22 March 2013

House of Cards (Part A) #nlpoli


This is the third in a four part series on the current financial crisis the provincial government is facing.  The first instalment – “The origins of rentierism in Newfoundland and Labrador” – appeared on Tuesday and the second – “Other People’s Money”  - appeared on Wednesday.  The third instalment – “Rentierism at the national and sub-national level” -  appeared on Thursday.


Finance minister Jerome Kennedy told the Telegram’s James McLeod on Wednesday that the provincial government had a structural deficit problem.

His proof was that government spent 60% or so of its total outlay each year on the social sector.  That includes health, social services, justice, and education.  If that’s what Jerome is worried about then he and his cabinet colleagues should know that in 2005, they spent 67% of their budget on the social sector.  In 2003,  the last year the Liberals ran the place, they spent about 64% of the budget on the social sector.

Before he goes all Grim Reaper, Jerome should know spending that kind of percentage on the social sector isn’t unusual for governments across Canada.  That’s been pretty much the norm since the late 1960s when governments introduce publicly-funded health care. In Ontario in 2012, for example, all but about $30 billion of the government’s $126 billion budget went to social program spending.

That doesn’t mean the provincial government doesn’t have a huge financial problem. They do. It just means that Jerome is looking in the wrong place to find a sign of it.

If Jerome wants to understand why he has a huge financial problem, he needs to understand what the problem is.  Spending 60% of social programs isn’t it.  Here are some of the obvious indicators of the government’s financial problems

Too Much 

One problem is that the massive increases in spending in the last seven years come almost entirely from a revenue source that we know as a matter of fact just won’t last and can’t last at the current high levels.  That’s why all sorts of people including the current Premier have been admitting since 2009 that government spending is unsustainable.  That words means you can’t keep it going.

This is one of the reasons why both the government policy and the position taken by the labour federation and the recent Canadian Centre for Policy Alternatives’ commentary are just moronic.  The government has made long-term spending commitments – more staff, higher wages and bigger program spending – that it just won’t have the money to pay for, barring the appearance of some pixie dust or other nonexistent magic.

Too fast

Another problem has been the rate of change.  One problem is the rate of change.  In the 15 years from 1995 to 2010, health spending went from about 26% of the budget to almost 37%.  Ten percentage points doesn’t look bad except that it represents a 40% growth. In truth most of that relative growth has come in – you guessed it – the past seven years.  The finance minister knows all this.  He keeps alternately crowing about it and whining about it. 

The 1995 Strategic Social Plan was based, in part, on an understanding that demographic would increase costs for social programs in the future.  Government’s plan, subsequently abandoned, was to control the rate of growth by shifting spending from one area to another as demand shifted.   What government did after 2005 was just spend more.



Even if all that weren’t true, the provincial government spends money ineffectively.

Chronic, massive cost over-runs do nothing but add costs that drive up spending. 

And that’s on top of spending more per person in the province to deliver government services than just about the federal or any provincial or territorial government in the country.

That’s not just because it actually costs more to do things here.  Anyone who claims that is just dead wrong.  Government wages are the largest expense on the government books.  Government wages are not the highest in the country.  Indeed, historically, they have been among the lowest.  Yet, historically, the provincial government spends more per resident.  That’s a sign they are not spending effectively.

Let’s not forget the huge turn-over in the senior levels of the public service over the past four years or so.  That just breeds inefficiency and ineffectiveness, which in turn just drives up costs as well.

Paying More and More Interest on the Growing Debt

Aside from spending too much, too fast, ineffectively, you can look at another structural problem with the government’s budget:  debt servicing.  That is just the amount needed to pay the interest on the public debt each year.  It’s about seven percent of Ontario’s annual budget.  In his most recent report, the Auditor General noted that provincial debt servicing costs have risen since 2009 to slightly more than nine percent.  Cutting that to the national average, said the Auditor General, would save the provincial taxpayers about $100 million a year.

Debt servicing is one of those fixed costs that you just have to bear every year.  Getting rid of debt is a good thing because it frees up cash to spend on other things or simply not spend at all.  Jerome and his colleagues don’t see that, of course, because they continue to spread the illusion that the public debt is lower than it actually is.  Jerome, his colleagues in cabinet and the folks over at the labour unions along with their friends pretend the public debt is less than eight billion.  It’s actually closer to $13 billion.

People who support Muskrat Falls  - like Jerome Kennedy - claim that they can borrow the billions to build it and the costs won;t show up on the provincial budget. They are wrong. We will have to pay the interest on the loans every year.  Debt servicing costs will go up, not down as the Auditor General recommended.

The Growing Debt

Then there’s the total public debt itself.

Only two government budgets from 1949 to 2003 delivered surpluses.  Every other one called for and delivered a deficit.

Every budget from 2003 to the latest one planned for a deficit.  Indeed, former finance minister Loyola Sullivan said in 2005 he expected to see deficits on the order of $500 million a year for the foreseeable future.

The Conservatives’ 2012 budget called for a cash deficit of around a billion dollars.  That’s what they planned for.  What actually happened was apparently worse.  That wasn’t because they misjudged the price of oil.  As David Cochrane has noted,  cabinet consciously decided to run a massive cash deficit.

That’s the root of the government’s structural deficit:  cabinet keeps deciding to spend more than the government can afford.

They do it for the reasons in Part B.


The Series