So the scuttlebutt has it at the nearby Timmies, the boys got a call Thursday afternoon about the time Ross Wiseman was reading his budget speech. The workers over a Colonial Building said they saw two fellows come out of the old House of Assembly Chamber, arm-in-arm.
There was one older fellow, a bit on the round side, who walked with a limp. The other fellow walked very straight and had a really high collar on his shirt. Sorta like Don Cherry would wear one of the workers said.
The two fellows went out the front door of the building, the workers inside said. The only problem was they didn’t open the door. They just walked through it.
Another worker outside saw the same fellows go down the steps and saunter toward Military Road as if all the construction and fencing wasn’t there.
“Let’s go down to the Newfoundland Hotel for a drink,” said the fellow with the collar to his companion. “It’s better than the sandwiches they’ll be serving up at the new place.”
“Any money left in the pit prop account, Richard?” the fellow with the limp said to his companion. “We could get a cab.”
The taller fellow shot the other a dirty look.
‘Good budget,” the one said to the fellow with the collar, with a nod of approval borne of experience. ‘We couldn’t have done it better.”
“Yes, Fred” his companion replied. “As I always said, borrow as much as you can and keep doing it for as long as you can.”
“As long as the banks will let you,” the portly fellow added with a chuckle.
The workers said the two went off down by Government House until the workmen lost sight of them in the swirling afternoon fog at the top of Cochrane Street. Meanwhile, the two constables from the basement are busily checking Twitter to see if they can figure out who the two old fellows are.
While the pair were dodging on down the street in the fog, Liberal leader Dwight Ball was up at the new place telling reporters about the big difference between him and the crowd currently running the place. Ball said he would borrow more. Repeal the tax hikes and borrow whatever it took.
The slight rise in the sales tax and the permits and fees are all “job killers” according to Ball. "Every single economic indicator is going in the wrong direction. So, if I had to make a choice over borrowing that extra money or increasing the HST, I would borrow more."
The province’s New Democrats, meanwhile, don’t seem to have too much concern for anything beyond getting everyone on the public payroll. Earle McCurdy has been going on and on since last week about the plan by the Conservatives to leave three percent of the already over-stuffed public service jobs vacant as a way to cut costs. Where will all those young people go to find a job, Earle fretted. Perhaps Earle is finding it hard to recall this is not 1975 any more. And as for how the Dippers would pay for everything, well that has never been a worry to them.
All three of the province’s political parties have roughly the same response to the financial mess in which the government finds itself. All parties would cut little, spend more, and borrow enormous sums to cover it all. The only modest difference is that the Liberals would tax a bit less than the Conservatives who would tax a little and the NDP who would tax a handful a lot, even though it would bring in almost nothing new at all.
It’s all really a matter of frigging at the margins, if you step away from all the heat made by the party activists screaming at one another. Neither of the parties wants to acknowledge the magnitude of the financial mess we are all in. They just operate in this fantasy world of their own, all of them together, along with the fourth party called the news media, and a few hangers-on.
In their world, this is a tough budget
The reality is that the provincial budget this year calls for spending $7.8 billion. The government spent $6.9 billion last year. We are supposedly in a hard spot, but the Conservatives want to increase public spending spending by about 12%.
Not a single one of the province’s political parties - including the fourth party - bothered to mention that. In these supposed times of austerity, the government actually plans to increase spending by almost a billion dollars.
The provincial government estimates its income - including a couple of hundred million in tax hikes and fee increases - as $5.7 billion. The three biggest sources of income for the government, as listed in the Estimates, are:
- Personal income tax at about $1.2 billion,
- Offshore oil royalties at $1.15 billion, and
- sales tax, at $1.05 billion.
That means – in effect – that the government’s largest source of income this year is really from the banks. It’s about 26% of the total income from all sources, that is $7.8 billion. Personal income tax is about 15%, with the other two coming along at 14 and 13 percent.
Borrowing to fund operating expenses will actually be around double of any one of the government’s top sources of cash of its own, including offshore oil. At $ 2.1 billion, money coming straight from the banks will be equal to more than one third (37%) of the government’s own cash ($5.7 billion).
Some of you might be having a bit of trouble getting your head around that idea, especially since it isn’t what is coming from all those official party sources. As regular readers know, what the official sources agree among themselves to say isn’t always exactly what is going on. Sometimes the world inside the Echo Chamber is quite far removed from where the rest of us live.
You can unbend your mind a bit, though, if you appreciate that governments balance the books every year so that income and expenses are the same. In some places, they do that quite often. They even manage to spend less than they take in.
But in Newfoundland and Labrador, the government typically balances the books by getting cash from the banks. Over the past few years, the government didn’t have to go to the banks. Instead, they just dipped into the windfall from oil.
They borrowed from our future, in other words, without any effort to pay it back. When we had lots of money, the categorically refused to put any of it aside for a rainy day: they wanted to spend it instead. And now when the money is gone they are promising to create a rainy day fund, one day, in the future if there’s any money to do it.
While regular readers have heard all this countless times, it is worth repeating if only because the story everyone else passes around is fundamentally wrong. The current crowd running the place didn’t just spend all the oil money the past few years. They spent so much they had to borrow on top of all the oil money. Now they are borrowing to the point where it is the single biggest source of money the government has.
