Lots of people are wondering what the changes to the price of oil will do to the provincial budget.
It will have an impact: no doubt about that.
But trying to figure out what the provincial budget numbers will look like is a wee bit more complicated.
For starters, we have to make sure everyone is using the same budget figures when they talk about surplus and deficit. There are actually two sets of numbers because, since about 2006, the Conservatives have reported the budget using two ways of accounting for everything.
Two sets of books
The budget speech uses accrual accounting. That includes an assessment of the government’s assets and liabilities over the long haul. The budget Estimates reports the actual cash in and cash out for the year that runs from the first of April to the end of March.
Some people think that the accrual method is a more accurate picture of the government’s overall picture. But here’s the thing: you really need both the short-term and the long-term pictures to see what is going on.
Take the current budget as a case in point. When finance minister Charlene “Failed Leadership Bid” Johnson read the budget speech she said the shortfall for 2013 was forecast to be $563 million but they’d managed to get it down to $349 million.
That cash shortfall didn’t magically disappear. It had to come from somewhere. At the end of the year, the government had to find the cash to pay the bills. Actually, it didn’t matter if they borrowed the cash from a pile of money sitting in a bank account or if they got new money from the bank. Borrowing is borrowing.
So in 2014, they budget speech gave the projected deficit as $538 million (accrual) and that was, according to the budget speech “$112.6 million lower than forecast last year.”
Who’s on first?
Right there is the second thing you have to watch. The way the government talks about the public accounts is designed to be confusing. What forecast were they referring to? It wasn’t the deficit forecast for the previous year. That was supposed to be $563 million, remember? The forecast for 2014 was actually about the same as the one forecast for 2013 and it was actually about $200 million more than the actual deficit.
So what “forecast last year are they talking about”? They are talking about the forecast for 2014 that they made in 2013. Follow? It would be surprising if you were confused. The budget speech is written in a way that you can easily get confused.
But if you can actually pull it apart, the forecast deficit for 2014 was over $200 million larger than what they delivered in 2013. And it was about on par with what the government forecast for the year before. Any words that make it seem like things are getting better are completely false and misleading.
You can really see the deficit situation is you look at cash. Remember we said the cash projection for 2013 was $1.0 billion. On a cash basis, they actually came in with a deficit of about $700 million. And for 2014, the projected cash deficit was more than $1.3 billion.
No tough math there. They actually projected a 30% increase in the deficit.
But you wouldn’t have seen that unless you delved into the budget a wee bit.
So two things: the government reports two kinds of figures (accrual and cash) and the budget speech is written in a way that people can easily get not just confused but outright misled.
Oil is the single largest source of income for the provincial government. All the non-renewable sources of revenue (oil and minerals) account for 42% of the provincial government’s own source revenues in the 2014 budget. They were 38% of the government’s actual own-source revenues in 2013.
Of all provincial government revenue (own-source + federal transfers), oil was 33% of actual revenue in 2013 and it’s forecast to be 38% this year.
According to the 2013 budget speech, a one dollar per barrel change in the price of oil changes provincial revenue by about $26 million. We’ll use that figure since it also seems to take into account the bonus from the dollar conversion. Oil is sold in American dollars and then converted to Canadian dollars. We make a bit extra because the Canadian dollar is worth less than the American one.
The past couple of days, oil has been trading about $20 a barrel less than the forecast average. Before that it was a running a couple of bucks a barrel higher than forecast, on average. A really rough calculation puts oil about $70 million above forecast for the first half of the year. If the current price held for the rest of the year, then the government would lose about $520 million. The difference between the two is $450 million, which means that oil revenue at the end of the year would be roughly where it was last year or a little bit less.
Now if that was the only thing that might change from what the finance department put in the budget last spring, we’d be be able to project a cash deficit of about $1.7 billion if oil prices stayed down where they are now.
The problem is that there are other sources of income, like personal taxes and sales taxes, that could be higher than forecast. Then there are government expenses, or what government say they planned to spend. Those numbers are seldom 100% accurate these days. The budget typically has all sorts of padded spending estimates in it. And, of course, the government can always tighten up spending for some things so that they can reduce the total amount they actually spend.
The Mid-Year Financial Statement
Things might get a bit clearer in December, when the finance minister releases what the government jokingly refers to as a Fall or Mid-Year financial update. The problem you’ll run into then is is that the finance department has been known to give a very selective picture of the overall state of the province’s finances that is ultimately about as accurate as the name of the thing.
Now that you’ve worked your way through all of that, remember that oil prices are not the problem, they are a sign of the enormous financial problem the Conservatives have created. They had an opportunity about eight years ago to increase spending using new oil revenues. At the same time, they could have reduced actual public debt and started socking away some money in investments so that they would actually earn more cash down the road. That’s essentially what places like Alberta and Norway have done.
The Conservatives specifically rejected any of it. As finance minister, Tom Marshall opposed balanced budgets and he and Danny Williams emphatically refused to create an investment fund using the billions of dollars in irreplaceable oil revenue that came their way over a handful of years around 2008. On top of that, they just increased spending to levels that the province couldn’t afford. They did it knowingly. And they admitted it.
The result is that the public debt these days is somewhere close to $18 billion, including Muskrat Falls. That’s roughly the amount of oil cash the provincial government has collected since around 2006. And each year, the government is running a deficit. That is, they are spending hundreds of millions more than they are taking in.
It doesn’t matter if you are counting it on an accrual basis or on a cash basis. The are deliberately spending more than the public can afford. That’s what was obvious a couple of years ago when people got worked up about a drop in the price of moil. The provincial government forecast oil at $124 a barrel, but their budget could only have been balanced if oil hit $136 a barrel.
The problem is not the price of oil. The problem is prolonged financial mismanagement by the Conservatives since about 2007.