13 March 2013

Land of Confusion meets World of Hurt #nlpoli

From Tuesday’s Hansard comes this chilling reminder that even the Premier has no idea what is going on with the province’s finances.
Mr. Speaker, I again have to implore the members opposite to stop pretending that you do not understand the fiscal structure of the Province. The $600 million that was earmarked in the Department of Natural Resources was not contained in the current budget, Mr. Speaker. That was contained in investment. There is a difference between a capital budget, the investment budget, and the current budget. 
Muskrat Falls has nothing to do with the deficit we are experiencing this year…
Let’s break it down.
Let’s start with the first sentence.

Not a math problem, but a basic English problem.

Kathy Dunderdale asks Dwight Ball to stop pretending that he doesn’t know something.  The double negative turns into a positive:  she is saying he does know how things work.

The problem for Dunderdale is that she didn't accuse him of playing dumb.  What she was trying to do is say he is dumb.

But she frigs it up.

So right off the bat she can’t even get her arrogant personal dig right.

Not a good start.

Then she talks about the money for Nalcor.  Not in something she calls the “current budget”, apparently.  Then she talks about three different budgets: current, capital, and something called “investment”.


There is no “investment” budget.

There is a current account or current budget that covers the day-to-day cash transactions of government.  And there is the capital account which is all the purchases of substantive items like buildings, roads, repairs, computer equipment and the like.

Scour the annual budget documents all you want.  There is no “investment” budget.

In the 2012 Estimates you will find a record of the project cash transaction of government in both the current or operating account and the capital account.  Both are clearly labelled.

Look under “Natural resources” and on page 12-19 you will find the $664 million everyone is talking about.  Here is a picture of the page.  Note the three columns.  The one in black is the amount the department proposes to spend in the year.  The middle column is the amount actually spent at the end of the year (note that it is blank).  The right hand column is the amounted approved in the previous budget.


The money is in the capital account because it is to help buy a big capital item.

The magnitude of Kathy Dunderdale’s cock-up here is all the greater since this money is in the department she used to run.  if she did not understand what is going on in her own department…well…  you get the idea.

Capital account.

Not investment account.

There is no such thing as an investment account.

The money transferred to Nalcor shows up right here because the government wants to do something with public money. In order to spend public money, they need approval from the House, which is supposed to keep an eye on things on our behalf. Given that awesome responsibility of the elected delegates of the people, any elected member of  the House who approved any cuts to spending on oversight in something like the public accounts committee – for instance – is an irresponsible fool.  Any opposition member who went along with PAC cuts is incompetent to boot.

But that’s another story.

All the cash in the budget – current and capital – that is marked for spending goes to make up a deficit, if the government plans to spend more than it takes in.  You can’t rightfully single out one dollar from another and say it does or does not add to the budget deficit.

Bottom line:  both the Premier and the Leader of the Opposition were lost in a land of confusion over this money for Nalcor.  Let’s hope the rest of us don’t wind up in a world of hurt as a result.


Update:  We've edited this for content and layout. Some of the edits picked up spelling mistakes, incorrect verb tenses,  and missing words.  There are some extra sentences to clarify some points without changing the original meaning. We've also added the following note.


This claim  - spending on Muskrat Falls has no impact on anything - continues to be a major government talking point and it is an issue that continues to befuddle lots of people.

The government talking point relies on their plan to book the final asset at Muskrat Falls as an asset that cancels out anything they spent on it in the first place.  If the government borrows $3.0 billion to fund the "equity" bit of the project, then sometime down the road, they will list an asset of a piece of Muskrat Falls' total value that is $3.0 billion.  For the purposes of figuring out the net debt (assets minus liabilities), the debt from borrowing the $3.0 billion will be cancelled out by the asset value.  


No apparent impact.

There's nothing wrong with it.  Accountants have done it for years.  Like so much of this scheme it is built not on the basis of sound policy or good engineering but on the creative accounting prowess of the guy who runs Nalcor.

Two things follow.

First,  their accountants will have to tell them when they can book the asset.  The question will be whether they can book an asset before it is completed.  Is an asset an asset when it isn't finished?  Maybe, but the value might wind up being considerably less than the amount spent.  

Right now, for example, there's been lots of spending on planning.  The only tangible assets are the land at Muskrat Falls.  The land value on the market might be a lot less than what they've spent.

Second, there is a financial impact on the annual provincial budget.  The annual spending Muskrat falls by the provincial government shows up on the cash transaction.  if the government has the cash and spends it - hands it to Nalcor -  they have to show the spending.  All the spending goes toward figuring out if there is a deficit or a surplus on a cash basis.  If they plan to spend more than they take in, government has to borrow, either from the bank or from the public cash reserves.  That last bit is how they plan to cover the deficit of $430 million from last year and the projected roughly $550 million one from 2013. It's still borrowing.

As those cash assets deplete with all that borrowing, by the way, the net debt will change as the assets go down.  

So yeah,  government spending - no matter what it is for - has a very real budget impact of government spending. 

Anyone who says otherwise is wrong. 

In this episode in the House, Kathy Dunderdale was wrong on something she should understand intimately, but obviously doesn't.