05 May 2015

The Red and the Black: budgets and politics #nlpoli

The annual budget is probably the most political document of any government in a Westminster style parliament like ours.

At its simplest and most obvious level the budget is the formal statement of a government’s priorities.  Once approved by 1the legislature, it gives government the legal authority to spend money.

The budget is, in that sense,  the most obvious display of what political scientist David Easton defined as politics:  the authoritative allocation of values.

There’s more politics to the budget than just that, however.

The government’s budget has a huge impact on the economy. That’s why, typically, budget details are a closely guarded secret until the finance minister present the budget in the legislature.  The annual “mid-year” financial update in Newfoundland and Labrador appears these days during the peak sales season of the year. 

That’s not an accident.  Nor is it an accident that even in years when there is potentially a tough budget coming, the finance minister will tell everyone that the future is bright.  They want you to keep your wallet open:  just as retailers make the most money of the year during Christmas,  one of government’s top cash sources – the sales tax – floods through the doors at Christmas time.

Government is acutely aware of this.  Take the plan to hike the sales tax by two percent.  It will come on the first of January.  That is, after the Christmas.  The people who out the provincial government budget together are well aware of the impact taxes can have on the economy.  They want people to spend cash this year. That’s why they gave them plenty of time to spend the cash in their pockets..

That economic impact is also why you could have drilled out Ross Wiseman’s teeth without anaesthetic and he wouldn’t have acknowledged that the province is sliding into a recession.  He needs to keep every as optimistic as possible. The official government optimism can keep businesses investing in the province just like it can keep consumers buying all sorts of high-priced goods.

Politics is also why the government is running a record deficit.  Over the past decade,  the provincial economy has grown ever more dependent on government spending. Even though government doesn’t have the money any more, they have to keep spending or risk a serious economic problem throughout the province.

While all of that makes sense, some of the politics of the budget doesn;t fit.  Take the message about restraint.  Government spending is actually going up this year by about 12%.  The tax increases are miniscule in comparison to the spending growth.  The cuts in the public sector are a modest three percent of the total labour force.  The biggest tax increases are  - like the job reductions – back- loaded, to use a phrase that’s popular these days.  That part makes sense.  Cabinet put off the bad news. 

Political Disconnect

But why is there any bad news at all?

If cabinet was prepared to borrow $2.1 billion, it hardly seems worth the pain for them to raise a paltry 10% of that again by increasing a lot of nuisance fees and charges. The popular reaction to the tax increases and fee hikes is pretty strong.  It’s all out of proportion to the actual impact.  Media reports, for example, had to illustrate the impact of the sales tax hike by looking what the tax hike will do to the richest people in the province.

The numbers look dramatic but, to be frank, the impact is proportionately the same whether one is going to buy a BMW or a KIA.  For most of us, the sales tax will mean – quite literally – nothing more than a couple of cents on a cup of coffee.

What will have a huge financial impact is the decision to eliminate the  sales tax rebate on home heating fuels.  Whatever political pain the Conservatives are feeling today over the HST hike is nothing compared to the heating fuels smack.  That will come in July but the real impact will face consumers in the fall when they start to use heat in their homes.  Imagine going to the polls as people get that little present in their mail boxes.

The Conservatives are paying a political price out of all proportion to the actual amount they will raise by the tax hikes.  It’s something they didn’t have to do – quite clearly – and yet they did it anyway.  Politically, the Conservatives would have been better off pretending that the drop in oil prices meant nothing since they would borrow to cover it all.

As it is,  the Conservatives don’t have much support from their traditional allies in the business community. The business groups are all talking about the need to cut spending, not increase it.  The Conservatives aren’t even getting serious thanks for all the public works contracts that will flow to the group who – as we noted before – also just happen to be the largest block of contributors to the provincial Conservative Party.

Meanwhile, the public sector unions are fried about the notional job losses and the possibility that some private sector companies might get involved in long-term care. 

As if all that wasn’t enough, the 2015 budget even has some old politics in it as well.  Go back to January and read the post about the relationship between oil prices and the Hebron project.

Rather than be a source of significant extra revenue starting in 2017,  Hebron will provide a modest additional increase in provincial government funds.  The cumulative total revenue would be $162 million over the six years until payout.

By contrast, the generic royalty regime established before 2003 would have provided two years at  one percent,  two years at 2.5% and another two years at five percent.  The cumulative total of that would be $709 million.

That pegs the up-front loss from the 2008 agreement at $547 million.  Add that to the other give-aways in the deal on local benefits and construction and you get a sense of what the provincial government gave up to cut a deal in time for the 2007 election. It all works out, if oil prices stay high, but only if they stay high.  Any other oil price scenario and the assumptions underneath the 2007 Hebron agreement don;t work so well for the provincial government, i.e. taxpayers.

Now look at the provincial government’s overall situation,.  Rather than looking at a couple of years until bags of cash start showing up, we are really looking at almost a decade before we see significant extra cash from Hebron.

Then try 2008 and the combined impact of shelling out scarce money for equity stakes in Hebron at the same time you’d need money and old people. Or look at a post from 2012 that notes the number of give-aways by the provincial Conservatives in the Hebron development deal.

Almost $800 million of the current budget is earmarked for provincial equity stakes in Hebron and other oil projects.  Quite a few people have noticed that money at the same time they are complaining about the $250 million in fee hikes coming from their pockets.

These figurative rods that people are using on Conservative backs are ones the Conservatives made for themselves and all by themselves.. As hard as it is to believe, this is the Conservative political strategy.

Weird, eh?.

Well, it’s not half as weird as what people think the Conservative political strategy has been.

But that’s for tomorrow.


Wednesday:  Thursday  The Fourth Party

Thursday: Friday: Trending