25 March 2013

Oil Revenues, Surpluses, and Deficits #nlpoli

The Newfoundland and Labrador Federation of Labour hired the Canadian Centre for Policy Alternatives to issue a report on the upcoming provincial budget that basically says all the things that labour federation boss Lana Payne has been tweeting for weeks.

Here’s what the report’s author said in a news release from CCPA:

“The province’s economic fundamentals are strong. The task for the government is to ensure it doesn’t rock the boat and damage the province’s economy and social fabric with spending cuts.”

Things are looking pretty good, in other words.  The government has to be very careful because any big cuts would damage the economy.

As much as some people might think this is a challenge to the governing Conservatives, that’s not really the case. 

Take a look at what Wade Locke told the Telegram on March 13.  Locke is the expert hired by the provincial government to give it yet more of his advice on how to manage the province’s finances.

“There's problem you've got to deal with, but you have to deal with it in a planned, gradual way. Being too dramatic and trying to deal with it all in one year or two years is not an optimal strategy because it will have implications for the provincial economy."

Here’s what the CCPA report said about the province’s recent history:

At the same time, NL has a very recent history of being a less wealthy province and thus a legacy of underinvestment in social and physical infrastructure.

In the House of Assembly on March 13, finance minister Jerome Kennedy defended his government’s spending record:

…in 2003 we inherited a Province that was not only financially bankrupt, but there was an infrastructure deficit that was huge.

And just to really drive home the point, here’s what Locke said about the near-term plan he would recommended for the government:

“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."

Go slow.  Take it easy.  Things will right themselves couple of years and we can gently ease into some sort of magical alignment with the future.

Yeah, well, maybe not.

Take a look at the Budget Estimates from 2005 to 2012.  The following charts show the total amount spent each year for operations (called current account) and capital works.  Remember that the Estimates are reported on a cash basis.  This shows the actual cash in and cash out for the year. 

The Conservatives went back to cash Estimates in 2007 for some unexplained reason.  For 2005 and 2006, the numbers are taken from a page of the each set of Estimates that indicated the cash reconciliation with the accrual method of accounting used from 2003 to 2006.

The first chart shows exactly what is listed in the Estimates for revenue, shown in orange, and what the government spent in each year, shown in blue.

rev and exp as reported

Looks pretty good, doesn’t it?  Lots of surpluses, even if they are small.  One big surplus in the middle there in 2008.  The one big deficit there at the end is actually just the projected result from Budget 2012.  That changed by the fall and frankly we don’t know what the final results will be until Tuesday when Jerome Kennedy delivers the 2013 budget.

Now let’s look at the same spending, but on the revenue side, we’ll take out the oil money.  The spending number is still blue, but now the revenue number is shown in red.

We’ve taken out oil royalties because the money comes entirely from an asset that we have liquidated.  In other place, like say Norway, they salt away a huge chunk of that money and let it earn interest. 

You’ll realise pretty quickly that in Newfoundland and Labrador we’ve spent pretty well all of it.  The money is gone and its never coming back.non oil rev and exp

Spending has been higher than the non-oil government revenue in every year since 2005, with 2005 itself being essentially balanced. Note, though, that the recession really cut a big chunk out of the money coming from the non-oil economy.  The non-oil revenue over the past four years has all been on par with what it was before 2008.

But spending hasn’t been.  That has continued to climb based entirely on oil money flowing in.  If the spending was one-time spending, then it would match the one-time money.  When one goes, the other can go too.  No problem.

That’s not the case when you hire thousands of people and introduce a bunch of new spending programs based on one-time money.  If the money drops away in that case, as it has dramatically dropped this year apparently, then you have a major problem.

Over the next couple of days, SRBP will have a look at oil revenues and some of the thinking into what states should do with the revenue they get from non-renewable resources like petroleum and mining.  What this post does is give a sense of what role oil plays in current government spending.

In this last spending/revenue slide, let’s take a look at spending (blue) and revenue if you allowed for enough oil money to cover actual capital spending each year.  For 2012, we are playing with the original estimated spending.  The budget forecast $1.4 billion in capital spending for 2012.  Since the budgets in the time we are looking at never included more than $700 and a few odd millions in capital spending, we allowed about half the budgeted amount for 2012.  it might wind up being higher or lower on Tuesday but this table uses a figure consistent with the overall pattern.

rev net oil capex and exp

If you credit capital spending, the picture changes slightly from the non-oil one, but overall the pattern is the same:  a couple of modest deficits before 2008,  a couple of surpluses, and then from 2009 onward big deficits.

How big?

Well, if you add up all the oil revenues in these years, less capital spending,  you come up with about $9.9 billion.