That is how bad things are.
The Limits on Borrowing
The province’s politicians seem to think there is an endless supply of money. They will increase spending by 12% from last year and raise only 25% of the increase with new revenue. They will borrow the rest.
In the real world, there isn’t an endless supply of money. Even when you are a government, the banks will eventually cut you off. That is what happened to Newfoundland in the early 1930s. Just paying the interest on the debt took up 65% of the government spending every year at the point when the national legislature voted itself out of existence in 1933-34.
Newfoundland and Labrador is a long way from that point these days. Officially, debt servicing is around $600 million. Don’t forget, though, that in 2017, the debt servicing will take a dramatic jump upwards as we start to pay back Muskrat Falls. Local taxpayers are on the hook for all of Muskrat Falls, in case that point slipped by in all the noise a few years ago.
For all those people who think we are an impossibly long way from that situation, just recall that everyone said the same thing about oil prices a few years ago. Can’t go down they said. A few years later and oil prices fell dramatically. Lots of things can change quickly and unexpectedly.
Newfoundland and Labrador isn’t about to collapse like it did in 1934 but that doesn’t mean there won’t be consequences to taking on more and more and more debt. No one has heard from the bond rating agencies yet. They questioned government spending back in 2008 or so, as Tom Marshall told us. They’ve also been questioning Muskrat Falls. They might not be too thrilled about a plan to take on another $5 billion in debt without a plan to balance the books beyond the hope that oil prices will jump back up.
If the bond raters change the province’s credit rating, that will drive the cost of borrowing higher. All that extra debt will drive the cost of servicing the debt higher anyway. So what is $600 million and eight percent of spending today could become $1.0 billion and 12 or 15% of spending quite easily.
That’s not allowing for any income drop, either. If your plan is just to borrow more money – as all three parties basically would have it – then your costs for borrowing will only go up. With less income, it will be harder and harder to pay the debt servicing costs and at the same time keep services going. Paying for all that debt will take up a larger and larger part of your budget. It will be harder and harder and harder to avoid tax increases or lay-offs or service cuts or some combination of the lot. You get the picture.
Push yourself ahead two years. It doesn't matter which party wins the next election. Muskrat Falls will boost what the taxpayers have to find out of their own pockets to pay back the $8.3 billion that the project is currently expected to cost. That enormous project is actually a kind of new tax on Newfoundlanders and Labradorians.
You see, the concept – from the get-go – has been that the people in this province will pay the entire cost of the project, plus the profits to the various investors in other provinces, through their electricity rates. Private sector companies in Nova Scotia and in Labrador will get gigantic breaks with free electricity and electricity that is heavily subsidised by the working poor in Newfoundland and Labrador.
That’s why it is so incredibly bizarre to see the Liberals and New Democrats complaining about the current budget and, in the case of New Democrats, about Muskrat Falls.
Liberal Dwight Ball calls the tax hike in the current budget a job killer. Well, Muskrat Falls, will suck more than three or four times that much money out of the economy in electricity prices according to the official estimates. Those of you who are already pissed off at the 10% jump your electricity prices will take soon better start getting their heads around the idea that you will have to increase electricity prices on top of that again in two years time to pay for the Conservatives’ legacy project.
And if you think the working poor are going to be screwed by a two percent hike in HST or that evil private companies will profit from long-term care – get this New Democrats – those poor people are paying for Muskrat Falls so those private companies can reap huge profits. Emera, for example, will get electricity from Muskrat Falls for nothing for 35 years. They will also get heavily discounted electricity if they want it.
Not bad, eh?
Well, in addition to the Conservatives who cooked up the screwball scheme you can also thank the province’s other political parties for this mess as well. Back in 2010, the Liberals and New Democrats couldn’t say a bad word about Muskrat Falls. They were actually quite positive about it. The Liberals loved it. The NDP loved it as well, if for no other reason than it was a deal with the short-lived NDP government in Nova Scotia.
If you look at what representatives of the party have said on the record, you won;t find any words of concern about Muskrat Falls in and of itself until the past couple of years. That is, once the Nova Scotians flicked the NDP out and as costs and problems with the project mounted, both the Liberals and NDP have become more and more openly critical about the way the Conservatives have managed the project.
The closest either party has come to doubting the project finances was Dwight Ball’s idea that we could use money from sales outside the province to lower local costs. We will only be able to get – if we are lucky – about 10% in export markets of what Muskrat Falls electricity will cost to make. Even if Ball did what he promised a couple of years ago, then we really aren’t going to get much of a break. The math just doesn’t work.
Sheets of Paper
Over the past decade or so, there’s been very little difference among the political parties in the province on major issues. You cannot slide a sheet of paper between them. That’s one of the reasons their hard core partisans fight so viciously among themselves and with anyone they perceive to be a member of one of the other camps.
The most recent budget is no exception. if you step back and look at what the parties have said, they are all within microns of each other, in practical terms.
That sameness is what is so scary sometimes about politics in Newfoundland and Labrador.
- Tuesday: The politics of budgets
Wednesday:Thursday: The Fourth Party and Budget 2015