05 January 2016

Metrics #nlpoli

Telegram editor Russell Wangersky tried on Monday to put the government’s financial mess into some shape that people could understand.
The simple fact, to put a shortfall of $2 billion into perspective, is that if the provincial government wanted to cover those costs outside of oil revenues, it would have to not only double the province’s income tax rates, but double the provincial share of the HST as well. (Given the current five per cent federal and eight per cent provincial breakdown of the 13 per cent HST, that would bring this province’s total sales tax to 21 per cent.)
If we could do that, we’d break even, says Russell.

Well, ummm,  no.

Russell’s got the right idea.  He just missed another billion dollars of borrowing in the budget for capital spending.  The way the government reports its spending that capital works borrowing keeps getting left out but it is stuff we have to pay for. 

And that  $3.0 billion is just to cover this year.  Next year,  the problem is due to get worse again.

What Russell is actually describing is the problem last spring when the former Conservative administration introduced the budget.  They actually boosted spending by 12% and called it a restraint budget.  All the local media plus the other political parties chimed in and repeated the same charade.

All that’s happened in the past few months is that the stupidity of the spring budget got so painfully obvious that no one could ignore it any more.

Even if he came up a bit short, Russell was on the right track, though.  Basically, he was trying to find a tidy way of helping people understand precisely how screwed up we are.  We need that because a great many people – politicians included – are blissfully ignorant of either how bad things are or how they got this way.  Russell doesn’t really get at the background to the current mess beyond pointing out a bunch of people complained about the government’s spending problems.

Well, yes, some people did point out problems with the Conservative policies. To be accurate, though, there were not nearly as many of them as Russell would have it nor were they as consistent in their criticism.  The number of people who screamed loudly about government policy were typically:
  1. relatively few in number, and,
  2. attacked savagely at the time by the government and its many supporters, including their friends in the local news media.
Russell noted comments Kathy Dunderdale made in October 2012.  She was talking about how a relatively small number of people in the province paid most of the taxes.  The comments were odd at the time.  It’s odder still that Russell has repeated them.

After all, Kathy held those numbers out as a good thing.  Wrap your skull around that one. Then note that Dunderdale was actually pointing to a fundamental weakness in the economy.  Then realise that at the same time Dunderdale pointed to that weakness,  she was proposing to burden that handful of taxpayers with yet another massive tax increase with Muskrat Falls. it's a sign of how confused people are when they cite a weakness as a strength and then add an extra burden to an already weak taxpayer base.

Dunderdale was then proposing to offer multinational mining companies heavily discounted electricity as an incentive to exploit local other local resources.  Lots of give-aways of the sort Dunderdale decried but did anyway, and lots of people ignoring the fairly obvious problems with government policy in favour of  long diatribes on the value of pursuing Muskrat Falls for the pride of it all.   Pride and the non-existent but widely-touted multiple interlocking business cases for building the damn thing.

Well, the dam thing is driving the province further and further into the ground with little hope of ever producing anything valuable.  The politicians still can;t figure out why public finances are shagged up.  The local media quotes Kathy Dunderdale and Wade Locke as if they were sources of anything vaguely resembling wisdom and we  - collectively - are still no closer to understanding how we got into this financial mess than last spring.

Perhaps this might help.

The 1920s example

Newfoundland surrendered self-government in 1934.  David Alexander wrote in 1976 that the cause of the collapse was more than the public debt that people have generally held out as the cause. The coutnry burst itself in the struggle to emulate its continental neighbours but without the resources or the population to do so.

 Other historians would likely agree. But the debt built up struggling to keep up with the Jones played a huge role in the collapse of responsible government.  The public debt went from about $47 million in 1920 to about $97 million in a country with an annual budget of around $10 million. It’s major source of revenue was customs and excise duties.

The commission appointed to examine the government’s financial crisis produced a little table in its report.  The table showed the government’s spending and borrowing from 1920 to about 1931.  In the text, the commission said that the government’s annual spending was around $11 million a year over that decade and that its annual deficit averaged $2 million. 

Take a closer look at the figures in the Amulree commission report though and you see something more interesting.  Using the information in the report, you can calculate how much of each year’s spending was covered by borrowing. 

The table below shows the 1920s results in the first and second columns.  The third and fourth columns compare the current situation as provided in the recent economic forecast.  The two sets of figures are actually calculated on a different basis, incidentally, so the current numbers don;t include all the borrowing.

Borrowing as a share of expenses
Borrowing as share of expenses

Not pretty, is it?