05 April 2013

Political Will and Public Policy #nlpoli

The SIDI simulation of government spending that we’ve run this past week might not be everyone’s cup of tea, but these sort of thought exercises are always useful.

The most striking thing is the amount of money from oil and mining that the provincial government has spent in the past seven years:  $15.6 billion.  That’s enough to wipe out the entire public debt plus the unfunded pension liability and have a couple of billion left over for an unprecedented capital works program. 

It’s a staggering amount of money and the only thing more amazing than how much money there was is how easy it was to do something far more productive than just spending all the money, as the current provincial government has done.

The SIDI simulation included:

  • a steady, sustainable increase in spending each year,
  • an unprecedented, sustainable capital works program,
  • a $3.675 billion real decrease in public debt,
  • the prospect of a complete elimination of public debt within a decade, and,
  • an income fund that would continue to grow with further oil money and generate new income for the provincial government for as long as the fund existed.

The only thing needed to make the simulation a reality was a political desire to do it.  Had the provincial government done any one of the elements of the SIDI approach, then the provincial government could have either avoided the current crisis altogether or significantly altered the profile of the crisis and the prospects for coping with it.

The fact remains that the provincial cabinet expressly rejected the basic elements of the SIDI approach.  They dismissed balanced budgets flatly.  They dismissed investment funds or anything of the sort. The only thing they endorsed was spending aimed at boosting their standing in public opinion polls and the single-minded pursuit of the Lower Churchill.

They have never waivered in their commitment to overspending or the Lower Churchill, as Wade Locke’s March 25 memo shows.  The government will continue to spend more than the province can afford.  They will devote any surpluses that result from high oil prices and production to Muskrat Falls.

With that in kind, it is difficult to look at the SIDI simulation and not be floored by the dramatic fall in government revenues from non-oil sources between 2008 and 2009.  Indeed, except for the one-time spike in 2008, provincial government revenue from sources other than oil and mining has remained steady for most of the past decade.

What;’s so striking about the 2009 drop, though is the fact that it coincides with provincial government’s acknowledgement that fall that their spending was unsustainable.  Paul Oram said it first as he quit politics suddenly and unexpectedly.  Then-finance minister Tom Marshall agreed as did Danny Williams. Later, Williams’  hand-picked successor agreed that government spending was unsustainable.

The SIDI simulation  and the ease with which cabinet ministers admitted to financial problems makes you wonder is what sort of analysis cabinet had in 2008 and 2009.  They knew and yet they have maintained that unsustainable spending ever since. 

It makes you wonder because the persistent low revenues other than oil and mining suggests either the economy is sluggish, the government taxation system isn’t working as efficiently as it might, or some combination of the two.  Certainly there is good reason to believe the economy is increasingly fragile, as SRBP has been arguing for some time.  Tom Marshall said as much in 2010.

To deal with the current crisis, the government ought to be looking at both those elements, namely economic development and taxation.  The Conservatives have talked a bit about economic development and the need for diversification but clearly they have no idea what to do. 

As a last point today, though, let us consider the refusal by government to consider taxation reform.  Just as the Conservatives have rejected any alternative policies to the failed ones they continue to follow, Wade Locke – their favourite economist – explicitly rejected in his March 25 memorandum any talk of taxation reform.  He had a string of flimsy excuses against change even though the evidence in front of us is such that we cannot afford to reject any ideas that might potentially bring new money or stimulate the economy.

His one suggestion on taxation - a two percent hike in the harmonized sales tax – is striking since it shows no sign of imagination whatsoever and the income it would generate is trivial compared to the government’s financial problem.  Consider as an alternative view, a paper by economist Jack Mintz in 2012.  Mintz argues that the existing royalty regime discourages investment and proposes an alternative that might, in the end, make more money. The thought is worth considering even if the result is a policy that government doesn’t follow for good reason.

By contrast, Locke’s suggestion for the HST increase is the same sort of policy as the Muskrat Falls tax he has already endorsed.  Locke’s tax plans – HST and Muskrat Falls - place a disproportionate financial burden on taxpayers, the majority of whom we know earn less than $35,000 a year.  Those same taxpayers derive no benefit from either.  With the HST, the taxpayers pay for both and still get an enormous public debt made larger by Muskrat Falls.  The principal beneficiary of the Locke – Conservative policies are either the companies that will get discount electricity in Labrador or Emera, that will get free electricity in Nova Scotia.

Locke and the Conservatives repeatedly argue for more of the same when “the same” is clearly not working.   That’s as fundamentally nonsensical as Locke telling politicians who have demonstrated they cannot restrain their spending that running deficits is okay since it can be averaged out with future surpluses.  In practice, such advice tells politicians to borrow when they don’t have money and spend excessively when they do. Anyone with access to PowerPoint can work up a set of slides to rationalise anything.  That doesn’t mean the rationales are worth much of anything.

By contrast,  thought exercises like the SIDI series, can point to new ideas when new ideas are needed and in short supply.


Next week: economic development options.