Back at the start of the current Conservative administration in 2003, they were very sharply aware of the problem with using one-time revenues for day-to-day spending.
They were so concerned about using that one-time money that they tried to get the federal government to do the impossible, namely give the provincial government here a permanent handout equal to oil revenues, in addition to the oil revenues that the provincial government collected.
Then they tried to get the federal government to exclude those one-time revenues from the Equalization formula so the provincial government could get the oil money and the hand-out at the same time. That didn’t work either.
The one thing the Conservatives didn’t do – for all their rhetoric about independence – was to act like a responsible, independent government. They didn’t manage public finances for the long haul.
That sounds like a contradiction but it’s true. They didn’t try to live within their means. You can look at it another way. They didn’t even manage public finances like another province in Canada, like say Alberta.
Promise Made. Promise Changed. Promise Kept.
In the past 20 years, Albertans have been able to completely wipe out their public debt. On top of that, they’ve been able to put aside money in all sorts of investment funds, savings funds, and even a fund designed solely to get the government through periods when oil prices go down. The oil money in Alberta is not all gone. A lot of it is around making more money. The Albertans turned a non-renewable resource into a renewable one, of sorts.
Not so, in Newfoundland and Labrador.
Conservative finance minister Loyola Sullivan warned everyone sometime around 2006 that he anticipated the government would run deficits of about $500 million every year until at least 2014. Back then, Sullivan couldn’t possibly have known oil would hit US$150 a barrel at one point and average more than US$100 a barrel for five years.
But he did know that the government planned to spend way more than the public was bringing in. And he also knew that, unlike any finance minister before him, he had more money generally to spend than any of his predecessors. No matter what issues the government faced, he’d have more cash to deal with it. Sullivan didn’t know how much more, but he knew there’d be more and on top of that he planned to spend more besides. That more besides money, was something the people didn’t have.
The inevitable result of spending more money than you have is that you build up a debt. Now in Newfoundland and Labrador, the public debt was already pretty big in 2003. Sullivan and his colleagues had promised in 2003 to reduce debt. But after they got into office, the Conservatives promised to increase the debt.
Sullivan quit suddenly in December 2006. He never really explained why, but he quit. Sullivan’s replacement – Tom Marshall – opened up the spending taps. He delivered on Sullivan;’s promise. Every finance minister since then, did much the same. The result was that by the time Tom Marshall became the latest in a string of fill-in Premiers, the public debt was officially more than it had been in 2003. By the time you factor in the $8.0 billion from Muskrat Falls, the total public debt in 2014 is roughly doubt what it was in 2003.
That’s not the way the Conservative see it. During Marshall’s day, they started talking about what the net debt was. That’s what you get if you take all the debt you have and subtract any cash or other assets that you could use – theoretically – to pay off the debt.
The Net Debt Fallacy
Net debt is a common idea among accountants and the like. They use it as a sign of financial health. It isn’t really a sign of anything, in itself, especially not of anything meaningful. For one thing, you can have a net debt of zero and still have to pay money to cover the interest on the debt. Sounds silly when you say it that way and it is silly because net debt doesn’t tell you much that’s worthwhile.
In Newfoundland and Labrador, the amount it takes to pay the interest on the debt every year has stayed around the same for years. That’s not because debt has gone down. It’s because the provincial government has just borrowed money at a lower rate of interest. They use the new money to pay off the old debt, but the debt is still there.
Some people, especially people who have an interest in seeing that taxpayers keep paying more money than they bring in every year, play up that lower debt servicing cost. They talk about how the amount we pay out is now the fourth largest thing we pay for every year, down from its old place of third. If they knew about it, they’d probably say that we are way better off now than before 1934. Back then, a third of every budget went to pay for public debt.
They talk about how the debt is such a small fraction of the size of the economy. We are in very good shape, these people will tell you. What they do not tell you is that they are measuring the debt against an economy measured mostly by the price of a barrel of oil. It’s a moveable target, that. Right now the debt to GDP ratio looks really good because oil is really expensive. Cut the price of oil down by 30% and reduce the GDP accordingly. Now suddenly the debt to GDP ratio is higher.
