by 70 per cent, and increased our infrastructure spending by more than 200 per cent.

Last spring, his predecessor delivered a budget speech full of boasting about how much money the government spent:

This year, we will invest more than 40% of total expenditures – around $3 billion – in health care and continue to work with our Regional Health Authorities to ensure every dollar invested delivers results for Newfoundland and Labrador families.

Kennedy blamed all that spending on the Liberals who, to quote health minister Susan Sullivan, “did nothing” while they were in power.

Doing Some Things but not Other Things

Despite all that spending, though, it seems that the Conservatives still hard problems spending money on some things.

In 2008, the people of the province were surprised to find out that the Conservatives had been sitting on a report for three years. They weren’t supposed to find out about it.  Then-health minister Ross Wiseman accidentally mentioned it one day to a bunch of reporters.

The report described the state of hospitals and other health facilities in the metro St. John’s region.  “The assessments,”  SRBP reported in 2008, “[were] completed in 2005 [and] showed that four St. John's area health centres required $134 million in required repairs. Over half that amount - $70 million - was classified as currently or potentially critical.”

In each of the three budgets after they got that report, the cabinet decided to spend about $12 million on maintenance for those facilities.   The year Wiseman shagged up and mentioned the report, cabinet was considering increasing spending on maintenance for those hospitals and seniors homes to $14 million.  After Wiseman outed them, the Tories promised to spend something like $20 million.

That’s still a lot less than the report recommended.  And it is pretty cheesy-looking given that in 2008, the Conservatives boosted overall spending in the budget by about 10% overall.  That’s five times the rate of inflation, incidentally.

 Structural versus Cyclical

For all the spending they’ve done, the Conservatives have never explained why they didn’t include the renovations in their plans for three years. There’s also no indication how much of the reported work ever got done.

What we do know is that the Conservatives did spent a lot of money after 2005. While the Conservatives have slimmed down the size of the annual spending increases, they have managed to get into a situation where they are spending 270% more on health care than in 2003.  They increased spending so high that the projected deficits from 2012 to 2014 could be as much as $4.0 billion  - by government’s own estimates – if they did nothing at all.

To put it in perspective, that’s a little less than a quarter of the current total provincial government liabilities. Put another way, if they had to borrow to make up that shortfall, the gross public debt would hit about $16 billion, an increase of 25%. 

Economist Wade Locke told the Telegram on March 13 that this is a “structural deficit”. What that means in plain English is that the entire set of government spending commitments would produce a deficit annually no matter what the economy did.

In order to fix a structural deficit, cabinet would have to do some surgery.  They’d have to change how much money government was spending every year.  Layoffs would be pretty much guaranteed, as would be cuts to spending not just for a year or two but permanently. Cabinet would also have to decide what government just wasn’t going to do any more.

They’d also have to take a look at how the government was doing things.  To get an idea of what we are talking about here, look back to the 1990s.  A significant part of the provincial debt was in foreign currency.  Every year the government paid out cash not only to cover the interest charges but also to cover the changes in the value of the Canadian dollar from year to year. To fix the problem, cabinet decided to convert foreign currency debt to Canadian currency debt.  That solved a major problem and, as interest rates fell, it allowed government to gain a bonus drop in annual debt servicing costs.  Direct public debt actually declined in the years before 2003.

That’s the sort of thing you do with a structural deficit.  Wade Locke’s advice to government doesn’t look like that, though:

"Over a 10-year period, we should be running balanced budgets on average," he [told the Telegram] . "There's going to be some of those years, like the next couple of years, we're going to be running deficits. After that, because of the nature of the oil revenues that are here, we're going to be running surpluses, and if we don't do something, we'll go back into deficit again."

That’s what you do if you have a cyclical deficit or one caused by a temporary downturn in the economy. It’s also a sort of Keynesian approach that uses government spending to level out the normal ups and downs of the economy. In boom times, government can increase taxes and cut spending to moderate the private sector economy.  In recessions, government can boost spending until the private sector recovers.

That isn’t what happened in Newfoundland and Labrador, though.  The provincial government boosted spending before the recession and then continued to boost spending once the recession hit in 2008. 

And that sort of counter-cyclical government policy isn’t what Locke talked to the Telegram about. Cabinet needed to very careful, Locke warned, because “if politicians go about [managing the deficit] the wrong way, it could do serious damage to the province's economy.” 

Fragile Economy.  Fragile Politics.

Locke is right since the provincial government spending is one of the major economic drivers in the economy these days. Almost half government’s annual income comes from oil and mineral royalties and taxes derived indirectly from those industries.  All that money fuelled the government spending, hiring, and pay raises which have, in turn, fuelled the local economic boom. Cut that spending and the boom disappears.  You could do serious damage to the provincial economy, to use Locke’s words. 

That’s what SRBP has called the fragile economy.

While Locke is worried about the economic impact of government cuts, current government policy -  the one that got us into the current squeeze -  carries with it some other political implications.  According to a recent assessment by the C.D. Howe Institute, for example, the current government approach to health care funding coupled with the impact of demographics would mean the government would need assets totalling about $80 billion to cover health care spending needs out to 2062.  As the Institute notes, government’s implicit policy is to enhance health care, not cut it or change how it is delivered.  As a result, it creates “an implicit liability on the government’s balance sheet, because meeting the commitment will require the government to tax a higher share of provincial income in the future.”

The government’s problem is structural. 

Their consultant seems to be offering them a policy for a cyclical deficit. 

As such, no matter what they do – take his advice or reject it – they will wind up in a political and potentially and economic mess, if not right away, then in another short while.

It hardly seems like much of a choice at all..

Mr. Hobson would be proud.