28 November 2014

Welcome to the bottom of the rabbit hole #nlpoli

Putting a freeze on any discretionary spending is the very least that the provincial government could do in light of the dramatic – but entirely predictable – volatility in oil prices that have made the government’s huge budget deficit even larger.

The fact that Premier Paul Davis finally admitted on Thursday that oil prices are likely to remain low for the foreseeable future – something that has been clear for some time now – is a pathetically small sign that the provincial cabinet is finally starting to realise the depth of the problem the provincial government currently faces.

As small and as pathetic as it is, we do at last have a sign.

The implications are enormous, of course.  Politically, the Conservatives will have to go into the next election with a very bad financial situation.  They were likely counting on a good budget full of elections spending goodies to try and buy votes as they did in 2007.  Sadly for them, that won’t be the case. 

They also can’t go into the election claiming they are the ones to deliver great financial success.  The current mess is entirely of their making so they have to own it twice over.

To be sure, the Conservatives didn’t set the price of oil.  That was beyond their control.  Their failure was in:

  1. Admitting that commodity prices tend to go up and down, and therefore,
  2. Setting the government budget accordingly.

SRBP has gone over this before.  There’s no need to repeat it all again.  Check these posts out, if you need a refresher:

Since we appear to be looking at oil before US$90 for a couple of years and possibly before US$80,  the strategic problem the Conservatives have ignored for most of the past decade is finally here.  Their “Prosperity Plan” – developed by Wade Locke – was built on the premise that oil prices would stay high.  Well, this drop in prices makes it even plainer why economists shouldn’t be in the prediction business.

What are the Conservatives going to do? 

What can they do?

Well, rest assured they won’

t be making the kind of fundamental changes to government operations and spending the province needs.  They firmly believe that they were right all along.  They will likely only continue the same deluded thinking that got us all into this mess in the first place. 

The subject came up in the Trinity – Bay de Verde by-election during a candidates debate, apparently.  Someone asked Steve Crocker what the Liberals would do.  Neither the Liberals nor anyone else will be able to tell anyone what the government can do until they get into office and find out how bad things really are. The one thing Crocker did do was make it plan that if it hadn’t been for a decade of profound fiscal mismanagement, we wouldn’t be in this spot.  Steam apparently came out of Charlene Johnson’s ears and well it should.  The truth hurts.

What the Conservatives will likely do in the little time they have left is mask as much of the problem as they can.  There is likely a fair bit of fat and padding in the budget so they will dump all of that.  They will at least have to look at some hikes in taxes.  HST is the most obvious one.  They might try adding an extra tax bracket at the top end of the income scale.  That would be fitting so that the guy who really caused the mess – Danny Williams – can help deal with it.

But even in those kinds of measures, there is a limit to what the Conservatives can do.  Contrary to the sort of whack-a-doodle economics practiced at places like the Canadian Centre for Policy Alternatives,  jacking up taxes brings in some extra money initially, but it also causes people to curtail their spending the more you suck out of their pockets.  Less spending means the higher taxes won;t bring in the extra cash the provincial government would need to cope with oil revenue that is 30% below what they forecast for this year.

If the Conservatives were thinking straight, they’d halt construction on Muskrat Falls immediately pending a thorough review of the whole project.  Remember:  the whole thing was justified on the grounds that oil prices would – inevitably – skyrocket to US$200 a barrel by the end of the decade and hit something like US$120 to US$150 by the time power came online in 2017.

The second justification was that an $8.0 billion megaproject was cheaper than any alternative.  It never was, of course, but Nalcor claimed it was anyway and the provincial government rigged a bunch of reports to back the claim in 2012. Well, with oil at half the price where Muskrat supposedly made sense and with forecasts that it will stay low for several years,  we’d be crazy to increase the public debt on this project.

And besides,  the whole thing was premised on pulling another $450 million annually out of the economy through electricity prices.  Muskrat Falls was already designed as a massive tax increase.  If we hike taxes that much,  there’s a limit to how much tax room the government has in other ways.  Is it getting clearer yet why Muskrat Falls always was a completely nutso idea?

We’ll have to wait at least a couple of weeks while the cabinet gets its collective head around the government’s financial problem.  On Thursday, you could tell from the way Paul Davis was talking to reporters that they are still hoping this will go away.   They’ll delay a financial statement until the last possible minute.  Part of the reason is to buy time to come up with ideas.  The other reason is to keep people spending for Christmas so that the tax money keeps rolling in.  The Conservatives need cash so desperately at this point,  they have to do everything they can to keep your wallet open as wide as possible.