Go back and look at what it takes to pay just the interest on the debt. This will make things far more clear to you than Fourth largest item on our annual government budget after health care and education. According to the budget speech in 2014, the government spends about $850 million a year just to pay the interest on the public debt. Over the past couple of years years, the provincial government has spent between $350 and $550 million more than it brought in.
Just imagine if the provincial government had – in the past 10 years - actually reduced the deficit rather than just rolled it over into new debt. Or if it had invested some of the money like Alberta has. Yeah, well that didn’t happen. But just imagine if they had. When oil prices dropped – as they always have - the provincial government wouldn’t be in such trouble today.
The Size of the Problem
But they didn’t.
So they - well, we - have a huge financial problem.
If you want to get a sense of how big a problem we have, let’s take a look at some numbers. Let’s look just at the money it takes to pay the cost of government services like health care, education and so on every year. And so that we are absolutely clear on the numbers, let’s look at the actual annual spending for the past five years and the actual revenue, both in cash that came in during the year.
The red line is the money coming in. it includes taxes, royalties from oil and mining, and federal transfer payments of all kinds. The blue line is the annual spending from what the Estimates refers to as the “current” account. There are some figures not in this, like the money for capital works like buildings and roads. This number also doesn’t include some debt servicing transactions.
You can see, there is actually a surplus there because the red line (revenue) is higher than the spending line (blue).
Let’s take away some one-time money. In this case, it’s the money from the 1985 Atlantic Accord than ran out in 2011. Everyone in the provincial government knew that this was one-time money that would run out. They even knew exactly when it would run out. We’ve taken it out here because the Auditor General included a table in his report on 2013 spending that showed the surplus and deficit annually based on when the extra cash from Ottawa ran out. Some people, like Tom Marshall back when the current AG used to be the deputy finance minister, say that the only reason the government has deficits now is because there’s no extra federal handouts.
Well, no.
There are deficits now because the provincial government spends more than it takes in every year. If you look at the chart right there, you can see that even without the 1985 Accord money, the provincial government actually had a surplus on current account in every year, except 2009. In that year, the expenses and revenue were balanced.
If you want to see the real deficits over the past five years, you have to take out all the one-time cash the provincial government used. The chart shows the total “current” spending for each year. The black portion represents the amount covered by all the provincial government’s own source income and federal transfers.
The red bit is all the one-time money: oil and mining royalties and the 1985 Accord offset payments. In effect that red bit is the real deficit every year. It’s a deficit because we spent it only by selling off an asset that we can’t replace and did nothing to replace. That’s not included in the conventional way that people talk about debt and deficit. But we should talk about it that way if we want to understand the cost of what’s been going on in the province for the last few years.
Because the provincial Conservatives spent all the oil money they’ve got, without using any of it to pay down debt or generate new income, they effectively incurred a debt. In effect, the way other people talk about debt and deficit underestimates, the actual impact the provincial government’s annual deficits have had. The average deficit using this approach has been $1.9 billion each year, with the five year total being just shy of $10 billion.
An Alternative
Things didn’t have to be this way. As SRBP showed early last year, a policy that split up the non-renewable revenues into four categories would have produced a very different result. The provincial government could have increased spending, just not by the unbelievable levels they did. They also could have funded capital works every year, created an investment fund to earn money each year, and paid down debt.
This chart – taken from one of the series in 2013 – shows the different between a steady growth in spending (shown in red) and the Conservative’s actual spending increases, shown in blue. Another post showed how the simple policy allowed the provincial government to fund $500 million in infrastructure spending each year. By the end of 2012, there was actually a bank account with almost $3.0 billion in it to cover infrastructure spending and revenue changes due to oil prices.
Few choices
Now that the problem is on us, the provincial government has fewer options than if if it hadn’t created the problem in the first place. The annual deficit – on a cash basis – is likely going to be about $1.0 billion this year. That’s roughly what it would be each year if oil prices stay down and the government tried to keep spend levels where they are. Any spending increases would cost more on top of that, and if you wanted to start salting away cash for a rainy day or for an investment fund, you’d have to spend more on top of that again.
