09 December 2015

Two solitudes #nlpoli

CBC and the Telegram  carried a story on Tuesday that the province would be hit by a “mild recession” next year. There’s not much real news in that since oil and minerals will all be down in price for the foreseeable future. Major projects are coming to an end.  All known.  All foreseen. But since the Conference Board of Canada issued the release and used the words “mild recession” and so that makes it news.

Later on Tuesday,  everyone carried the story that Premier-designate Dwight Ball had written to the federal government to try and forestall the two percent hike in the harmonised sales tax. Same thing:  news release, therefore news.

At the risk of repeating the same thing again, let’s just recall that the latest change in oil prices means that 36% of government spending this year will be covered by borrowing from the banks.

The sales tax hike won’t make much of a difference this year.  The  $50 million or so it will bring in between January and March will amount to precisely 1.6% of the revised borrowing. It was frig-all before oil dropped. It is even moreso frig-all now when compared to the magnitude of the provincial government’s financial problems.

We can say that revenues won’t be much better next year.  This is another point worth bearing in mind.  The local media have habitually followed slavishly behind the provincial government’s lead over the past decade and talked about last year, not the year coming up. and in truth.  Well, this whole HST thing is another example of chasing mice when the deer are just over the hill.

We have the problem.  And we have what the politicians and the media are talking about.  The two things are not the same.

What the media and pundits are talking about.  What the Liberals and Conservatives are talking about?  Not the same thing either.

Just to really drive home the point that the media are chasing after figments of someone’s overwrought imagination, do something few of the local pundits have done. Let’s actually look at what the Liberals released as their platform costing during the election. It actually gives a comparison of what the Conservatives had already forecast.

liberal costing
Basically, the Liberals plan to deliver what the Conservatives had already forecast, using the same basic assumptions with some modest adjustments.  The Liberals just proposed to do some things a little differently from the way the Conservatives planned to do things.  Instead of hiking the sales tax, the Liberals figured they’d come up with some cash somewhere else.

Economic Drivers and Brakers

For the past decade, the provincial economy has been driven by  four things:
  • non-renewable resource exploitation (oil and minerals),
  • migrant labour,
  • megaprojects, including Muskrat Falls, and
  • massive increases in government spending, based on money from oil and minerals.
All three political parties know this. It’s why none of them campaigned on the need to reduce government spending.  The polls showed people like the way things are and none of them like it more than all those folks on the northeast Avalon who have been making out like bandits on all this.

The political parties also know that, as the population ages,  they will have to face a bunch of consequences.  For one thing, they will have fewer and fewer people in the productive part of the labour force, making things and bring new money into the economy from exports.  A smaller labour force will mean less income tax and less sales tax.

Those old folks will need more health care,  which will consume more and more of the health budget.  It’s already almost half of all program spending. To make matters worse,  Newfoundland and Labrador already spends more money per person than any other province in Canada to deliver programs and services to its residents.

The Size of the Problem

Regular readers have seen this picture before.  The red line represents the money the government gets from everything that isn’t oil.  The blue line is how much the government spends.
the gap

The gap in between gets filled up by oil and  - as we’ve seen this year this year – more and more borrowing.

Now as you think about what the Liberals and others suggest will make things better, notice that red line.  it represents the amount of money the government has received from all sources other than non-renewable resources. The total amount raised in new cash from all the tax hikes didn’t move the red line upwards much of anything at all. Anyone who thinks tax cuts caused this doesn’t have a clue what is going on.


Politicians want to get re-elected. They want to be liked. Cuts to government spending make them unpopular. It’s hard not having an answer to people facing hard times or the prospect of leaving their homes or leaving the province. Historically, local politicians have substituted government spending for sustainable economic activity. The difference between the Danny Williams party and all the politicians before them and since is that the Williams crowd had more money than they knew what to do with.

So they spent it all.

Public debt today is higher than it was in 2003 by an order of magnitude.  It’s not going to get  bigger, as Telegram editor Russell Wangersky said the other day. It is already bigger.

The Liberals today are facing all the same pressures the Conservatives have faced since they abandoned common sense in 2007.  That’s roughly when they started spending anything they could get their hands on rather than lay a solid foundation for the future.  The Conservatives listened to a lot of siren songs.  After 2010,  things just got worse and they were even more susceptible to any suggestion that things would just be bad for a little bit and then all would be well again.

No one should expect the Liberals to be any better or any worse.  They might be but they are really just humans.  And they are humans surrounded by folks who face the same pressures and who want think everything is just fine or can be made just fine after a couple of years of big deficits.  That’s the sort of thing Wade Locke used to get on with, but he isn't alone.

If you want to get a sense of just how widespread those sorts of delusions can be, look no further than the Conference Board of Canada’s forecast from the middle of November. Two years of bad times and within a couple of more years,  the board forecasts oil royalties will double before 2020.  They also forecast other revenues will increase, including a return of transfers from Ottawa.

conference board 
Thinking like a Townie/Tory

Maybe that will happen.

More likely than not it won’t.

The problem we have been having is caused, in part, by folks who look at those forecasts and who think it is okay to spend money now based on some projections that we will have cash two years from now. It’s a form of magical thinking and it is basically the way the local townie business community and the local Conservatives all think.

What they don't realise is that the sorts of policy advice contained in things like the Conference Board report is usually very general.  It’s based on a raft of assumptions, some or all of which may not be very sensible.  The board thought, for example, that the government could hold the line on spending,  cut educational spending because there are fewer school-age children, and then transfer those savings over to things like health care.


And there isn’t a lobby to reduce the cost of university education in the province and extend the existing subsidies to Nova Scotians beyond where they currently are.  All sorts of people have their hands out and folks like the economists at the Conference Board aren’t good at handing out political advice.  They give sort of maybe decent economic advice.


Assuming their assumptions aren’t out to lunch.

Any new administration in Newfoundland and Labrador needs to think very differently from what we have seen over the past decade.  Over the past decade,  The folks making decisions looked ahead and saw there'd be money coming.  So they spent it today.  Whether or not the money came, they spent as if they already had it.  That's Townie slash Tory thinking.

Asking people not to think like that flies in the face of experience and it flies in the face of evidence from the recent election campaign. Despite what some people would have you believe,  all three political parties supported exactly the same policies for the same reasons.

If stupid is doing the same thing over and over again and expecting a different result, then what is expecting the a bunch of folks to do something different when all the forces acting on them are the same as the ones acting the previous bunch?