11 January 2016

Enough #nlpoli

You can easily lose track of the number of former cabinet ministers who will tell you the same thing.

Ask them about the one lesson of government and budgets that stands in their minds.  They’ll likely all tell you some version of the same thing.

There is never “enough.”

No matter how much money you put into a department,  that department will always want more or have a way to spend more.  Doesn’t matter the department.  You can never spend “enough” such that you can safely say you can then turn to another department and start trying to give it “enough.”

The Authoritative Allocation of Values

The biggest decision you can make as a government, therefore,  is deciding how much money to spend.  You have to decide what “enough” means.

Since the departments themselves can’t define “enough”, you have to go elsewhere.

Citizens and all those interest groups can’t help you.  They are part of the reason why the departments can’t figure out how much to spend.  Those folks all create the demands on government for more spending.

Economists and the banks are usually not very good at helping you figure out what “enough” means either. 

Before the oil money started to run easily,  governments in Newfoundland and Labrador had a rough measure of what “enough” meant. They could add up all the taxes they could get out of the economy. Then they could add to it what the federal government sent them.  That was called “all” as in “all you had to your name.”

You could add a bit of borrowing to that and there you had “enough.”

Once the oil money started flowing,  you couldn’t hit the bottom of “all” and “enough” was down beyond that.  The banks were happy to lend you money when it looked like you were rich.  That’s one of the reasons why the banks and their economists and even the bond raters were useless as a guide to setting government spending.

So one of the most important decisions you have to make as a cabinet, not matter what the year,  is to decide what is “enough.” 

How much is enough?

Look at it this way.

In 1992, the provincial economy was in a big recession, along with the rest of the world.  The provincial population was 574,000 souls and the government spent $5,574 on each of those souls to do everything government had to do.

In 2006, there were about 509,000 souls in the province and government spent $8,675 per person to deliver pretty much the same services.

In 2015,  there were about 507,000 people in the province and government spent $14,000 on each of them.

If we just relied on an increase for inflation,  then that $5,574 per person would only have been $7,186 in 2006 and $8,634 in 2015.

That inflation increase would have put spending spending in 2015 just slightly less than where it actually was almost a decade earlier.

And that 2015 figure is just bat-shit-crazy-out-of-line, no matter how you look at it.

Just to do a little bit of math for you,  if we carried 1992 spending forward on the basis of inflation,  the annual budget this year would be about $4.6 billion. 

Actual spending this year will be $7.8 billion

But revenue will be around $5.0 billion. 

In other words, if we had been more careful with our spending all along the way, we’d actually have been in a surplus this year.  Our non-oil income would have covered pretty much everything we needed to spend this year.

We could have salted away all our oil cash, just as we had been doing since it started flowing.  The result is that we’d have no public debt at all today and still have roughly $15 billion sitting in the bank making money for us.

Setting the Bar

Just so that you understand,  the first Conservative budget in 2004 called for spending of about $4.3 billion, with a deficit smaller than what they forecast in the spring of 2015 for this year.

The problem for the Conservatives was that they basically abandoned any idea of “enough” shortly after their 2004 budget.  What they basically did was say that “enough” was whatever the income was plus however much beyond that they wanted as well. That’s why the excuses lately came to be about making mistakes in the price of oil.

Essentially it was the same definition government used to follow. Minor problem was that the oil money didn’t have any limit the way federal transfers did.  It seemed to just keep going up for a while.  Even though we knew – historically -  that oil went up AND down,  politically the government needed to only think about prices going up. 

And, of course, they could find lots of folks who were happy to tell that that they could safely assume oil prices would only go one way, whether that “up” came now or at some undefined point down the road.

That same sort of analysis – based on assumptions that were themselves flawed – produced flawed conclusions.  It was classic Garbage In, Garbage Out. One brilliant idea the government came up with was to set an eventual, imaginary “net debt” target.  In other words, they could look like they were planning but, in practice, they had no real limits on how much debt they could rack up in the meantime.

They needed a definition of “enough” that actually limited the amount of debt.  They needed a spending cap.

The Future

Enter Dwight Ball and the Liberals who, if we take Dwight Ball at his word, are in precisely the same heads1pace as their predecessors.  What they actually need to do is look at that $14,100 per person they are spending.  Compare that to the $9,000 they should be spending if we just allowed for inflation and draw a logical conclusion.

In other words, the Liberals need to set a spending cap on themselves and work within it.  They could use a convenient measure that gets worked out every now and then. It’s the fiscal capacity determined by the Equalization program.  There are some technical things to consider about what gets counted and what doesn;t, but, at the very least the government would get a number for spending that we have figured out nationally as a fair measure of what a province needs to deliver services.

We need to be clear, incidentally, that we are not looking at some kind of short-term thing that will change in two, five , or 10 years.  We are talking about a fundamental policy shift. Incidentally, government’s own oil forecasts don’t put annual oil revenue above the 2015 forecast over the next decade.  SRBP’s own assessment puts the government is roughly the same position.

Even if oil came back tomorrow, we need to get out spending down to a level far below where it is today.  We need to do that so we can avoid these crises that have come along now about once a decade for the past 20 years.  Long-term, sustained prosperity has to be the goal.

The Liberals could set their future target at $10,000 per person.  That’s above the inflationary projection using 1992 as a base year.  There’s obviously a huge gap between where we are and where we want to be of $10,000 is the definition of “enough” that we accept.

The budget plan the Liberals are looking for would then determine how quickly we get spending down to $10,000 a person.  That might take five or six years. It means spending would have to lower – in real terms – by about $2.0 billion from where it is.  We could then define annual spending limits as the fiscal capacity cap set through the Equalization program.

If oil came back in the meantime, government would have to set a policy about what to do with the money. Debt reduction and an investment fund would be a good start.  In the meantime, the government would have to stick firmly to its definition of what constitutes enough spending.

That will be politically very hard but, frankly, the public  have had enough over the past 20 years of the sort of financial crises we are in yet again.

Enough is enough.