The provincial government’s Prosperity Plan, developed with help from economist Wade Locke, basically called for government to endure annual deficits in the hope that oil prices would shoot up and produce windfall surpluses at some point later on. That’s what we should expect them to do now. They’ll take as much time as possible to make a decision, all in the hopes things might get better.
Unfortunately, Locke’s plan apparently didn’t anticipate a drop in oil prices. On top of that, the plan didn’t apparently include any plan to use the surplus from one year to wipe out the debt from earlier years. The end result after 10 years would be a debt load higher than it was when you started, even though on paper the deficits and surpluses might actually cancel each other out.
The public sector unions have profited hugely from the massive growth in public spending over the past decade. They wound up with lots of new members all of whom made a lot more money. Not surprisingly, the unions are opposed to any cuts to spending at all. They even got an affiliated think-tank, a sort of left-wing answer to the right-wing think tanks, to give their position a veneer of credibility.
Their think-tank uses all the same indicators of financial health the provincial Conservatives use to justify their spending habits, debt-to-GDP, net debt and all. Their position is that the provincial government should spend all it wants. They can make up any deficits, if they need to bother with it, by taxing the crap out of everything especially those repositories of evil called “corporations”.
They cherry-pick a few examples, claim that the local taxes are needlessly low, and then move along. Conveniently, the think-tank types don;t actually make concrete proposals or even supply a detailed comparison. Instead they just say that the right type of taxes “in NL needs more research and debate.” Couldn’t be bothered to spell out the name of the province. Couldn’t be bothered to do the proper comparison.
By the same token, the business community has lately decided that public sector pension plans are one source of evil. They also have decided that government must cut spending, somehow. Just like the unions, though, the local business types don’t want to see any cuts to government spending that would put money in their members’ pockets.
The Perversity of Interests
Oddly enough, both the business groups and the political party run by the unions agree on the need to keep going with one of the huge sources of public debt. They both like Muskrat Falls. Since the provincial energy corporation first announced it, the only source of money to pay for the project – all $8.0 billion of it – are the taxpayers of Newfoundland and Labrador. They will borrow money directly to pay for it and the taxpayers will also Nalcor to borrow money to cover the costs.
Then those same taxpayers will cover the entire cost through their taxes and electricity rates. They will cover the full cost of building the project, plus they will provide guaranteed profits to the banks and other lenders. Part of the deal even involves giving a block of electricity free of charge to a private sector company in Nova Scotia annually for 35 years. Anyone else who wants power from the plant, whether in Newfoundland and Labrador or elsewhere nearby will get the electricity at market rates.
The market rates these days have been running as low as 10% of the cost taxpayers will pay. That is what the big corporations will get their power for. Less than 10% of what the union members will have to pay, by law, for Muskrat Falls power.
Newfoundland and Labrador is a place where the supposedly progressive party, the NDP, supports regressive policies and the Conservatives love debt more than the caricature of the NDP they use in their political propaganda.
If there is an afterlife, Tommy Douglas is looking down on the goings on in Newfoundland and Labrador and scratching his head. Conservatives and New Democrats agreeing about public overspending and the need for local taxpayers to foot the bill., not for their benefit but for the benefit of a few.
“Mr. Douglas paved roads, delivered hydro power to farmers and built sewage systems,” the Globe and Mail tells us. It must be true if it is in the Globe. The Globe and Mail is the oracle of the Newfoundland nationalists, after all. Things are not real unless they are in the Globe, just as nothing political is ever real unless Don Mills and his three questions CRA poll says it is so. The Conservatives were not in political trouble until Mills’ poll turned on them, even though they obviously were.
That is another story.
But back to Tommy Douglas. He delivered universally accessible health care. The first in Canada. Well, Canada at the time. “Amid the madness of our own debt spiral,” the Globe says, “his singular achievement appears more remarkable than ever. He set an example of fiscal restraint (and, ironically, of limited government) that no other Canadian premier approached in the 20th century. In 17 years as premier, he produced 17 balanced budgets. From this perspective, he governed in a uniquely rational, disciplined and principled way.”
In the afterlife, Douglas is looking at politicians and unions and business groups in Newfoundland and Labrador.
Tommy Douglas is doing a face palm.
-srbp-
