25 February 2015

Bond Raters and other things to wonders about #nlpoli

Cast your mind back a couple of years and you will probably remember finance minister Jerome Kennedy told us a couple of things.

One was that he expected the government would run deficits for three years, totalling about $1.6 billion.

The other was that surplus would follow after that.

Well, here we are three years later and the latest finance minister – we’ve had four in three years – is now saying we can expect to see another  five years of deficits before maybe, possibly, getting the budget into surplus in Year Six ALE. 

That’s ALE as in “after the latest estimate.”

Some provincial finance ministers may have trouble with math but that adds up to eight years of consecutive deficits and the added debt that goes with them. That’s a spectacular failure for a government flush with cash from oil.  It’s even more spectacular when you consider that the crowd currently running the place promised they wouldn’t shag things up. 

And it’s even more spectacular again when you consider these goomers insist they have done just fine in the financial management department, thank you very much.  Of course, that’s  if you ignore their complete and abject failure in the financial management department.

What do the bond raters think?

This latest announcement by the finance minister makes you wonder how the bond rating agencies are going to respond.  Until now, the government at least had an official plan to balance the books over the course of 10 years.  They never really had an intention of doing it, mind you,  but at least whoever was the finance minister at any given moment could make it sound like possibly, theoretically, if everything went right, they might balance the books. 

They’d certainly try.

Now Wiseman has even given up that charade.

Wiseman can fool the punters in the province with these annual consultations. He can toss around a couple of numbers and people won’t notice he hasn’t given them anything concrete.  He hasn’t shown them the government forecasts for the current fiscal year let alone the one coming up.  Without hard information,  there’s no way people can speak sensibly, credibly about how the government should manage its budget.

But the bond raters are a different bunch. They know the numbers. They can get the government numbers. The real numbers. The bond raters have their own numbers in addition to ones used by banks like CIBC.  The Canadian Imperial Bank of Commerce is forecasting the province will go through three years of negative growth in the economy.  Three years.

The bond rating people will understand that things are not looking very good. Other people might not realise it, but things are not good.

Sharing Responsibility

You can tell things are not good, either for the economy or the Conservatives.  You can tell because the new “consultation” this year will involve sending not just one minister but a gaggle of them out to talk to people. This is an exercise in political management the likes of which we haven’t seen in recent times.

The Conservatives want to share the responsibility. They want people to feel like they have had a hand in making the cuts that will come to cope with a record provincial deficit.  Ross Wiseman said exactly that:

"As a government, we have a mandate to provide the leadership through this process," Wiseman told CBC News.

"But everybody who lives in the province has a role to play in contributing to the discussion, to help us map out a way forward for the next five years."

If everyone has a share of the responsibility, they will have a harder time blaming the Conservatives for whatever happens in late April or early May. That’s what Ross and his friends hope will come out of these “consultations.” They are not looking for ideas. They are looking for cover.

If Ross and his friends can figure t out how to do it, the Conservatives will try to co-opt the Liberals into this charade of shared responsibility as well.  The Conservatives don’t need to worry about Lorraine Michael and her disciples.They are already on board.

Lorraine Michael knows what side her political bread is buttered on.  The unions pay her bills. The unions don’t want any kind of cuts to government spending.  So Lorraine sings the union song:  deficits are no problem. Borrow lots. The more we borrow the better. Just don’t cut anything.

The Conservatives don’t really want to cut anything, either. They will only cut what they have to cut. They will fudge the numbers. They will borrow bags of cash. They will do anything to avoid making real changes to the way they have run things.  Provincial Conservatives have spent more money with greater abandon than the mythical New Democrats they love to kid about in their talking points.

When the cuts come, the New Democrats will follow the union lead and get miffed about the cuts that will happen. But deep down, even Earle McCurdy knows that the two old line parties, as he called them during the NDP leaders debate, are a lot less alike when it comes to financial policy than the provincial Conservatives and the New Democrats. Dipper, Tory, same old story is the way that line runs in this province.

The Liberals are a different matter. If nothing else, they have a finance critic who knows what is going on. Cathy Bennett has turned out to be a keen political operator. She is savvy. She learns quickly. She speaks clearly.  She is backed by some of the sharpest political minds in the province. She listens to them.

Nobody’s Fool

As the Telegram reported a couple of days ago,  Bennett “said that right now, the province can keep borrowing, but at some point, lenders will stop providing money and the government will need to make a sharp course correction.”  Get it under control now or face big consequences, in other words.

Lenders will stop giving us money.

The last time that happened was 1933, for those who haven’t read Doug Letto’s book about the last prime minister of Newfoundland.

Bennett is not an easy mark. 

The Conservatives may have fooled the Liberals in January, but they might not be able to get Dwight Ball to support them on the budget so easily.  Fool me once and all that.

That is what they will try to do, though. The Conservatives need the political cover and if they can dupe Dwight into siding with them, they’ll do it.

Low-Hanging Fruit

In the meantime, the Conservatives will try to shed the responsibility for the budget onto the public’s shoulders,  the Liberals’ shoulders, and anyone else they can find..

