15 December 2015

Revisiting the spring budget: a little thought experiment #nlpoli

Last spring,  SRBP looked at some speculative budget projections using some different prices for oil and  assumed growth in revenue from non-oil sources.

The results weren’t pretty.  The only way to get to a surplus was if you managed to hold spending constant.  Even a modest increase in spending would throw everything out of whack.   And in the one scenario where you got a surplus, it vanished as oil production dropped.

Well, folks, reality turned out to be uglier than the optimistic forecast of the provincial government at the time and its pet economist, Wade Locke.  The assumed average price of oil last spring is now a distant memory.  The most recent forecasts from the United States suggest oil may hover around US$50 a barrel until we are into the next decade.

So let’s take another look at those figures.

In each case, we’ve started with the 2015 budget assumptions for revenue and spending.   For revenue,  we’ve assumed a two percent annual growth in non-oil revenue.  Oil revenue is calculated using CNLOPB production forecasts and an assumed average price for oil of US$50 a barrel.

In the first slide, we assumed a two percent increase in spending.  That’s consistent with the position taken by all three parties in the election.

In all scenarios, government revenue never gets above $6.6 billion.  If we allow spending to increase by an average of two percent per year,  the debt would grow by about $16 billion between 2016 and 2023.

In the second scenario, we held spending at $7.8 billion. The only thing you’d do by holding spending flat is reduce the size of the annual deficits, but that wouldn’t be all that attractive. You’d still be looking at new debt of something on the order of about $10 billion or the current forecast price of Muskrat Falls.

Again, this is consistent with what all three parties proposed in the recent election.

A modest change in assumptions

All of this is striking given some of the discussion last spring from the Conservatives’ pet economist, Wade Locke.  As SRBP put it in a post then:
More recently, Locke has cavalierly accepted the notion of adding enormous levels of new public debt.  The most he has offered is that if we “If do not control debt, we may get back to 1-in-5 or 1-in-4 dollars of provincial revenue being diverted to debt serving (forecast to go from 11.6% 2014-15 to 12.7% in 2015-16).” 
At best that’s a penetrating insight into the obvious.  What’s more revealing, though, is that Locke didn’t include an actual assessment of current government plans for new debt using a range of assumptions about government revenue.  Had he done so, Locke would have realised that a few modest changes in the assumptions used to develop the current budget would push public debt into those problem ranges.
Welcome to the problem ranges.