02 March 2015

The Elephant in the Room, the Astigmatic Seer, and other horrifying budget tales #nlpoli

Has anyone noticed a small problem in all the discussions about next year’s budget?

On Point’s David Cochrane had both NAPE’s Carol Furlong and the Conservative’s pet economist Wade Locke on the show to talk about the next budget.  Carol was warning against cuts.  Locke was talking about a request by Tom Marshall last year to reform the provincial income tax system. Locke and his students – are busily working them up, in close co-operation with the provincial finance department.

Can you see the elephant in the room?

It’s secrecy.

Locke has been working on this tax reform project since last year.  Until now, the existence of the project was a secret outside a select few people.  What is potentially one of the most significant policy initiatives of the past 40 years has been conducted entirely in secret.  The people most affected by it have known nothing about it  - not even that it existed - and they will know nothing about it until the whole thing is done.



And for, all intents and purposes, in place.

Oh sure.  Locke said we will get a look at the finished product just before the provincial government introduces the budget, but that’s hardly enough time for the rest of us to give such a massive policy reform even a cursory glance. Meanwhile, the Conservatives will have already seen it,  tweaked it with partisan political input in secret, and then approved it.

The Astigmatic Seer

They’ll also be deploying Locke to talk it up and sell it. The media will present him as an objective expert rather than the what he is:  the guy who has helped create the current financial mess in the provincial government.  Locke’s been very loyal to the Conservatives since he started giving them intellectual cover during the 2003 campaign.

When he appeared to be criticising them, like in comments to APEC about the 2009 economic forecasts,  Locke got upset with reporters who accurately reported his comments. Otherwise, he’s been supplying them with the forecasts of oil prices that have fuelled their Projects. He loved up Muskrat Falls in an obviously biased presentation at the Harris Centre.

Locke’s oil forecasts helped create the current mess since they justified spending not just what came in but more besides. The fact Locke apparently never saw the current situation coming  - even though changes in energy supply and demand has been in all the papers since about 2010 - seems to bother the Conservative brain trust not one jot or tittle. 

The Silence of the Lambs

You haven’t heard either of the provincial opposition parties raise a single word about this secrecy since the current Premier let slip last week that it existed.

They might start doing it now that this post is out there but no one can or should take it seriously. They don’t see secrecy as a problem. They evidently don’t think that this is something people might find objectionable.

But it is.

As with all of the pre-budget periods under the current crowd running the place, they have kept pretty well everything of substance completely secret. Some of the stuff we don’t know is glaringly obvious.

The Known Unknowns

Carol Furlong, for example, talked about how much money the government could raise by getting rid of all its tax cuts to date and by restoring all the fees and charges they’ve dropped. She tossed out a figure of something north of $700 million as if it was of no consequence to anything or any one.

But how much money are we trying to raise here?

Wade Locke is talking about hiking the HST as a cheap and easy way to bring in cash.  But how much do we need to cover the deficit next year?

We know the projected deficit for the year that ends on March 31. It’s around $1.0 billion. You can see that figure in the budget consultations for next year. Their budget “simulator” uses the financial data for the current year. You might have missed it, but January 2015 tells us what the government thinks will happen in the financial year that isn’t over yet.

That isn’t what they expect next year.

And that’s the year the budget consultation is about. That’s the year Locke’s tax changes will take effect. 

The impact Locke’s tax changes will have on the economy depends heavily on the economic forecasts and vice versa. Private sector forecasts have the province in a recession for the next three years. The finance minister has already forecast we will have five more years of deficits on top of the three we’ve already had.

Consumer spending is a big part of the economy. When the Conservatives cut public spending, hike taxes, and lay people off, they are going to change consumer confidence in the economy.  What they do may well determine how deep the recession will be over the next three years and whether the recession will last longer than that.

Longer you say?

Double Whammy

Of course, it could last longer.

Likely will last longer.

Starting in 2017,  consumers in the province will be paying hundreds of millions of dollars in a new tax to pay for Muskrat Falls They are the only people paying for Muskrat Falls electricity.  According to the Nalcor/Conservative plan, 100 percent of the project plus profit for the lenders and Emera will come from local taxpayers, who will use, notionally, only about 20% of the plant’s output.

There are no other customers.  None.  That is why Nalcor and the Conservatives are going to stick you and me with the bill for their scheme.  There are no other customers because those customers can get all the electricity they want cheaper from somewhere else. 

We don;t know exactly how much those taxpayers in Newfoundland and Labrador will fork over in the new tax. In Locke’s infamous marketing pitch for Muskrat Falls,  Locke forecast that Nalcor would need to pull in at least $400 to $450 million to pay off loans at seven or eight percent over 30 years.  That was to cover the original price. You may recall that their original estimates were way off the mark. 

For our purposes here, let’s work with Wade’s original estimate.  The number was bad enough.  And if memory serves Wade basically blew off any impact of the new tax with the sort of pffft that would have made Danny Williams green with sneer-envy. 

So let’s take $450 million out of the economy in 2017 to pay for Muskrat Falls. That’s money that won’t be available to pay for core government services. It’s just for paying back the debt on Muskrat Falls,  plus profit.

Now consider that this year, the provincial government will have to pull hundreds of millions out of the economy in the form of income taxes, HST, and whatever other fees and charges government they will need to cover the massive deficit their mismanagement has created.

Starting in 2017,  you have to suck another $450 million – at least – on top of that.  Let’s say they pull $450 million in tax measures. Two years from now,  that doubles. The current forecasts for three years of recession don’t include the impact of those kinds of government cuts in an economy that relies very heavily on government spending to keep it going. 

You can see where this is going.

Imaginary money

The people who know absolutely nothing about Muskrat Falls will talk about money that will come from sales to imaginary places south of Newfoundland and Labrador. Liberal leader Dwight Ball wanted to use that money to lower the cost of electricity in this province.

That is so not going to happen now.

But let us imagine there was a few bucks to be made from selling electricity that cost more than 20 cents a kilowatt hour for less than five cents a kilowatt hour in places where they already have electricity that is cheaper than that in abundance. Using that kind of math and assuming there are no other costs to eat into our revenue,  we might come up with something like $100 million extra from those sales.

That’s it.

$100 million.

Newfoundlanders and Labradorians will still have to pay more than eight times that much in all those new taxes just to help balance the books.

The 800 pound Gorilla Next to the Elephant

The secrecy Elephant in the room has a buddy.

It’s the 800 pound gorilla no one talks about.  The gorilla no one is talking about is the size of the deficit the provincial government is facing next year and the year after that and the year after that.

If you want to know how big the number is, consider that the figure they’ve been talking about – upwards of $1.0 billion doesn’t appear to be cash deficit.  The cash deficit  - how much cash they’d need by March 31 to pay all the bills on time - was already supposed to be $1.3 billion.  That was before the arse dropped out of oil prices.

Here’s a chart that shows the cash deficits over the past few years.

deficits from Estimates

The deficit for the fiscal year that ends in March may well be the largest cash deficit in the province’s history.  If it isn’t the biggest, the deficit will be one of the top five biggest ever. 

How big is it going to be?

We need to know how big the gorilla is before we can decide how much money we need.  His buddy the elephant keeps blocking our view of him.  Meanwhile, the government has hired a seer with a history of cloudy vision to use a set of binoculars turned around the wrong way to get a glimpse of him.

That would be one of the funniest things you’d ever read except for the fact the gorilla will be sitting in your lap next year and for a long while to come.