27 March 2013

The Debt is Passed: Budget 2013 #nlpoli

[Note – see below]

The throne speech promised that the same Conservative financial management that produced the current financial mess would continue and they delivered in Tuesday’s budget.

The strategic problem remains unchanged

The Conservatives will continue to spend billions in one-time cash from oil and minerals.  That’s the structural deficit people have been talking about and the Conservatives have done nothing to change that.

Tuesday’s budget gave us the year-end cash figures for 2012 and the forecast for 2013.  Here’s the chart from Monday’s post on deficits and surpluses that shows spending and the non-oil revenue.  We’ve updated it to include the cash figures for 2012 (actual) and 2013 forecast from the 2013 Estimates.  Remember that the Estimates are presented on a cash basis.

2013 rev and net oil

This  chart shows spending in blue.  The orangey purple line represents non oil revenue plus a chunk of oil revenues equal to capital spending for the year.  Note that for 2013, we’ve taken half the planned capital spending of $1.2 billion. We’ll come back to that in a second.

What you will see is that for every year since 2008, the provincial government has boosted spending based solely on one-time revenue coming from oil royalties.  This is the strategic problem in current government policy and it is the fundamental “structural” problem in the annual budget.  .

Cash Income Down

You’ll notice that the strategic problem is actually forecast to be bigger this year than last year.  That’s because government is forecasting revenues will be $400 million less in 2013 than the year before on a cash basis.

Oil royalties are supposed to about where they were in 2012.  Other taxes are moderately increased. 

This is a bit curious.  In the budget speech, finance minister Jerome Kennedy said that we “we have had a substantial increase in revenues of nearly $700 million.”  The budget speech tables, though, show a forecast of revenue that is actually slightly less than the 2012 final figure. You can see the detail in Exhibit I of the budget speech tables.

Lest you think this is some kind of difference between accrual accounting (used for the budget speech) and cash accounting (used for the Estimates,  the cash budget shows the same drops. Mining income is forecast to  drop from $379 million in 2012 to $169 million in 2013. Ditto corporate income tax which is forecast to plunge in 2013 to $375 million from $775 million in 2012.

What you’ve got here is nothing more than a bogus comparison by the finance minister and his officials. The increases or decreases really should be compared to the previous performance, not  - as Kennedy has done – to a forecast deficit the details of which were never made public. The truth is that revenue is forecast to go down in  2013 while spending is forecast to increase stay the same, despite cuts. [See note below]

The total cash deficit is forecast to be about $1.0 billion, as it was last year.

Be careful, though.  For the past two years, the provincial Estimates have included what is starting to look like a lot of padding in capital accounts across government. That’s what happened in 2011 and right on cue, it is what happened in 2012. Part of the variance is caused by money allocated for Nalcor for Muskrat Falls that the company hasn’t drawn down but there appear to be other entries that are padded.

Total spending stays the same

On a cash basis, the 2013 budget calls for only about $100 million less spending in 2013 compared to actual spending in 2012. Actual spending in 2012 was about $6.845 billion.  Forecast spending for 2013 is $6.744 billion, if you allow only $600 million for capex.

Current account spending – operating costs – actually will go up this year, despite all the cuts and the increases to nuisance and sin taxes.  Admittedly, the forecast change is from $6.105 billion to $6.135 billion but it is still an increase. 

Power Grab

Perhaps the most important part of the 2013 budget actually has nothing to do with money, per se.  It’s about power and control. And it’s something SRBP discussed on March 6 and the news that the provincial government was taking money transferred to private, not-for-profits and keeping it to fund departmental operations..

As part of Budget 2013, the provincial government will abolish the province’s English-language school boards and create in their place a single administrative entity that will be controlled – de facto by the education department. 

While this is being sold as a way of saving money, the move in 2013 is the logical result of a planned started sometime around the last consolidation.  That’s when government collapsed the existing board system with locally- elected school boards and created four larger districts with neutered boards.  Since the French-language board is small, there’s no easy excuse for cost-saving.  The English language education program is where the money is, and hence where the power is. 

If current plans continue, we’ll see the same sort of concentration of power in other departments.  The review of the college system in the province – proposed to start in 2014 -  is likely to amalgamate the College of the North Atlantic under Memorial University. 


Note:  In the past 24 hours (Wednesday-Thursday),  further assessment of the budget caused your humble e-scribbler to revise this post based on an understanding that the budget calls for increased spending despite a financial crisis.

The chart above adjusts both spending and revenue net of oil in the chart to remove half the forecast capital works spending.  That is consistent with what has actually happened.  A revision to this post made briefly on Thursday morning showed a chart that increased spending to the forecast level of $7.3 billion.  A check with the 2012 budget showed that the actual final spending was lower than the forecast spending by the amount of capex not done.  For this post, therefore, the chart applies a consistent methodology.

A second change remains.  The budget calls for a spending increase over last year’s actual.  The revised version now reads as such.  At the same time the words “stays the same” from the original post are left there but struck through with a direction for readers to check this note.  The budget calls for spending to increase over last year’s actual.  It would stay the same if  - as this post allows – the final performance would be for only half the capital spending noted in the budget.

Fundamentally, the strategic problem remains the same:  the government is still spending one-time oil money on operations.  The budget calls for a billion cash deficit and a half billion dollar accrual deficit.  Despite all the claims,  the government is continuing to live beyond the public’s means at the same rate as recent budgets and in generally the same way.