31 December 2015

Consistency #nlpoli

"We need to find a way to bridge us [from] where we are currently until the commodities rebound and be [sic] the significant contributor we need them to be." That’s what Premier Dwight Ball told NTV’s Mike Connors in an interview that will air in full this coming Sunday.

The words are very familiar. 

We heard them just a few short months ago.

"I have laid out a five year plan,” Conservative finance minister Ross Wiseman told the House of Assembly last spring, “to bridge the commodity revenue dip and get us back to surplus, step by responsible step." 

Immediately after that statement, Wiseman  promised in the budget speech that there “will be no jolts to send our economy over the embankment.”

What Wiseman meant was that the Conservatives wouldn’t do anything to reduce government spending.  The understood that their policy over the past decade had made the economy heavily dependent on public spending.

The strategic assumptions behind the spring 2015 budget were the same as the ones the Conservatives had offered since 2009.  They reaffirmed them in the 2013 '”sustainability” plan.  The Conservatives would make modest adjustments in spending and find find new revenue where possible.

But essentially, they’d borrow as much as they could for as long as they could and wait – hope -  for oil prices to recover, as economist Wade Locke assured everyone they would.  “Oil prices are increasing currently,” Locke wrote last spring, “and are expected to pick up further in the near future.”

If government intended to do nothing to shock the economy, the economy had other ideas.  Wade Locke was wrong about oil prices, as he had been wrong countless times before.  Strategically, the Conservatives had been wrong.  They had created a situation for the provincial government that was fundamentally unsustainable. 

Events of late 2015 proved how desperately wrong they had been in every respect.  The government’s financial update delivered the week before Christmas confirmed what more and more people had come to realise:  the strategy was wrong.

Advice

Yet, there we had newly elected Liberal Premier Dwight Ball confirming the new Liberal government’s commitment to an untenable strategic position established by the Conservatives.
It could be that Ball just had lousy advice.  It could be that Ball got good advice but ignored it.  That’s the thing about advice:  you have to get it and you have to accept it.  Then you have to act on the advice.

Anyone who has watched Dwight Ball over the past couple of weeks will see a pained look on his face. Listen to what he says and you will understand that the pain is not because he realises the magnitude of the province’s financial problem.

Ball looks pained because he hasn’t accepted the information coming to him. He’s not taking the advice.  You can tell Ball isn’t taking the advice because of what he says about the financial mess:  we just have to bridge through a couple of years until oil prices come back.  At this point, after all we have seen, Ball’s comment to Mike Connors is just nonsense. 

Before we get into that, let’s just take a second and put the current financial mess into a wider context.

2003

Dwight Ball started his interview with CBC’s David Cochrane by noting that some people had told him the current situation is the worst one that any new government has faced on taking office.

That’s certainly true.

In 2003, the Conservatives faced an initial annual deficit less than the one the Conservatives planned for in the spring 2015 budget. What’s more, in dealing with the problems, such as they were, the Conservatives could count on increased income from its own sources as oil production reached maximum.

They also had a new mine development at Voisey’s Bay. Danny Williams and the Conservatives initially trashed the deal but as, Williams subsequently admitted, it was very good. The mine itself and the smelter at Long Harbour provided significant new economic activity and new government revenue.
That’s without taking into account the massive increase in oil prices, which no one could reasonably have forecast. In 2003, the Conservatives exaggerated the magnitude of the government’s financial problem for their own purposes. Within a year of starting a restraint program, the Conservatives abandoned it entirely and within three years, they’d started massive and unaffordable increases in pending that created the very problem we face today.

Indeed, event by May 2004, the Conservatives knew the federal government had already set aside cash to help the provincial government. As it turned out, the federal government had at least $1.4 billion earmarked for the province and eventually received $2.0 billion.

The first Conservative budget - 2004 – called for borrowing that amounted to total borrowing of 15% of total expenditure, on an accrual basis. Such was the real long-term prognosis, though, that finance minister Loyola Sullivan confidently forecast deficits on the order of $500 million a year for the foreseeable future.  That’s radically different from the situation the Conservatives left in 2015.

The 1990s

Go back even further.

In 1989, the new Liberal administration posted a current account surplus of $52 million in its first year in office. The government directed half of that to start addressing unfunded pension liability forecast at $2.0 billion. The 1990 budget forecast similar positive performance, until things went sour in the global economy.

The 1991 budget called for total borrowing of $297 million on a total cash budget of $2.97 billion (current and capital accounts). That’s about 10% of spending met by borrowing Total public debt was $9,000 per person. That borrowing came after the new government had already streamlined government spending and implemented further cuts and reductions in an effort to meet the demands from bond raters.

2015

The 2015 budget, as presented, called for borrowing that was 14% of spending, on an accrual basis and 26% of spending on a cash basis.  In other words,  and just to confirm how stupid former Premier Paul Davis’ comments on Tuesday were,  the government was already in a crisis in the spring of 2015 when he introduced the spring budget.,  He actually made the crisis worse, not better.

By the fall, borrowing was forecast to comprise 43% of spending, on a cash basis with the forecast for the next fiscal year to be even worse.

Net public debt, meanwhile, was forecast to more than $23,000 per person. That doesn’t appear to include all the debt related to Muskrat Falls.   Bear in mind, as well,  that net debt is a misleading indicator of the state of public finances. It masks debt behind the illusion of asset valuations for assets that may not be all that liquid or that may be over-valued, on a practical basis.. The per capita debt load in 2015 is far worse than the simple comparison of 9,000 to 23,000 would make it.

The way net debt treats assets is misleading. What that means is that the assets may not be ones that could easily convert to cash. If they could be sold, the value government could actually receive may well be less than the value assigned to them on the government books. Muskrat Falls is a good example of precisely that problem. The project will be carried on the public books in a way that values the cost of the plant and transmission facilities at the same amount as the borrowing to build it.

The problem is that project wouldn’t have a market value at that level, even if it worked as planned. What’s more, if the project turns out to be closer to the likely outcome, and not the rosy projections of its backers, the real value of the asset on the market may be less than the scrap value of its bits and pieces.

Bottom Line

Public debt in 2015 is far greater than it was at any time before, on an absolute basis or shared among all the people of the province.

The annual deficit planned by the former Conservative administration was, at best, more than two and a half times what the government faced in 1991. By the fall, the new Liberal administration faced a cash borrowing problem more than four times greater than the 1991 situation.  There is no reasonable basis to expect an improvement in government income in the next decade that would eliminate the problem.  That makes the current situation worse, on that level, from what existed in 1991 or even in 2003.

So worse?

Yeah.

It’s a lot worse.

Worse than it has ever been.

Ball acknowledges that we have to act in the face of the unprecedented government financial situation. So clearly, he’s getting the advice from somewhere.

On the other hand, Ball categorically rejects any changes to the government’s current spending trajectory even though all of the assumptions that underpin the Conservative plan have been demonstrably wrong.  Getting the advice but not accepting it.

There is an alarming consistency in all this, something that Ball seems to cherish above all else. On Monday, we’ll take a sharper look at the financial information Ball disclosed in his year-end interviews. It points to where it seems Ball is intent on going in a few months’ time.

-srbp-