In the end, the cuts might not be quite as bad as the Conservatives are making out. That doesn’t mean there isn’t a financial problem.  There’s a rev less oil and exphuge one.  Nor does it mean there won’t be cuts and layoffs.

It’s just that the Conservatives have a record of talking about things and then doing nothing. There’s been a massive problem, these days running at around $2.5 billion, and it’s been there since about 2009 or so.  The Conservatives have acknowledged it repeatedly. They have made tee shirts and lapel pins about it.

But they have never done anything about it.

That’s why we still have a problem.

That’s why they have run huge deficits for the past three years and plan to run them for at least another five.  In fact, if you look at their record, the Conservatives have planned to run gigantic cash deficits every year since 2007.  The blue-green line in the chart below is what they planned to do.  What actually happened is in red.  The cash surpluses  - three points on the red line above the zero line - were accidents, in other words.

Everything else in red is below the zero line, meaning it is a deficit, meaning that is what the Conservatives planned to do. Things didn’t turn out as badly in deficit as the Conservatives planned, until more recently, but that’s as much a matter of fluke as anything else. The bullet hit where they intended.deficits from Estimates

The Conservatives aren’t evil or stupid. They are politicians.  Politicians like things that are easy.  They love to pick low-hanging fruit.  Anything that takes work is not on a politician’s agenda.

Politicians have a very short attention span and an even shorter focus.  They look no farther ahead than tomorrow.  Most can barely figure out what supper might look like.  Sure they tell you that they are planning for the long haul and that their financial eyes are on the horizon.

But the reality is that they can only vaguely picture what tomorrow looks like if they squint.  Beyond that is stuff that they consider science fiction. They can’t conceive of tomorrow, let alone pick out anything in it, even with the political equivalent of the Hubble telescope on maximum magnification.

Politicians are usually only in politics only as long as it takes to get a pension and not much beyond that. They want to get by and get out.  The best way to get by is to avoid failure. That means they won’t do anything that involves real work. The easiest thing to do is to make people happy. Nothing makes people happier than when government spends money.  

Yes, folks, politicians are lazy migrant labourers.with attention deficit disorder.

The Political Sciency Bit

Political scientists would call that a model.  They’d use fancier words.  But it is a model.  It is a picture of how things work.  Take the model and apply it to politics in Newfoundland and Labrador to see if it works.

Look at the recent past. Loyola Sullivan said it back when he was finance minister. They were in financial trouble but Sullivan said they would run deficits of a half a billion on average every year for the foreseeable future.  Might balance the books by 2015.

Sullivan also said there were a bunch of projects on the horizon and the government needed to pace them out so the economy didn’t overheat.  Just before he quit politics, the provincial government started to come into a huge pile of money. They had lots of people looking for something:  every government does.

What every government before these guys has done was manage the demand. They had no choice  They didn’t have a lot of money. Those politicians did what they could and pushed off everything else because it was tough. What those guys did was what you’d expect them to do given the model.

What these guys – Sullivan’s guys – did was to announce everything.  They did it all, as fast as they could.  They announced and  announced and spent and spent. They opposed any form of restraint.  Save money for a rainy day?  Not on your frackin’ life, said Tom Marshall in less colourful terms.

They took every cent and spent it.  And when they ran out of money, they borrowed money in order to keep the taps open. The went years without borrowing from the banks because they had oil cash sitting in the bank.  That should have been rainy day money but the Conservative spent it all.  They say they didn’t borrow but they did borrow to cover their overspending. They borrowed from the future.  They borrowed from our grandchildren and they have no plan to pay it back.

When the taps were open, people loved them. They loved the Conservatives like no party before them and likely no party ever to come in the future, unless they legalize cocaine and the politicians in the future hand it out free on street corners.  People would love those politicians more, but only just.

When the taps even looked like they were going to close,  people didn’t like the Conservatives as much. Now people in the past didn’t like politicians in the past that much sometimes either.  But those politicians didn’t have the desperate need for public affection the current crop of politicians do. Lazy migrant labourers with attention deficit disorder and a pathological, egomaniacal need to be liked.  

Talk about a recipe for financial disaster.

Think about it for a second and you will see the model works.

The real test and the ultimate value of any model is its predictive behaviour, though.

Based on all you know, and with the model as a guide,  see if you can figure out what Ross and his pals will do.

If you need help, go find a book called . Eighty four years a Newfoundlander.  It’s the memoir of a guy named W.J. Browne.  He was a politician in Newfoundland in the 1920s and served in cabinet for a time. Browne recounts that the members of the House of Assembly knew at some point in the 1920s that the banks wouldn’t give the government in Newfoundland more than about $100 million.

Knowing that, the politicians approved borrowing and overspending long before the Depression kicked the guts out of the Newfoundland economy. They did it for lots of reasons, some good and some bad.  But the point is they did it, knowing where things were headed.

By the time Fred Alderdice got to the prime minister’s office down in the Water Street side of the Court House building,  things were pretty much over except for the crying.   

We aren’t there yet but some times you have to wonder.