27 January 2016

Jerry Earle won't retweet this post #nlpoli

Apparently the surest way to piss off a couple of university academics a.k.a the NDP policy brain-trust is to point out how their take on the government’s financial crisis is out to lunch.

Short recap:  Math prof and Indy columnist Tom Baird got hold of an access to information response that explained the calculations behind a comment by cabinet minister Susan Sullivan on Twitter in March 2015:
In 2014 NL taxpayers will pay $744 million less as a result of tax deductions – affordable?
The ATIP request asked for a breakdown of that $744 million figure. Tom left off the cover page from the response when he posted a link to it in his Independent column in 2015.

“Tax cuts made during the Williams-Dunderdale era now cost the government $744 million in revenue each year,” Baird wrote, “ according to a recently released document from the Department of Finance obtained through an access to information request. This accounts for more than two-thirds of last year’s $1.1 billion budget deficit.”

That just doesn’t look right

There were some clues that this might be something other than an annual tally. The footnote on personal income tax says that the figures for 2013 and 2014 were estimated because it wasn’t possible to separate out budget measures any longer.  This note makes no sense if it was just a calculation of 2015 PIT.

Then there are the other footnotes.  One says that it actually isn’t possible to calculate the annual impact of retail sales tax reductions,  motor registration fee changes and a change in the threshold for the health and post-secondary education tax.

If all of this is annual tax savings, then something is seriously wrong.  Some of the key figures including personal sales tax are  - apparently – just guesses.

Then you start looking at some of the figures and you are just scratching your head even harder. One obvious problem that appears right away is that the largest single amount in the ATIP request pegged the personal income tax saving at $561 million.  By Tom’s interpretation,  changes to income tax in 2007 meant that the provincial government gave up $561 million in PIT in 2015.

That’s a lot of money.  The 2015 budget forecast PIT revenue at about $1.1 billion in total.  Basically Tom was saying the government could have increased tax revenue by 50% of its forecast by taking back the 2007 changes.

Musta been some cuts.

Well, they were if you consider a mere two percentage points in each of four brackets (notionally 20% of revenue at the time) was apparently enough to cause a 50% change in the total today. That’s what the Conservatives did in 2007. They estimated the annual cost of the reductions from 2008 onwards would be $160 million annually. on revenue of about $800 million.

Still doesn’t add up

Whether the figures were just made up for the sake of a Conservative talking point or they were something else, it’s pretty obvious they don;t add up. Regardless of that,  the point Baird and others make is that we don’t spend too much money.  We just don’t take in enough.  In 2015 we didn’t have a problem in the first place because the Tories could have just reversed all their old tax cuts.  Together with the hike in sales tax, they’d have solved the problem.

For the sake of argument, let’s allow that the Susan Sullivan figure is really what Tory tax cuts cost the treasury.  For roundness, let’s make it an even $750 million.

Tom would be right – on that basis – except for two key points.  Budget 2015 included an inexplicable 12% increase in spending.  If the Tories didn’t hike spending, they didn’t need to raise taxes.  Second, even if they had raised taxes according to Tom’s thinking, they’d have still had to borrow $1.0 billion in cash to cover capital works and off book debt transactions.
And by the end of the year, they’d still be in the hole by a couple of billion dollars because oil prices did what oil prices do:  they went down.  Budgets are just estimates and,  as in the past the Conservatives fell victim to the same problem:  they geared their spending to a dodgy projection of revenues.  That’s a spending problem, not a revenue problem.

Let’s double income taxes on Jerry’s members

No problem according to the thinking coming from the public sector unions and their front organization, the New Democrats.  We’ll just raise taxes.

Let’s roll back the 2007 tax breaks.  That gives us $561 million.  We need roughly six times that so let’s do that again. That would double the tax haul from every single person earning an income in the province.  Someone should ask all the province’s public servants if they want to see their income taxes doubled.

How about the folks on low and fixed incomes?  You don’t want to tax them, eh?  Okay, so we’ll just put back the tax on the fat cats. That would really limit the amount we could get.  You see, there aren’t that many folks out there making big salaries. About two thirds of tax filers make less than $40,000. 

Kathy Dunderdale was getting at that when she said that 20% of the population paid 70% of the taxes. 
Unless you tax everyone, you have to increase the tax on a smaller segment of the population to make up for the difference.  As it is, in this scenario, we’ve left off  all those tax breaks for seniors and other folks on low and fixed incomes. So if we focus our taxes only on a small segment of the population, that’s going to cause all sorts of problems.  it wouldn’t be very good if we hiked up taxes to the point where it triggered an exodus of the folks you need to pay taxes.

Let’s just go back to the personal tax rates in the Baird example. Then double it. We’ve brought in an extra billion dollars. We are still $2.0 billion short. You can see that what is going on here is most emphatically not a revenue problem alone.

But let’s keep going.

Sales tax.

If we raise the tax two points we’ll get something like $200 million.  Raise it five points and get $500 million.  Maybe.

Another $1.5 billion to go.

This is easy.  Not.

Mining taxes and oil royalties.

Bit of a problem there.

The current deals are locked in.  Some of the current mining projects are paying on deals that date back to the 1950s.  The only relatively modern deal is Voisey’s Bay and that’s actually a pretty reasonable deal for everyone.

Fundamentally, the problem for all these export industries is that if you drive up costs,  other places in the world will beat you out, the plants will close and you will have nothing.  If you want a good sense of this, think of the fishery a few years ago.  The fundamental problem for plants in this province – and the people splitting fish in them – was global competition.  You could ship fish caught here all the way to China,  process it, and get back to market here for less than you could process the fish locally.

No magic solutions

Baird, among others, used to make fun of the Liberals for having some kind of magic solution to the government’s financial problems.  Funny thing is that what Baird made fun of and continues to criticise is basically what he and his friends in the NDP and the public sector unions have been saying and it's a version of what the Conservatives have been saying. We just need to find more revenue because this is only a revenue thing.

The problem for all these revenue-only types is that there isn’t some kind of magic tax button you can press and solve all your problems.  As much as they wish it to be so, the thing is just not there.  In our little exercise above, we have doubled income tax and hiked sales tax by five points and we still don’t have anything near enough cash to balance the books.

What the current crisis has done is bring the deeper financial reality of Newfoundland and Labrador into sharper focus for a whole bunch of people who, until now, just didn’t understand what was going on.  The Conservatives boosted spending – with the enthusiastic support of Liberals and New Democrats, without exception – even though the non-oil economy wasn’t producing enough revenue at a reasonable level of taxation to sustain it in the event oil prices dropped.

The only way the Conservatives could spend as much as they did was by borrowing.  They either borrowed cash from the banks, more recently or, in the early stages of the excess, they liquidated oil and spent all the cash they got from it. 

Now that we see the magnitude of the problem of the policies endorsed by all three parties, some people are panicking.  When you see them justify the current public labour force sizes by comparing them with the days when thousands of typists operated manual and electric typewriters in giant office pools, you know they are just not capable of offering any constructive comment. 

Getting out of the current mess isn’t possible just by increasing revenues.  The problem is fundamentally one of spending way more than was ever reasonable.  More borrowing is – at the very best – a stop-gap measure on the way to a more substantive solution. That lasting solution will involve some extra revenue but it must involve a significant cut to government spending.  

We need to find something that the public sector unions,  other special interests and most politicians can't find.  We need to find enough.